The chairman of Lloyd’s of London said the insurance industry could be “in jeopardy” if it was forced to pay out for Covid-19 claims that it never intended to cover.
Insurers have said that infectious diseases are excluded from most business interruption policies, prompting fury from customers facing huge losses.
Lawmakers in the US want the industry to soften its stance and pay out anyway. But speaking to the Financial Times, Lloyd’s chairman Bruce Carnegie-Brown said any move along those lines would have serious consequences.
“Fundamentally the insurance industry relies on contracts,” he said. “We pay out from the premiums we collect, and if we haven’t collected premiums for covers like coronavirus, it would put the industry in jeopardy to be paying claims for those risks.”
In the US, a bipartisan group of 18 lawmakers in the House of Representatives has urged insurance companies to recognise the losses that businesses — particularly small ones — face from the economic fallout of coronavirus.
In a letter to Washington-based trade associations representing insurance companies, the lawmakers urged them to “work with your member companies and brokers to recognise financial loss due to Covid-19 as part of policyholders’ business interruption coverage”.
In the UK, the parliament’s Treasury committee on Thursday wrote to the Association of British Insurers asking whether the industry would be flexible over business interruption.
Mr Carnegie-Brown said: “We will work very hard to try to make sure that customers benefit from the policies that they’ve got but it will be difficult to pay out if customers have not specifically bought protection.”
He added that Covid-19 would cause claims on more than a dozen different types of insurance policy, and that total payouts could match those for a big natural catastrophe.
Mr Carnegie-Brown said it was too early to put a figure on the size of potential claims, but added that it would be a “large loss event” for the market. Large natural disasters typically cost insurers many billions of dollars.
Policies likely to face claims include event cancellation, travel insurance, directors’ and officers’ liability, health, and product liability. Lloyd’s management has asked the insurers that operate in the market for details of their exposure.
Lloyd’s is one of the last face-to-face financial markets in the City with about 5,000 people using the building every day. But last week it closed its famous underwriting room, where brokers and insurers meet to discuss cover, for the first time in living memory.
Business is instead being conducted digitally, a trend that Lloyd’s management has been keen to encourage for many years. Mr Carnegie-Brown said the market’s systems were holding up well, and that there had been no adverse impact on business volumes. March is usually a busy month because many commercial insurance contracts renew on April 1.
The crisis has hit Lloyd’s balance sheet. Its solvency ratio, which is a measure of capital available as a proportion of the minimum required, has fallen from 238 per cent at the end of December to 205 per cent last week because of financial market volatility.
Mr Carnegie-Brown said he was not concerned about Lloyd’s financial strength and that the solvency ratio was “still very comfortable”.
Lloyd’s returned to profit last year, with £2.5bn of pre-tax earnings, thanks to strong investment markets. At an underwriting level, results improved but the market was lossmaking for the third year in a row as it paid out for Typhoons Faxai and Hagibis in Japan and Hurricane Dorian in the Atlantic.
“We’re reasonably encouraged by the rate of progress but there is more discipline to be had in terms of the quality of business we bring into the market,” said Mr Carnegie-Brown.