While some carriers are beginning to offer pandemic insurance, questions and risk remain.
Welcome to the Growth, Profits, and Wealth Blog where we'll be featuring this new and yet to named series where we’ll look at the accounting, tax, advisory and business angle of topics such as Risk Management, Restructuring, Distressed Assets, Automation, Best Practices, and Growth Initiatives. This is our introductory post and cast which is about was delayed close to a month because of the never-ending tax season.
The idea is to touch on a range of matters affected by the Pandemic for just about a minute or two, to get you informed, help you be better prepared as a practitioner or business owner, give you some reference material, and get you back to work.
First topic is Pandemic Insurance of course, and we'll be coming back to this topic in the weeks and months ahead.
The insurance Industry is moving pretty quickly to provide some measure of Pandemic Insurance, now that we're several months into the pandemic, and also because this is what Fintechs, InsurTechs, and specialty insurers are really designed for. What's interesting is seeing the formation of these insurers and the ownership mix of their backers. May are tied to large insurance companies, private equity, and wealthy individual investors. While these are newer insurers or startups a number of those research have very experienced insurance professionals at every level.
These setups makes a lot of sense as the close ties to large existing insurers gives them access to ReInsurance so the risk can be diversified by other insurers who want to take on some of the risk for a portion of the premiums. On the operations and startup cost side, the ties so private equity and wealthy investors gives them access to capital to create, operate, and administer these policies.
The problems, well where to begin:
First, while this sounds all well and good, these initial insurers and policies are here to make money not do the world or economy a favor. Thus, these policies are going to be some of the most expensive insurance available. Not only is it a hot topic with limited data, but the spike and second closure in some areas makes this about the worst possible time to buy and likely the policy would not even pay out immediately.
In the U.S. News Article "Pandemic-Proofing..." it mentioned policies that offer up to $1MM in coverage, however that coverage comes with eye popping premiums of $80,000 - $100,000 annually. Part of the problem here is with very limited data to model (if even possible) most policies at the moment are using all worst case scenarios to make sure if they do find a buyer they're likely to come out break even or better in the short and medium term.
Perhaps this is why back in May Warren Buffet said he would interested in offering in offering Pandemic coverage, but only at the right price, which is a great leading to something that is overlooked with insurance coverage, which is as one's risk protection is another’s investment.
In the July 23rd Insurance Journal article the insurer One80 was able to write polices up to $100MM , I don't see this as a realistic offering by traditional insurance companies or a solution for small businesses. It's much more likely that these policies fill a niche that needs can actually afford them, perhaps Hollywood, perhaps live entertainment, but will almost certainly have lo effect on the economy. Instead insurers and businesses appear much more likely to wait to see if the Federal Government provides a backstop for insurers or something similar.
Another major issue I see is, if the language and terms are not broad enough these policies could very easily still leaving gaps in coverage, setting things up for this same type of problem in just some other form.
Lastly, and most importantly in my opinion, while these policies might be associated or have some backing by major insurance brokers and carriers, it's very important for the businesses, advisors, & agents to know who is actually underwriting and backing the policy.
Insurers and policies have ratings for a reason but the fragmented structure of these new insurance makes them susceptible for abuse. A little bit of clever or confusing marketing slight of hand is to and the ability to use a large carriers name and ratings to:
I'm not accusing anyone, but the opportunity for abuse and risk is real, and insurance that is at high risk for nonpayment might very well be worthless in the end.
We'll call that a wrap for now and let you all get back to work!
That's enough for now, thanks for listening and I'll be back with one or two more casts by this weekend, and then back next week as we'll being our normal schedule.
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Travis Raml, CPA