Risk managers offer solutions on insurance

Gerry Kennedy, a part-time Alton resident who works at Observatory Holdings, a risk management company, along with his partner, Rogan Dwyer, maintain that, “The insurance industry is broken but either has not realized it yet or is ignoring the flashing red warning signs.”

That is beginning to change as the full scope of the potential claims under the coronavirus starts to become apparent.

Andrew G. Simpson, in a March 30 article appearing  in the Insurance Journal, writes, “The property/casualty industry estimates that business interruption losses from the coronavirus just for small businesses in the U.S. could be between $220-$383 billion per month — or a quarter to half of the total industry surplus available to pay all P/C claims.”

Note that is a per-month figure.

The estimates say there could be as many as 30 million claims from small businesses — 10 times the number of claims processed from the 2005 hurricane season when Katrina, Rita, Wilma, and several smaller storms devastated businesses.

Kennedy and Dwyer, in a series of telephone interviews, email exchanges, and in published articles, say those numbers represent only part of the story, failing to factor in employee wages and other liabilities. Then those higher numbers could double when the potential risk from cyber viruses is factored in. With people working from home, businesses are at risk from cyber attacks on their servers, launched through home computers that are not adequately protected from malware.

Furthermore, they contend that many of the claims now being denied by insurance companies as not falling under business interruption policies will, in fact, be upheld by the courts. Government orders to shut down or curtail business constitutes regulatory taking, which has legal implications, they maintain.

Many in the insurance industry argue that the loss of business income due to government-ordered shutdowns is not covered because it is not a direct physical loss.

Reservation of Rights

Kennedy notes that insurance carriers routinely issue Reservation of Rights letters when claims come in. Policyholders usually ignore those letters as “boilerplate” material — routine letters they can ignore. In fact, those letters put policyholders on legal notice, before the claim is even examined, that the insurance company may not cover everything.

Kennedy says policyholders should turn that process on its head by sending their own reservation of rights letters to their insurers before filing a claim is necessary. The letters put the insurance carriers on notice that the policyholder intends to recover legitimate claims under the policy for which premiums have been paid.

“You, as a policy holder, can use the same tactic which may (and should) result in your ability to move forward with a claim, or in the alternative, gaining the specific missing coverage that you thought you had … and were depending upon,” Kennedy said.

Kennedy and Dwyer are quick to point out that they are not attorneys, and policyholders’ reservations of rights have not been tested in court; but the letters are prepared by attorneys as additional “insurance” against being denied a valid claim.

They have established a website, www.reservemyrights.com, that provides insights into the initiative intended to improve the prospects of a satisfactory outcome.

Insurance industry renewal

Dwyer said insurance companies are encumbered by legacy issues — having put out policies without the requisite 3:1 monetary backing to cover potential claims or the necessary exclusions to coverage that would protect them from claims due to the coronavirus and the potential “cyber hurricane” to come.

The only solution for them is a massive government bailout, he says.

“Creating and managing the funeral for the old industry will require government support, huge amounts of money and determination, strong leadership, and cooperation between the old order and the new order,” he wrote in an article about the problem.

Going forward, insurance companies should separate that type of coverage, much as flood insurance is now handled, he said.

“As always, however, this creates opportunity for new entrants to the insurance world who are unencumbered by legacy issues and can dictate terms according to a rewritten play book.”

Dyer said it is through the sharing of concepts and ideas that solutions are found. He noted that Lloyd’s of London started as a group of ship’s captains who got together in a coffeehouse to discuss their concerns about shipping a full cargo of merchandise. If a ship were to go down, the whole cargo would be lost. They came up with a sharing agreement where the cargo would be put into several ships to mitigate the risk.

That is the concept behind reinsurance: A $10 million policy is sold to several reinsurers so each shares in a smaller amount of risk.

“Today we need to be working from actual data and evaluate and mitigate risk according to new technology that exists and is being ignored as the industry continues its passage forward in the manner of an oil tanker headed for the beach,” Dwyer said.