There has been quite a lot of commentary in the media from small-business sources suggesting that the government has been reckless in suggesting that pubs, bars, restaurants and other such establishments should all be avoided by the public, but without requiring that they close for business, which means that they cannot claim on their business interruption insurance. I agree that this does appear somewhat unfair to the businesses in question, most especially when bailout packages for the banks have already, in effect been announced, but in practice this claim does not reflect a proper understanding of how the insurance market works.
Insurance works on the basis that everyone faces risk, but who precisely will face difficulty at any point in time is unknown, meaning that the risk can be pooled through collective insurance premiums and those actually suffering misfortune can be compensated when it arises.
What is happening at present is nothing like this: every single pub, club, bar and restaurant is facing the same problem at the same time. They will all want to claim on their business interruption insurance. And the fact is that the market will be utterly unable to pay out as a consequence: no one priced that risk into the policy premium and, as a consequence, if claims were made the insurance companies would be wiped out overnight.
It would, of course, be possible for the government to underwrite insurance companies with regard to this risk. The cost in question is unquantifiable. But doing so would also mean that the survival of many businesses would be dependent upon the business interruption insurance that they took at a time when they could never have imagined the circumstance that has arisen, and which may have, therefore, been entirely inappropriate for their current needs.
In this situation it is probably fair say that the government is right not to have created a scenario where enormous insurance claims could have been made, with one massive proviso being added, and that is that the government must now provide the necessary finance to bail out the businesses in question, and keep as many of them and their employees either in work, or safely in their homes, for the duration of this crisis.
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we can’t expect insurance to cover a worldwide universal system shutdown like this. this is time for the state, courageous or otherwise.
here is a message Boris Johnson could have given yesterday:
“My message to the businesses of this country is this: the government will do what is necessary to support you.
In the capital, everything is being done to prevent businesses failing due to what is happening now, and to prevent individuals losing their jobs.
This will be a difficult time, but we are not going to abandon you.”
Funnily enough this is (my rough translation of) the message that Dutch PM Mark Rutte delivered last night (original below). If it can be done in the Eurozone with their state aid rules, why not the UK.
I do think within a short amount of time there is a big chance we will need to have state coordination of essential services, water, power, food, etc. Otherwise the distributed and uncoordinated nature of privatised service provision risks gaps in provision. It doesn’t easily allow for control and oversight in an emergency. I think rationing is needed sooner rather than later also. It’s said that Johnson has always wanted to be PM, and just saunters along doing his own thing. Well, this must be the last thing he would have ever wanted, and now he has to knuckle down and own it. I just hope that the government can suspend their disbelief in the power and role of Government before it is too late.
Mijn boodschap aan de ondernemers van Nederland en hun werknemers is deze: het kabinet zal doen wat nodig is om u te steunen.”
In Den Haag wordt ‘alles op alles gezet’ om ervoor te zorgen dat bedrijven niet omvallen door wat er nu gebeurt en dat mensen hun baan niet verliezen, zo zei Rutte. “Het zal hoe dan ook een moeilijke tijd worden, maar we laten u niet in de steek.”
Thanks
There’s a simple idea being circulated which could benefit businesses , tenants and other groups with bills to pay to local government. This is essentially to abolish all local taxes for a 1 year period from 1st April 2020 to 31st March 2021.
Councils will immediately say “How will we pay the care workers, bin men and the various directors and their pensions”, and the answer is for the central government to just send them the cheque.
So in the case of my local council which collects about £200 million a year in Council Tax and business rates, the government simply sends them the payment for that, uprated by the annual increase.
Is there a down side to such a straightforward idea? Apart from some admin staff and collection bailiffs having less work for a while ( although they will still have some previous year’s debts to enforce ).
As a real life example, I’ve just come back from cancelling our cat’s stay at our local cattery and kennels given we will not now being going abroad for Easter. The person who dealt with me was saying that until recently they had 61 dogs booked in over Easter. They now have just seven. And I was the 20th cat owner to cancel this week. And so he too was lamenting the fact that the government’s current stance means the owner of the business cannot claim on their insurance for interuption of the business and therefore as of next Monday he would have to take unpaid leave until the owner can re-employ him once business picks up again – whenever that might be. And this is someone who I suspect is only paid the minimum wage.
So, while I agree that the Covid 19 outbreak is an event that insurance should not be expected to cover the government really does need to get a grip, fast, and start implementing a system that ensures the many, many thousands of people who are going to be in a similar situation to the one I outline above get money to be able to carry on with life. Indeed, I note that even a Republican like Mitt Romney in the US is advocating the payment of 1000 dollars to every American forced out of work by effort to stop fight the spread of the virus. An announcement of something similar is already overdue here.
But it will need to be more than that – and for much longer
Indeed it will, Richard, as you’ve argued on various occasions on this blog over the past few weeks. But the point I was trying to make was that there are already many thousands of ordinary working folk – many of them in low paid work – who are already facing weeks without pay, not in a month or two but next week and the week after. And as with the person I spoke with today, they have no idea as yet about what the government is going to do to help them. Furthermore, even if an announcement was made today or tomorrow it could still take several weeks to implement an effective payment system.
If that was the aim of this payment I would entirely agree with it
I get your point in that case
I spoke to someone with that fear today…I get your point
This is a very important point to take on board. Thanks for stating it, Richard. I’ve heard lots of people complaining about this issue, without maybe thinking it through. There is a real need for government action just now. Insurance won’t do it.
And by the way, are you okay? Did you recover fully from your bout with The Virus Thing, whatever it was?
Not fully recovered yet
Just relying on adrenaline to blog and then I sleep for several hours…
Commercial insurance for business interruption is also likely to be capped – so many weeks at up to so much per week, for example – and the insurers should have adequate reserves and should be reinsured, so for example they can deal with claims arising from major natural disasters, such as hurricanes or earthquakes. But insurance won’t help at all if, as is often the case, there is an exclusion for loss caused by infectious disease, or if a business is closed by government action. https://www.insurancejournal.com/news/international/2020/01/29/556803.htm https://www.bbc.co.uk/news/business-51927500
Insurance is about pooling and sharing of risk. In this sense, like flooding and terrorism, the government (that is, society a whole) is the insurer of last resort.