COVID-19 Response: Govt. Should Support Business Interruption Insurance
With COVID-19, we are all travelling blind. We have no idea of the size of the problem, where the support is needed or the impact of the support that is provided. In addition, not all of the impact is immediately visible. While the effect on sectors such as hospitality and travel are immediately and obviously visible there are many businesses on which the impact will not show for 6 to 12 months. They will have work or forward orders to carry them for a while but the momentum that drives future work will have dried up and to restore that will mean months of downtime that will undoubtedly lead to numerous business closures.
The government has overlooked the most simple, effective and precisely targeted economic support available in the face of COVID-19: underwriting business interruption insurance. This type of insurance is generally taken out in conjunction with ownership or leasing of property. It is intended to cover events that prevent the use of a property, e.g. physical damage to a property, fire, water leaks, etc. Pandemics are generally excluded from these policies unless a clause covering these has been specifically negotiated. Sustainable New Zealand propose that the government support insurers to cover business interruption caused by COVID-19.
Why is it a good idea for the government to underwrite cover specifically for the interruption to business for COVID-19?:
- Insurance companies have the infrastructure in place through the insurer to assess and provide the relief needed in the most effective, targeted and cost-effective manner;
- this could be implemented and executed quickly helping minimise potential economic damage;
- this would in turn reduce the flow-on effect to businesses that would normally be indirectly affected.
The insurance sector use ‘catastrophe codes’ which allow them to gather data on the number of claims for an event and the cost of losses. The government could fund insurers to proactively approach their business clients to work out what claims would look like. A team of actuaries could work out the scale and scope of the likely claims and from there they can structure a package the government can afford. This would be the right mechanism if the government were prepared to adopt it as their approach to design a stimulus package.
This mechanism will also gauge the effectiveness of the measure and will also provide a real-time indication of when we are entering a recovery as the money claimed reduces as businesses recover.