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AM Best backs case for pandemic risk backstop

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Proposed public-private partnerships are warranted for the “disastrous effects” on businesses of COVID-19, given the systemic risks posed by the pandemic, ratings company AM Best says.

US proposals including the Pandemic Risk Insurance Act – modelled on the Government terrorism backstop – have been put forward as insurers point out that the industry doesn’t have sufficient capital to cover global virus outbreaks.

In a new report, Retroactive Legislation, Social Inflation: Credit Negatives for Insurers, AM Best highlights uncertainty from lawsuits aimed at insurers and legislative policy measures being contemplated that would nullify business interruption exclusions.

Social inflation, combined with lawsuits addressing liability policies, will drive defence containment costs higher, while court decisions will influence actual claims payouts, creating challenges in determining prudent reserve estimates and payout patterns, the report says.

AM Best Chief Rating Officer Stefan Holzberger says pandemics don’t offer risk diversification by geography or line of business, as shown by the number of areas affected in the current outbreak.

“Insurers may be able to offer limited protection against pandemic risks, however these limits would be insufficient for a full recovery,” he says.

“Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses.”

AM Best says it will continue to monitor regulatory developments and adjust ratings and outlooks as needed, with the US election set to create delays and “proposal resents” related to backstop plans.