Insurers told to clarify scope of business interruption coverage

Insurers need to be more precise on the scope of coverage being provided within business interruption policies, the European Insurance and Occupational Pensions Authority (Eiopa) has said.

In a staff paper, the EU agency, which oversees the insurance industry outlined several measures to improve “the insurability of business interruption” in light of the current crisis.

It said insurers needed to play a more proactive role in the process by promoting prevention measures such as social distancing, the wearing of protective masks and that insurance policies should incentivise these measures as well as business continuity planning.

The paper also calls on insurers to improve “clarity on the scope of coverage” being offered to business.

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Twelve insurance companies have been put on notice that they face High Court action from hundreds of restaurants and bars following last week’s landmark judgment against FBD Insurance.

The High Court ruled that four pub owners are entitled to be compensated by FBD for the disruption their businesses suffered due to the Covid-19 pandemic. The outcome affects claims made by about 1,100 pubs and restaurants.

In its report, Eiopa said the Covid-19 pandemic crisis had shown how certain prevention measures themselves may indirectly cause losses.

Socio-economic damage

“Containment measures that are aimed at preventing spreading of the diseas can cause socio-economic damage, in particular business disruption losses in the form of business revenue losses,” it said.

“Such secondary effects can cause direct losses affecting directly businesses required to close under a lockdown, or indirect losses, which are suffered through supply-chain disruption because of the lockdown.”

The majority of business interruption losses related to Covid-19 pandemic crisis can be attributed to these secondary effects, it said.

The agency said capital markets provided “a layer of potential alternative risk transfer” for such eventualities in the future.

“The challenges around designing new and successful capital markets instruments for financing business interruption risk in a pandemic crisis range from generating enough return and diversification for investors, to designing parametric triggers that are both objective (to counter moral hazard) and

relevant (to limit basis risk),” it said.