The US insurance industry faces widespread bankruptcy if forced to cover COVID-19 business interruption claims, according to a newly released AM Best report.

US legislation now under consideration at state and federal levels are trying retrospectively to introduce business interruption cover for loss of use and occupancy of premises because of COVID-19. For most US policies, that legislation would sanction an interpretation contrary to policies’ original intent, AM Best chief rating officer Stefan Holzberger says.

In an AM Best podcast, Holzberger acknowledged COVID-19’s disastrous effects as US SME and main-street businesses were forced to close their doors, dismiss employees, and, in many cases, struggled to avoid bankruptcy.

“These events have created a huge amount of political pressure to figure out a relief valve to support these businesses, even beyond the loan programs already sponsored by the federal government. It’s these political pressures that have brought business interruption coverage to the forefront,” he said.

AM Best estimated the loss of revenue to businesses with fewer than 100 employees was about $US294bn ($A423bn) a month. The potential impact on insurers, if forced to apply business interruption cover to that lost revenue, would be about $150-200bn a month, while the estimated capital and surplus of the USA’s commercial lines industry was about $US633bn.

Holzberger said even at the low end of $US150bn a month, about half of US commercial line insurers’ capital and surplus would be eroded in “merely two months”.

“Based on what we’re seeing in the market today, we know that it will take much more than two months for businesses to restore to that pre-COVID-19 level of business volume.”

Holzberger said if COVID-19 policy exclusions were nullified, AM Best expected a great many insurer bankruptcies and the companies most at risk would be SME insurers specialising in business insurance.

National and international commercial insurers would experience a material reduction to their capital but most would survive.

“In contrast, the hundreds of regional commercial insurers who are writing insurance business for main street commercial businesses, those are the companies that would be most at risk of an insolvency,” Holzberger said.

That would result in an insurance shortfall. Companies would be financially impaired and unable to write commercial business.

Further, several other companies would cease writing commercial insurance because of uncertainties around insurance contracts, leading to people, businesses, state and local governments facing a capacity shortfall as insurance would be very difficult to obtain or only available at much higher rates.

“Also, the sanctity of the insurance contract would be put into question,” Holzberger said. “How could an underwriter underwrite and price a … policy if the coverage terms could be changed after the fact?

“It would seem to me that would be very difficult to reach a stable economic position with consumer confidence and growth without a healthy insurance market there to protect the assets of individuals and businesses,” Holzberger said.