Insurers and a national emergency
Sir, – The call by Fianna Fáil TD Robert Troy for insurance companies to be arm-twisted into paying up on “business disruption” claims will be welcomed by many who have had claims disallowed by reference to “small print” terms (“Donohoe weighs in as insurers reject Covid-19 claims”, News, March 23rd).
Popularity, however, does not mean that the demand is correct. Mr Troy, and others, miss the point that insurance companies in effect are risk-poolers. Think about health insurance, paid for by nearly half the population. This involves individuals, most of whom will not need hospital care in any given year, paying a premium that, when paid by all taking out insurance, will cover the relative few who actually need that expensive care. The price paid for insurance is determined by the cost of the “event” multiplied by the probability of an individual needing to pay for it.
Business disruption is usually just such an event. So, if there is a one in a hundred chance of a disruption (say due to a power disruption, or the loss of key personnel in a train crash) with a cost of €10,000 you would expect insurance cover to cost at least €100. If it happens to you, and the insurance company has correctly priced the risk, it will be in funds to pay up.
The public discourse on Covid-19 uses the metaphor of a war with an invisible enemy. That’s only a metaphor, and not really a very good one. We don’t usually describe dealing with the costs of hurricanes as a war with the wind. But it is useful in the context of insurance. Insurance policies typically exclude war risk. This is not surprising since you can’t price in such a risk. You simply can’t ask fire insurers to offer house cover for an event at a price based on an expectation that the event will hit 1 per cent of houses when it hits 50 per cent or 80 per cent. House insurance at prewar insurance costs to cover damage in Berlin courtesy of the RAF and US Air Force?
In that respect, Covid-19 is indeed comparable to a war. The problem with Covid-19 (regardless of interpretations of the small print in policies) is that it would bankrupt insurers, who had sold policies based on a one in a hundred or even smaller risk, if they had to cover the costs when the disruption hits 30 per cent or more of the insured. You would hardly expect the three health insurance companies to pay, or be in a position to pay, a significant proportion of, let alone all, the hospitalisation costs of all those with health insurance who have contracted or will contract Covid-19 disease. Regardless of the fine print, business disruption on the scale of that flowing from Covid-19 is simply not an insurable risk, and anyone who really believes that insurers should cover such an event is seriously deluded.
The only way cover can be arranged in these circumstances is by making everyone pay the cost of the event – or socialising the risk cost, which is what is happening where treatment of Covid-19 is concerned, That extends, too, to lost income from the pandemic. And that is exactly what this Government is doing. Solving the problem is not helped by uninformed or politically partisan sniping or the peddling of snake-oil solutions, like the Apple billions. – Yours, etc,