Podcast Summary
Protect Your Small Business from Disasters with Insurance: Purchasing flood and business-interruption insurance can help businesses recover from calamities and stay afloat. It's important to negotiate insurance claims and invest in preventive measures to mitigate potential damages and losses.
Small businesses can protect themselves from disasters by purchasing flood insurance and business-interruption insurance to cover property damage and lost revenues. Insurance claims can help businesses recover from calamities like floods, fire, hurricanes, and pandemics. Insurance companies have a goal to not pay out, and business owners should negotiate insurance claims. However, without insurance, businesses would struggle to stay afloat after experiencing a disaster. As seen with Three Brothers Bakery in Houston, owning insurance was crucial to staying in operation after multiple disasters. Small business owners should invest in preventive measures, such as insurance, to mitigate potential damages and losses.
The Impact of COVID-19 on Small Businesses and the Importance of Insurance: Small businesses are struggling during the pandemic, and traditional business-interruption insurance may not cover losses. The crisis emphasizes the need for insurance, and new solutions must be found to protect small businesses.
Small businesses, which employ almost half of American workers, have been hit hard by the COVID-19 pandemic. While business-interruption insurance is common, it doesn’t cover losses due to a pandemic because there is no physical damage. This means that many small businesses are at risk of going under, as they often only have a few weeks’ worth of cash on hand. The insurance industry and the government need to find ways to respond to this crisis. The COVID-19 pandemic highlights the importance of insurance, even though people often resent the need for it. Lloyd’s of London, the world’s first commercial insurer, hosts a marketplace for buyers and sellers of insurance and has insured celebrities’ body parts.
The Complexity and Challenges of Property-and-Casualty Insurance Industry and Lloyd's of London's Role in Natural Catastrophes and Pandemic-Related Losses: Property-and-casualty insurance covers a vast range of risks, and Lloyd's of London provides insurance for natural disasters and pandemics. Major catastrophic events can cause challenges for the market, but in the face of adversity, the industry can still return to profits. However, the Covid-19 pandemic presents an unprecedented challenge to the insurance industry, affecting more than 16 lines of insurance business.
The insurance industry is complex and varied, with many forms of insurance available, including property-and-casualty insurance. Lloyd's of London provides insurance for natural catastrophes such as hurricanes and windstorms, as well as against wildfires and pandemic-related losses. Lloyd's underwrites large and severe events, which can create challenges in the market. In 2017 and 2018, the market experienced losses due to hurricanes, but returned to profitability in 2019. However, the Covid-19 pandemic has created unprecedented losses estimated at $200 billion across the insurance industry. Lloyd's estimates that over 16 lines of insurance business are affected by the pandemic, including medical malpractice and directors' and officers' insurance.
How Insurance Companies Make Money and the Impact of the Pandemic: Insurance companies not only make money through premiums, but also through investments. The pandemic caused losses for the industry from both declines in investments and claims. Insurance is necessary for protecting individuals from the economic and emotional costs of accidents.
Insurance companies make money not just by taking in premiums but also by investing them. Half of the industry loss due to the pandemic was from declines in insurers' investment holdings. While many markets have recovered, it is due to the concentration in the technology industry. The other half of the loss was directly related to claims, making it a major loss for the overall insurance industry. However, insurance is an enabler, such as mandatory motor-car insurance that allows individuals to drive without the risk of economic ruin. Driving without insurance would mean the economic cost of an accident, let alone the emotional toll, would be beyond the driver's net worth.
The Role of Insurance in Taking Risks and Lloyd's Contribution to Insurance History: Insurance allows people to take risks and Lloyd's has a history of providing unique insurance policies. Business interruption insurance policies cover loss of revenue due to events, but most don't cover pandemic-related shutdowns. Reconsideration of labeling is needed.
Insurance enables people to take risks they otherwise wouldn't be able to take. Lloyd's has a history of providing firsts such as insurance policies for automobiles, airlines, satellites, and cyber-risk. Business interruption insurance policies were designed to cover the loss of revenue due to an event, such as a flood, and extensions were added for additional risks. Lloyd's has been writing insurances for pandemic risks since the SARS issue, but most people don't buy it. The pandemic fell too far down the list of risks, and 80-90% of businesses with insurance wouldn't be covered for pandemic-related shutdowns. Business interruption coverage is typically linked to physical damage in the property, causing confusion and a need to reconsider labeling of such products.
Differences in Pandemic Coverage Between U.S. and European Insurance Policies: Insurance policies in the U.S. specifically excluded pandemic losses, while many European policies had looser wordings. Although U.S. courts have sided more with insurance companies, tighter regulation has led to clearer policy limitations for all.
Business interruption insurance policies in the U.S. specifically excluded losses from a pandemic, leaving many business owners with no legal recourse. This is because insurance policies are run state-by-state in the U.S. with a regulatory procedure for wording changes. However, most countries in Europe lack this regulation, leading to looser policy wordings. The lack of discipline in underwriting contracts meant that many business owners who thought they were covered by pandemic losses were wrong. The U.K. tends to rule in favor of small businesses, while U.S. courts have sided more with insurance companies. Although regulators were criticized for not anticipating a worldwide pandemic, the tighter regulation in the U.S. has led to more discipline in underwriting contracts and a clearer understanding of policy limitations.
Insurance Companies Excluded Virus from Contracts, Leaving Small Businesses Vulnerable.: Legislatures in multiple states are working on bills to force insurance companies to reimburse businesses for pandemic-related losses. Governments have stepped in before to override exploitive contracts. The industry has $1.7 trillion in cash and investments to bail out small businesses.
Insurance companies have excluded viruses, bacteria, or microbes from about 80% of contracts, leaving small businesses vulnerable during pandemics. Legislatures in multiple states are working on bills to force insurance companies to reimburse businesses for pandemic-related losses, regardless of exclusions. Governments have stepped in before to override exploitive contracts in cases of hurricanes and discrimination. The argument that bailing out small businesses will bankrupt insurance companies is bunk; the industry has around $1.7 trillion in cash and investments. However, we are looking at trillions of dollars in losses on business interruption due to the pandemic, and the length of the pandemic is unknown, making this a complex issue for economists and lawmakers to tackle.
Avoiding Common Mistakes in Insurance: Insurance is protection, not an investment. Understand the true purpose of insurance, prepare adequately for potential disasters, and ensure you have the essential forms of insurance, such as health care and life insurance. Don't assume coverage without reading policies carefully.
People tend to make two big mistakes when it comes to insurance: they underestimate the risk and think of insurance as an investment instead of protection. This leads to underpreparation for disasters. Insurance policies should be celebrated when they don't need to be used. We tend to buy less essential forms of insurance, such as for mobile phones, but not enough health care or life insurance. People often don't read their policies and assume they have coverage they don't actually have, which can lead to businesses not being covered for pandemic-related interruptions. It's important to understand the true purpose of insurance and prepare adequately for potential disasters.
The Insurance Industry and Pandemic Coverage: Insurance companies have not suffered major losses from pandemics due to exclusion from coverage. Future coverage may require partnerships with governments, as seen with terrorism and flood insurance.
Despite early concerns, the insurance industry has not suffered major losses from the pandemic due to exclusion of pandemics from coverage. If insurers were forced to pay retroactively, it could cost billions of dollars and become an enormous burden. While some governments have provided relief to businesses, it remains a public-sector responsibility. The insurance industry may need to partner with governments, as they did with terrorism and flood insurance, to cover future pandemics. Prior to 9/11, insurers did not charge for terrorism coverage and included it in business-interruption policies; following the event, they excluded it until government involvement led to the Terrorism Risk Insurance Act.
Congresswoman Proposes New Insurance Program for Pandemic Recovery: Congresswoman Maloney's proposed Pandemic Risk Insurance Act aims to provide a partnership between the federal government and insurers to help businesses recover after a pandemic. Though met with resistance, she argues it is better than ad hoc government intervention.
Congresswoman Carolyn Maloney authored the Terrorism Risk Insurance Act to provide insurance for losses from a terrorism event exceeding $200 million through government backstop, which allows insurers to offer affordable premiums. She has now introduced the Pandemic Risk Insurance Act, which proposes a program to help businesses recover and react after a pandemic with the federal government responsible for 95% of losses and insurers responsible for 5%. While there is resistance in Congress, Maloney argues that if a government goes in to help after a disaster, they might as well set up a program that partners with the private sector. Some objections to the proposal include its lack of retroactivity and the argument that it may not be the best solution for future problems.
Building Resilience Through Innovative Insurance Products: Incorporating insurance into business models is vital for protection against unforeseeable risks. Collaboration between private firms and public sectors is essential to address systemic risks and prepare for resilience against hazards like cyber-attacks, pandemics, and climate change.
Building resilience through insurance can prepare businesses for unexpected events like cyber-attacks, pandemics, and climate change. Lloyd’s has introduced three innovative insurance products, namely ReStart, RecoverRe, and Black Swan Re, to address non-damage business interruption, recovery, and large-scale events requiring government engagement. These forward-looking insurance vehicles allow for broader reflection on catastrophic risk management. Incorporating insurance into business models and balance sheets is vital for preparation and protection against unforeseeable risks. Private firms and public sectors should collaborate to address these systemic risks, and expand beyond pandemics to other potential hazards like climate change. Insurance policies should consider long-term effects, not just immediate benefits, to prepare for the resilience of businesses and economies.
The Optimistic Bakery Owner: Turning Tragedies into Opportunities: Don't let disasters defeat you. Look for silver linings and opportunities for growth. Rather than focusing solely on legal action, explore other ways to support your business during challenging times, such as voting for a stimulus package.
Despite facing multiple disasters, Jucker remains optimistic and believes that out of everything bad comes something good. Her bakery's history began with her husband's fifth-generation family, who fled from Poland to Houston after the Nazis took over their business and murdered his grandparents. Jucker doesn't plan to sue her insurance company over the lack of pandemic coverage, as lawsuits can be emotionally draining, and a class-action suit may be more effective. She believes that state legislatures forcing payouts is unlikely, but urges small businesses to vote on a stimulus package, as Americans are more concerned about what's in their wallet right now.
