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Retroactive business interruption cover would make pricing 'astronomical'

Washington's state insurance commissioner is strongly opposed to plans that would retroactively force insurers to cover business interruption claims, but has instructed companies to make sure they give "sound, legal reasons" when denying claims.

The regulator expects that some behavior changes, such as greater utilization of telemedicine, caused by the novel coronavirus pandemic may lower the costs of healthcare.

Washington Insurance Commissioner Mike Kreidler has been one of the most active regulators in dealing with the new needs of policyholders and insurers as they deal with the COVID-19 pandemic.

S&P Global Market Intelligence spoke with Kreidler to discuss his priorities, his perspective on business interruption coverage and the prospect of a federal backstop program to help deal with business interruption in the future. The following is an edited transcript of that conversation.

S&P Global Market Intelligence: What are some of the big priorities you have been dealing with during this pandemic?

Mike Kreidler: We wanted to make sure there wouldn't be cost impediments for people getting tested. We did that very early out of the box.

When it came to business interruption, we went out there and we did a survey of the companies that do business in the state of Washington … When it came back, we found the vast majority of insurers already had exemption language in the case of a virus. That went back to the early 2000s when the SARS epidemic passed through. Insurers realized very quickly that this was going to be a very expensive proposition if what was being discussed at that time came to fruition. They would have been on the hook for a huge amount of costs.

The language, which was very specific around a virus, appears to be pretty straightforward in saying that they do not have an insurance obligation. It is the policies that rely on the idea of there being some sort of physical damage that is taking place ... that are probably going to be ripe for litigation that is going to go on for some time. A number of lawsuits have already been filed, and I think it's just the tip of the iceberg.

You have some legislators in several states who have introduced legislation that would retroactively make insurance companies have to pay for business interruption. That's something the insurance commissioners and I strongly objected to. You just can't do that; it will absolutely be a disaster. It's a one-time deal. You can go in there and legally require them all to do it. I'm not sure you'd get past the state constitution, much less the federal Constitution on contract language. But presuming that you could, you could do it one time. After that, who is going to want to create an insurance company when you never know understand what you might have an obligation to pay for? The price for insurance would become astronomical, and there would be a lot less choice available.

Would you be supportive of a federal backstop program?

Oh, absolutely. I think it's going to be difficult to price. The nature of something like this is not nearly as quantifiable as a number of the other types of terrorism risk … It's much more difficult and challenging to do that with in the case of a virus, particularly when it's a global virus like this. It's much more challenging, but yes, I am sympathetic to that and I would be supportive. That's the correct way to deal with it.

Were you having a similar issue to California where claims were getting denied really fast and without explanation?

I became suspicious based on the complaints that were being filed with our office and what we were hearing from policyholders in their description of what they're being told by the company. That made us say, "Wait a minute, this is bogus. A company can't get away with this. This does not conform to their legal obligation." It was at that point we told insurance companies, "Hey, don't just go out there and give something bogus as an answer as to why you don't have to do it. Give sound legal reasons why your policy language exempts you from having this obligation."

Are regulators working together on this issue?

Yes, very much so.

What I find interesting is you've got Republicans and Democrats, we can argue about a number of things, whether it be climate change or healthcare reform and things like that. But when you come to an issue like this, there is unanimity. We all recognize that the stability and predictability of the insurance market could be called into question if we don't act to protect the founding solid principles of what the creation of insurance is all about. We're united on that.

As an elected official have you found it any more difficult to balance the protection of policyholders with the need to keep insurers solvent, especially when it comes to business interruption?

One thing about it is you don't have a governor's office to insulate you from the public, so to speak. A governor's office can buffer you on a number of things, but in this case, they don't call the governor's office. They call me and my office. As a result of that, I feel the pressure much more keenly from the standpoint of looking out for the consumers' interests. But on an issue like this, it's so profoundly tied to the credibility of insurance. You can't have economic activity without insurance. Nobody's going to lend money if they don't have something to back it up .... It'd be easy to do a popular thing and just say, "Oh yeah, let's make them pay and let's go after them, nobody likes insurance companies anyway so we can just beat the tar out of them with impunity." That would be to the detriment of the economy of the state, and if we do it nationally, of the whole country.

Are you hearing any concerns from life insurers?

I'm not aware of them raising any issues at this point. I think there's always the possibility that you could actually see the mortality tables significantly modified as a result of COVID-19 or another corona-type virus that comes over the next few years or whatever, but at this point in time I don't think it's come close to having that kind of impact on the overall insurance system where they're having to pay out a lot more claims because people aren't living as long.

How do you see things changing going forward?

We're going to be receiving the rate filings for the individual and small-group market here in the state of Washington in a matter of a few weeks. I'd say that it's a challenge because it was kind of forced on us without as much preparation as we'd like. But it certainly is one where we're becoming much more adept at it.

I think we're getting some positive things that are coming out of it too. One of them will be telemedicine. That was something that's been out there for a long time; now providers and insurers are starting to be a lot more comfortable with its utilization, and that's probably not the only example of something that was out there before but really got pushed to the front of the burner, so to speak with COVID-19. We're learning some lessons that I think can help improve the quality of healthcare and lower costs.