COVID-19's impact on the insurance industry will undoubtedly be severe. The primary impact on insurers across all lines of business — from property and casualty (P&C) to specialties — will likely be on the balance sheet.
This will stem from the challenge of navigating large claim exposures combined with a fall in the global equity markets, which has reduced investment return income. Investment income previously supported overall income, lowered combined ratios, and mitigated prior-year losses.
Could the financial implications for insurers cause more onerous regulatory requirements under already far-reaching regimes such as Solvency II? And how will capital, solvency, and stress-testing regimes change?
Developing Issues for Insurers
Many specialty insurers operating in long-tail businesses will wait to assess COVID-19's severity. Various coverage areas, however, already feel the impact. Following are some key questions and considerations for various lines of business.
- P&C: Business interruption (BI) coverage has become a critical area of concern under COVID-19. The point has been amplified recently with the prospect of class action lawsuits against BI insurers due to perceived ambiguity of some policy wordings. The Financial Conduct Authority reiterated, in its "Dear CEO" letter, the importance for insurers and brokers alike to provide clear advice. We have also seen action from the Prudential Regulation Authority to actively review the impact in this area, with coverage data requested with a weeklong lead-time, and speculative figures of BI-sector impact estimated at US$80 billion to US$100 billion. Regulatory and legal activity in this space is therefore set to increase.
- BI cover under property insurance policies requires an insured "event" trigger. Will COVID-19 satisfy this definition? If not, what may be the impact in terms of allegations of bad faith in the event of coverage being denied in the US?
- How could government restrictions and lockdowns affect US P&C insurers if they continue into hurricane season? For example, if adjusters cannot assess property damage, could there be an influx of bad-faith claims based on a failure of the duty to investigate?
- How can P&C insurers with US exposure reassure their own insurers and policyholders that they maintain a fully functioning claims offering, with no cause for delay?
- General Liability: The pandemic could see claims brought by third parties for bodily injury or property damage, resulting from an alleged unintentional or negligent failure to protect from the virus.
- Will event organisers and other businesses that continued operating until lockdown face claims from attendees or customers alleging they contracted the illness as a result? Although hard to prove, there is potential for lengthy litigation and resultant costs.
- Will employers face claims for a failure to adequately protect their workforce? For example, media reports have highlighted issues facing the healthcare industry due to a lack of safety equipment. This and other industries with supply chain concerns are likely to see employers scrutinised, with increased potential for class actions.
- Directors and Officers Liability (D&O): COVID-19 raises the prospect of lawsuits targeting directors and officers, which are already being filed in the US.
- Will directors and officers face scrutiny from their shareholders alleging a failure to adequately plan for contingencies, and thus leading to adverse developments to share price and business performance?
- Will there be employee claims against directors and officers for failure to implement plans that protect and manage employee wellbeing and mental health? (Note: Most D&O liability insurance policies contain a bodily injury exclusion.)
- Contingency, Travel, and Event Cancellation: Given the number of travel insurance policies activated and the scale of event cancellations and postponements – from the Tokyo Olympics to weddings – the impact is already being felt. For example, one reinsurer has estimated an event cancellation exposure of €500 million.
- Many policyholders in these sectors are consumers. Is the Financial Ombudsman Service likely to demonstrate particular scrutiny in how insurers treat their clients?
- Will insurers treat cancellations and postponements differently? To what extent will this be clarified for policyholders going forward?
- Other Areas: The pandemic will raise issues across a range of additional insurance areas and industries.
- Medical Malpractice: If hospitals must turn away patients and prioritise who receives treatment, will allegations of medical malpractice increase?
- Construction: Will COVID-19 and various governmental measures cause an influx of claims related to delays in construction projects? Could unclear governmental guidance, around employees being able to go to work, lead to an influx of employment practices liability claims against site owners that encourage construction staff to continue working?
- Aviation: Will financial instability in the aviation sector lead to insolvency of a large proportion of aviation policyholders?
- Marine and Cargo: Will marine and cargo insurers experience an influx of losses relating to delays? For example, what if government restrictions prevent ships from docking or unloading cargo at global ports?
- Life Insurers: Although life insurers can rely on strong balance sheets to withstand the pandemic, their profitability is likely to be affected for some years. Questions life insurers should ask include:
- What might COVID-19's impact be on longevity tables? As the global mortality rate increases, and continues to do so until the rate of infection and related deaths begin to slow, how will life insurers accurately calculate rates, risks, and premiums accurately, and what remedial work will need to be done to longevity tables?
- Is there any natural "hedge", given those most likely to be affected by COVID-19 are the elderly, and therefore any annuity payments that may cease prematurely due to the death of an annuitant?
Marsh can assist you in considering how best to demonstrate to your own professional lines insurers how you, as an insurer, are taking steps internally to prepare for these implications of COVID-19. By demonstrating that your company is acutely aware of the pandemic's possible impact on how you underwrite business and your balance sheet, and that you are taking mitigation steps, you will provide reassurance and ultimately differentiate yourself. This will prove crucial in navigating an increasingly challenging marketplace.