This is the conclusion of my series of posts about the different bills that states have put forward to force insurance companies to provide business income coverage for losses related to COVID-19.
Insurers look for other areas to write business, leaving customers with fewer options.
The final potential act in this comedy of errors comes in insurers leaving a market one of two ways. They may decide that they simply cannot support writing certain lines of business in that state. Worse, they may find that they cannot sustain writing any business in that state and conduct a strategic retrograde operation (military-speak for a hasty retreat).
Over the course of about a year, insurers will begin to non-renew policies. They’ll start telling their agents about it before it starts, and then according to the state’s requirements, they’ll start sending letters to their insureds thanking them for being customers and regrettably, they will no longer be offering coverage for business income for their particular type of business (or any businesses) in that state. Not to worry, this change will not affect any of their other coverages, but due to the changes in exposure and risk characteristics, the company must take this action.
The other option they have is to send notice that they are no longer writing any business in that particular state for the same reasons. Either way, the insured is forced to go without coverage or find other coverage. If enough insurers decide to pull out of a state for either a line of coverage or for all coverages, the available market capacity will go down. That’s where the surplus lines market will step in. When that happens, coverage will evolve because those insurers aren’t bound by the same rules that standard market insurers are bound by.
The next steps are predictable. Some insureds will ignore the notice and be surprised when their insurance renewal premium is lower. They may continue to ignore the change until they have a loss and want to file a business income claim. At that time, the agent produces a copy of the notice that the insured received, then follows the weeping and gnashing of teeth.
The absolute worst case in this scenario is that an insured will try and weather this without significant rate increases or changes in their underwriting appetite and they turn around in a year or two and exit the market by way of insolvency proceedings.
In the end, because of legislative interference, the insurance marketplace changes relatively quickly and not in favor of the insureds. Certainly, there will be several that will be happy when they get their claims paid, but within a year or two of that check cashing, they’ll be wondering why their insurance has gotten prohibitively expensive, or their insurance company isn’t providing coverage any more for them.
I’m from the government and I’m here to help.
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