Insurance Expert Steven Patterson Shares Best Practices During Catastrophic Times
By Sue McMurray
The Carson College produces many graduates each year who seek careers with insurance companies or become insurance agents or brokers. To prepare WSU students interested in exploring this career path, the Carson College hosts the annual Walton Lecture featuring an insurance and risk management expert to share professional perspectives.
This year’s presenter, Steven Patterson, J.D., president and CEO of Oregon Mutual Insurance Company, delivered “Risky Business: Regulated Insurers in Catastrophic Times” via Zoom to an audience of nearly 90 participants.
With business interruption and income loss due to the pandemic top of mind, Patterson discussed how business income insurance covers profits that could have been earned and continuing expenses if a business is forced to close.
Providing an essential service to the economy
While many business owners sought coverage for their income loss due to COVID-required closures, business income insurance requires that a physical loss, such as a fire or an explosion, must trigger the income loss for coverage to apply, Patterson said. Even though the physical loss trigger was not met for COVID-related business income claims, many insured people sought reimbursement, and the industry was pressured by some politicians and the general public to pay claims that were never intended to be covered.
Patterson noted while insurance companies are not sympathetic figures to the general public, they provide an essential service to the economy. Insurers assist with capital formation, facilitate credit by safeguarding collateral, and provide compensation for covered losses. He said his company is currently assisting insured customers who suffered losses caused by the wildfires that plagued the West Coast this summer. Such claims were intended to be covered, and his company protected itself from catastrophic loss by purchasing reinsurance to address this loss exposure.
Markets comprise a game of chance
Patterson noted that insurance companies select the markets in which they want to operate and then commit their time, effort, and capital to these markets. However, after making these commitments, regulators may attempt to change the rules of the game, especially during catastrophic times.
“It’s a game of chance: we assess what we know about risk against rewards,” he said. “It’s analogous to someone placing a bet in Vegas, and the casino changes the rules after the bet is placed.”
Patterson also cited the classification of a storm that hit the Eastern Seaboard in 2012 as an example of shifting rules. The classification of the storm “Superstorm Sandy” versus “Hurricane Sandy” determined whether special deductibles applied to the losses, and whether some losses were covered by insurance, he explained.
Insurers need to prepare for black swan outcomes
Patterson also traced the history of insurance regulation in the United States. Since Congress passed the McCarran-Ferguson Act in 1945, industry regulation has been left primarily to individual states. This patchwork system of regulation has created problems for insurers operating on a multi-state basis, he said.
The insurance industry is one of a few regulated primarily at the state level, and companies must deal with different rules in the states where they operate. The industry is regulated to make sure that consumers are treated fairly; but also to assure that insurance companies have a level playing field.
When it comes to COVID impacts, some states are aggressively changing policy, he said. Extended coverage through longer grace periods, deferrals, special payment guidelines, and cancellation moratoria are among the presumptive benefits. Other states enacted legislation to expand injury and disease coverage during employment.
“COVID is not the first pandemic, but it’s the first that has led to human intervention with black swan outcomes for insurers,” he said. “The biggest challenge in industry today is dealing with the unknown—and when the law requires insurers to cover something they weren’t expecting.”