Force Majeure! Insurance and COVID

The trending talk in the Life Insurance and Health Insurance industry is the “Force Majeure” clause. All insurances come with certain clauses. Some general ones are Insurable Interest, Indemnity, Subrogation, etc. There are hundreds of special clauses that are attached to a policy, and these may vary across different types of policies; For example, Marine Insurance might have clauses which might be very different from Life Insurance. 

What is the meaning of “Force Majeure”?

"Force Majeure" is a FRENCH term that means "Superior Force."

According to the Merriam-Webster dictionary, “Force Majeure” means “an event or effect that cannot be reasonably anticipated or controlled.” In business circles, “force majeure” describes those uncontrollable events (such as war, labor stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business. A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfill the terms of a contract (or if attempting to do so will result in loss or damage of goods) for reasons beyond its control.

Why is this term trending all over the world in the Insurance Industry?

With the outbreak of Coronavirus Disease (COVID-19) all over the world, all the stakeholders are in a dilemma whether the “Force Majeure” clause will apply to Insurance Policies or not. 

The below graph shows the Google Trends for the term “Force Majeure.”

We can see a sudden surge in search for this term as COVID-19 took all over the world. Different countries have different opinions about including the Coronavirus in this definition and many countries are still debating over it. We will move towards the Indian Context.

What is the definition of “Force Majeure” according to the IRDA?

According to IRDA, the clause stated is “In the event where the Corporation’ s/Company’s performance or any other obligations are prevented or hindered as a consequence of any act of God or state, strike, lockout, legislation or restriction by any government or any other statutory authority or any other circumstances that lie beyond the Corporation’ s/Company’s anticipation or control, the performance of this policy shall be wholly or partially suspended during the continuance of such force majeure. The Corporation/Company shall resume its obligations towards the Policy as soon as the Force Majeure event ceases. The Corporation/Company undertakes to keep the IRDAI informed and seek prior approval before effecting any of these changes.”

The last line clearly states that prior approval is required from the IRDA to include any such event in the “Force Majeure” clause. 

Does Coronavirus Disease (COVID-19) fall under the “Force Majeure” clause in the Indian Insurance context?

The Good news is, NO. COVID-19 doesn’t fall under the “Force Majeure” clause and all the insurers (Public or Private) must process all the Health or Life claims pertaining to COVID-19.

Below is the official notification from IRDA for your reference.

What if my Insurance company goes bankrupt due to the huge number of COVID-19 claims?

While there is a possibility that insurance companies might face a huge number of unexpected claims and thus even go bankrupt; however a very good metric can help us judge whether your Insurer is in good financial health or not—the Solvency Ratio.

In an insurance context, Solvency Ratio defines how good or bad is a company’s financial situation based on solvency 

Solvency ratio is calculated as the amount of Available Solvency Margin (ASM) in relation to the amount of Required Solvency Margin (RSM). The ASM is the value of the company’s assets over liabilities, and RSM is based on net premiums and defined as per Irdai guidelines.

The higher the Solvency Ratio, the greater the chances of your claim getting settled. To minimize the Bankruptcy risk, IRDAI guides all the insurers to maintain a solvency ratio of at least 150%

Below is the list of Solvency Ratio of Insurance Cos from IRDA, 2018-2019

All the companies adhere to the guidelines. However, misreporting is always a concern. One interesting thing to notice is that LIC has the lowest and Sahara Ltd has the highest Solvency Ratio. Does this make the LIC the riskiest and Sahara the safest? No. The Solvency Ratio is ONE among SEVERAL metrics which needs to be analyzed. LIC’s low solvency ratio is not an issue because LIC has a sovereign guarantee from the Government of India; Sahara in spite of having the highest solvency ratio is NOT the safest as the company is not doing good financially. 

Moreover, the probability of death (Mortality Rate) due to COVID-19 is very less when we compare it with other Fatal Diseases. On top of it, These insurance companies also re-insure with big re-insuring companies to protect them from the risk of any such event. Thus it is an implausible scenario that Insurance cos may go bankrupt because of COVID-19 related claims.