AM Best believes proposed public-private partnerships to address the disastrous effects on businesses related to COVID-19 are warranted, given the systemic risk posed by the pandemic.

In its new Best’s Commentary, “Retroactive Legislation, Social Inflation: Credit Negatives for Insurers,” AM Best states that it expects significant reserve uncertainty arising for the current accident year given the challenge for insurers to estimate ultimate losses resulting from the COVID-19 pandemic and the related shutdowns. Social inflation, combined with lawsuits addressing liability policies, will drive defense containment costs significantly higher. Court decisions will influence actual claims payouts, creating challenges in determining prudent reserve estimates and payout patterns. In addition, a number of legislative and policy measures are being contemplated that would nullify business interruption coverage exclusions in commercial property policies and force insurers to compensate policyholders for risks that were excluded during underwriting. Insurers with smaller capital bases in particular would be more vulnerable to these measures. AM Best previously has discussed the potential threat to property/casualty insurers’ solvency should legislated policy changes force them to pay retroactive coverage (see related Best’s Commentary).

AM Best believes any public-private partnership adopted to fill this protection gap should take into account the capital supporting all risks insurers bear, which is critical due to the uncertainty inherent in taking on those risks. As insurers consider the level of capital they should hold, they factor in the demands that each risk poses, as well as assumptions about the level of diversification among these risks. In addition, rating agencies and regulators require a specified level of capital commensurate with the level of risk the insurers have on their books.

“Pandemic risk does not afford insurance companies any geographic diversification due to its global nature,” said Stefan Holzberger, AM Best chief rating officer. “Diversification by line of