The Office for Budget Responsibility (OBR) has warned the government must be prepared to cover any business insurance claims on a last resort basis as many will be forced to close due to coronavirus fears.
At a Treasury committee hearing this morning (March 17) the OBR warned the state itself must become an insurer as many private insurers will not have deep enough pockets to pay out on the potential amount of claims coming their way from businesses affected by the coronavirus outbreak.
Professor Sir Charles Bean, member of the budget responsibility committee at the OBR, said as the government has encouraged people to stay away from bars and restaurants, forcing some to close for the time being, many businesses may look to claim from their insurance for losses incurred, which might overwhelm the system.
Sir Charles said: “The state should be the insurer in this situation.
“Insurers have limited pockets and businesses are just passing on their problems to insurers who may not be able to pay.
“This is where the state should be stepping in to implement things which minimise unnecessary damage to the supply side.”
Another member of the budget responsibility committee at the OBR, Andy King, agreed it was not right to purely rely on private insurers to swallow the bill.
He said there is a risk that insurers could wriggle out of paying out on business interruption insurance policies because when these policies were taken out coronavirus was not recognised as an issue.
Mr King said: “There is the question about whether we can purely rely on private insurance companies and whether they have deep enough pockets.
“This is why we need the state there to be an insurer of last resort against what can only be described as an act of God.”
Robert Chote, chairman of the OBR, said the OBR's economic forecasts given last week no longer stood in the wake of the coronavirus causing havoc in Europe.
Last week, as part of the Budget, the OBR forecast 1.1 per cent growth this year - a fall from the previous prediction of 1.4 per cent.
Growth forecasts for 2021 were raised from 1.6 per cent to 1.8 per cent and borrowing forecasts for the next five years rose significantly.
As a proportion of GDP, borrowing was forecast to stand at 2.1 per cent in 2019/20, up from a forecast of 1.3 per cent a year ago.
Mr Chote said: “Clearly things have moved on significantly and the economy is probably shrinking as we speak and that will have a consequence on public finances.
“We don’t know how long the impact of the crisis will be sustained or the impact on public finances but government policy is aimed at this being temporary.
“The priority at the moment is not dotting the i’s and crossing the t’s of fiscal rules but to do what is necessary for the economy and public.”
In the Budget, the chancellor announced a package of measures to ease the impact of coronavirus, including measures for small businesses, as well as greater sick pay entitlements.