The concept of insurance is marvellous. Individuals or corporations pay to spread risk across a large community, creating a greater degree of financial security and peace of mind, regardless of what challenges might end up materialising.
In many cases it’s worked flawlessly for centuries. Businesses burned to the ground can often emerge from the ashes in a matter of months. Disability and sickness mustn’t spell certain bankruptcy. In the 18th century, the wives and children of deceased members of the Amicable Society for a Perpetual Assurance Office were guaranteed cash, thanks to what’s believed to be one of the earliest examples of life insurance as we know it.
The insured should be able to rely on an uncompromising safety net in the toughest of times, and yet – as we’re enduring precisely such a time – coronavirus is adding debilitating insult to unprecedented injury by exposing the shortcomings of the insurance sector: the system we’re using is not fit for the modern world, and the cost of these deficiencies could well be cataclysmic.
In theory everything looked quite all right. The vast majority of companies across the UK and beyond tend to have business interruption insurance that pays when they can’t operate. A similar type of insurance, known as contingent business interruption insurance, comes into play when a critical supplier to an insured organisation can’t function. If you’re a company that makes smartphones in the US, but the Chinese factory supplying your microchips suddenly floods, you’re likely to be protected. A French luxury goods company whose Indian fabric manufacturer has been wiped out by a storm? Same thing.
The problem is that in the vast majority of cases, these policies cite “direct physical loss or damage” as a requirement to be triggered. Quarantines and travel bans might make it impossible for a business to keep its doors open, but they don’t constitute obvious physical damage. So as far as the insurer’s concerned, it’s not their problem.
It wasn’t always like this. In years gone by some insurers were more forgiving when it came to the prospect of paying out when disease struck, mostly because at that point major global disease was little more than a theoretical prospect. Then Sars and Ebola provided a lesson in what was actually economically viable – how far insurers can be stretched – and suddenly it became pretty clear that the parameters would have to shift.
The world has become much more interconnected. Supply chains are deeply complex and travel far easier. Bugs can be spread from one side of the planet to the other in a matter of hours while infecting hundreds en route. Taking on the risk of having to foot the bill of an uncontrollable pandemic has simply become unpalatable for anyone, particularly if no one can actually say for certain what the true extent of the impact might look like. It would be like asking an insurer to sign a blank cheque.
In the best case scenario, businesses are aware of this and have made alternate provisions, even if these might be painfully pricey. In the worst case though, they’re blind to the risk altogether. For smaller companies unable to hire a team of experts, understanding the nuances and caveats of what might look like a pro forma policy is an unenviable task. Ten years ago no one was stress-testing for coronavirus.
So we need education. Businesses can’t afford to be caught out as is happening now. They need to be able to scan the horizon and know what could be lingering up ahead: what provisions are in place and what risk truly means.
Perhaps even more urgently, though, politicians need to understand the domino effects of an inadequate insurance sector. On Monday, Boris Johnson advised the public against going to pubs, restaurants and bars. As of Tuesday night, he hadn’t issued an official order for such venues to close – and this matters. Many business owners, particularly in the hospitality industry, have expressed outrage, sparked by fears they won’t contractually be able to make insurance claims unless the government explicitly bans their venues from staying open. Some commentators accused Johnson of favouring the insurance industry, after it was revealed he was paid £25,000 to speak at an event held by the British Insurance Brokers Association (Biba) in May. (Biba has since defended the decision.)
In a furious letter to the prime minister on Monday, Emma McClarkin, chief executive of the British Beer and Pub Association (and a former Tory MEP), warned of an existential crisis as a direct result of the guidance issued by the government. “Thousands of pubs and hundreds of thousands of jobs will be lost in the very short term unless a proactive package creating cash and liquidity is provided immediately to the industry,” McClarkin wrote.
The Association of British Insurers was quick to point out that, even if the government were to force closures, the “vast majority of firms won’t have purchased cover that will enable them to claim on their insurance to compensate for their business being closed by the coronavirus”. But it nonetheless admitted that some, typically larger, firms “might have purchased an extension to their cover for closure due to any infectious disease”. Surely if the government can relatively easily provide a swift lifeline to even a tiny number of large businesses – businesses that provide jobs and jobs that support families – then that’s a step worth taking.
The hospitality sector is the UK’s third largest in terms of employment. It accounts for about 9% of this country’s jobs. According to the sector’s trade body, its economic contribution is greater than that of the automotive, pharma and aeronautics sectors combined. An awful lot is at stake here – perhaps even more than our politicians truly realise. If the support isn’t provided, we’ll face certain disaster and a bitter hangover for years to come.
It’s human nature not to entertain the grimmest of ideas. We don’t like to think about the worst case scenario because it’s uncomfortable. But perhaps the lesson we’re learning here is that we have to confront the inconvenient to protect ourselves.
On Tuesday the government said it would guarantee £330bn of loans to businesses struggling in the face of coronavirus. The chancellor, Rishi Sunak, also announced tax breaks in an effort to avert a full-blown recession. That’s to be applauded, but the shortcoming of the insurance sector is just one example of why we need a structural and sweeping rethink of the way in which the government supports business. A one-off sticking plaster just won’t do the trick.
• Josie Cox is a journalist and broadcaster specialising in business, finance and gender equality