Insurance Marketplace Realities 2020 Spring update

Introduction/Executive Summary

Last fall in this space we asked, “How long will it last?” and everyone knew what we were referring to: the hard insurance market. Today we could ask the same question, and everyone would know what we’re referring to: a global pandemic that has changed the world — drastically for the moment, and perhaps permanently in ways that will only become clear over time. But the question now for us as insurance and risk advisors is this: What impact will COVID-19 have on the P&C industry in both the short and long term?

The quick answer, we can say with confidence even at a time of great fear and obvious uncertainty, is a positive one. The insurance industry will be all right. We have been built to help sustain organizations and people in the worst of times and we will do that now. We will not and have never pretended to be the answer to all problems, and must state up front, to the frustration and disappointment of some, that for the most part a pandemic is not an insured event. But countless insurance policies will apply, and many billions of dollars will change hands. Policy language will be parsed, tested and litigated. And as governments and businesses look to find ways to mitigate such a crisis in the future, we as an industry will be one of the key participants in the conversation.

The long answer, which we begin to articulate below, is more complicated — perhaps as complicated as the policy language that will be at the heart of determining what coverage applies on a case-by-case basis in the weeks and months ahead. For property insurance, including business interruption (BI), which is the focus of many heated discussions these days, most coverage is dependent on the existence of physical damage. On the liability side, there are many open questions and more arising every day. The various lines of business discussed in this report will be impacted to a lesser or greater extent, but all will likely be impacted. An event of this magnitude, an event in many ways unprecedented in modern human history, is going to impact everything.

A reputational moment

Like every great loss event, this will be a reputational moment for the insurance industry. We will be judged by the extent to which we are perceived to have helped organizations weather this terrifying storm, with its unknown duration and its universal reach. As always, much of that help will come from the contracts we sign — the insurance policies — contracts that spell out exactly what help is promised, although not always with the perfect clarity we would like. Debate over interpretation of that contract language is already generating lawsuits. If history is a guide, the courts will decide some for the insureds and some for the insurers — and it will be an expensive process for all.

But at the end of the day (though at this moment it’s looking more like a year than a day), most insurers should be able to live up to their contractual promises to pay. The industry is solvent, well capitalized, and positioned to deliver in times of need. We have seen estimates that insurable losses for the pandemic could easily top $80B (our current estimate is $32–$80B), but insurers (and reinsurers) are ready. More on the insurer situation later; for now, let’s focus on lines of insurance and what insureds can expect.

A line-by-line look

Business interruption (BI)/property

This is the first place most insureds look when assessing the applicability of their policies. For the few with non-physical damage BI extensions, coverage will likely apply. For most others, coverage will be very limited and highly dependent on the specifics of the insured’s policy language, the facts of the insured’s situation, and, in some cases, the jurisdiction governing the insurance contract. Here are some considerations:

• Is there actual physical damage?
• Is this a covered peril?
• Does the policy provide any coverage for non-physical damage or “special peril” business interruption? Is there a sublimit? Is it site-specific? Does it apply per location?
• How many events is a pandemic?
• Is there an infectious disease exclusion?
• If there is civil authority or ingress/egress coverage — for cases where governments have required businesses to shut their doors — is a covered peril and/or property damage required?

Another overriding question already headed for the courts is whether the presence of the virus constitutes covered property damage. The answer will ultimately stem from the specifics mentioned above. Regardless of the limitations in most BI coverage, insured BI loss estimates are large, ranging from $5B to $15B.

Meanwhile, BI is the subject of current legislative action in many states, action we do not believe would survive inevitable challenges in the courts.

General liability

Fingers are already pointing, and blame is being tossed around. Whether the blame will stick will depend on facts. If it sticks, whether it is covered will again depend on the applicable policy language, particularly whether any form of communicable and/or infectious disease exclusion or other exclusions, such as the pollution exclusion, may apply. Crisis response coverage embedded in some liability policies may already be triggered. We suspect that the liability questions will receive a huge amount of attention in the coming months. One silver lining, however, is that the suspension of the courts will lead to long delays for pending civil actions. When courts reopen, they will deal with criminal matters ahead of civil matters. The resulting delay may lead plaintiffs and their attorneys to be more amenable to negotiated settlements.

Event cancellation

This line may be the most directly impacted. Early estimates pointed to a total payout close to that of a moderate sized cat event: $7 – 8B.

Workers compensation

Another list of significant questions presents itself, and the answers in this case lie not only in the policy language but in the rules and regulations of each state.

• Will COVID-19 be considered an occupational disease?
• Will quarantines and other pandemic-related workplace responses be deemed compensable?
• Will employees of businesses deemed essential by state governments be treated differently when it comes to compensability?
• Is foreign voluntary comp triggered?
• What will be the workers compensation impact of layoffs and furloughs?

Auto

Here’s another silver lining: with lower economic activity and stay-at-home restrictions, auto accidents are down. However, given the number of businesses asking employees to make deliveries directly to customers, issues surrounding non-owned vehicles are on the rise.

Directors and officers (D&O)

An intense hard market was in play before the coronavirus struck, and that is certain to continue. If the economy collapses further and executives face blame for decisions related to the pandemic, the market will worsen. Given the extremity of the economic situation and the depth of the impact on businesses, management liability lines could be among the most deeply affected. Bankruptcies yield D&O claims and bankruptcies are coming.

Employment liability

The massive layoffs taking place are likely to lead to claims of unfair treatment in determining who stays and who goes. Claims relating to privacy issues and retaliation could also spike.

Construction

In addition to project delays and cancellations, construction risk managers can expect further market hardening, as significant declines in available labor typically give rise to increased losses in workers compensation and general liability.

Environmental

Those thinking that pollution policies could help with COVID-19 losses are likely to be only partially satisfied, and some may be disappointed. Again, the specific policy language is critical. Some will find affirmative coverage for bacteria and/or virus, but the coverage may likely only apply to disinfection/clean-up costs, since many policies include a bodily injury or “human-to-human” contact exclusion.

Unfortunately, the above list is not exhaustive. Many other lines will be affected by the COVID-19 crisis and the economic shutdown, including trade credit, health care professional liability, personal lines and of course life and health insurance. We are hard pressed to recall another event that has impacted so many lines of insurance.

Standing tall on shaky ground

We’re not worried about insurers surviving the pandemic. In the wake of the Great Recession, the rules regarding insurer capital tightened, putting carriers and their capital on firmer footing. Conservative investments help as well. That doesn’t mean an economic downturn of this magnitude won’t have balance sheet impact, however. Several factors are at play.

• Given the uncertainties outlined above in many lines of insurance, carriers could be on the hook for more than they may have anticipated when the pandemic first came into view.
• The legal proceedings likely to accompany the many coverage disputes will produce considerable defense costs.
• Decline in economic activity will mean reductions — big reductions — in insurable values. Falling payrolls mean lower workers compensation premiums. Closed facilities and reduced activity mean lower property and BI values, which again cut into premium. Finally, there is the ugly prospect of policyholder bankruptcies, which will reduce aggregate premiums paid to the industry.
• Plummeting interest rates cut into another source of insurer income.
• Rising premium rates, expected in virtually all lines of business, will only make up so much of these potentially large declines.

The big picture

So…how long will the hard market last? Last fall we predicted that property rates would continue to rise throughout 2020 and likely into 2021, although we expected a more orderly property market by mid-2020. For umbrella and public company D&O, we predicted four to six quarters of unpredictable, hard conditions. Unfortunately, our answer today is that the pandemic and the resulting economic downturn will very likely extend the hard market through 2021. It may not expand it — rate increases for most lines may not increase further than they’ve been increasing for the past several months — but market discipline and upward rate pressure will continue as losses from the pandemic materialize and investment income deteriorates.

Rising rates are not the only difficulty insurance buyers will face. Coverage terms and conditions, which had been relatively stable in 2019, are now under scrutiny — in some cases intense scrutiny. The inconsistency of the coverage that we are finding for the pandemic (i.e., coverage that is not clearly excluded) has highlighted the extent of the broadening of coverage that we saw during the soft market years. As a broker, we applaud the astute negotiation of clients and brokers that led to this broadening, but we know our underwriting partners have a different view. Moves are afoot — moves that began as the soft market ended — to rein in manuscript forms and extensions, particularly in property, and that effort may go beyond coverages relevant to the pandemic. Similarly, underwriters in other lines of insurance are now seeking communicable disease and similar exclusions, albeit with only mixed success, but we expect pressure on coverage to last for the foreseeable future.

Rapidly changing conditions are driving many renewal negotiations down to the wire, but the work is getting done, and along the way we’ve seen some positives worth noting. For the most part, the global insurance market hasn’t missed a beat. Remote underwriting works. Site visits can’t happen; video chats can. Underwriting executives have made themselves accessible — no one’s out to lunch or on a plane or behind closed doors in someone’s office. You may have to listen to their dog barking or their kids yelling in the background, but you can reach them. Most remarkable of all is the sense that despite all the stress and pressure, business is being conducted with an exceptional degree of civility. There’s a strong sense that everyone in our business is in this together. We are seeing consideration granted by underwriters, especially in extenuating circumstances — of which there are plenty. We are seeing accommodations. That spirit is something we hope will last.

The bigger picture

Another exciting and potentially positive development is the discussion of a public/private partnership to address the threats posed by future pandemics. This could take the form of a federal backstop along the lines of the Terrorism Risk Insurance Act (TRIA) that followed 9/11, or it could follow the model of the National Flood Insurance Program (NFIP), which is funded by the government but largely administered by the private insurance industry. We think pandemic risk is different and the exploration of solutions should be robust and involve all stakeholders — public and private. We also think that the discussion should include other potentially catastrophic issues facing the world today — climate risk, for example, as we pointed out to our readers last fall. As the saying goes, we shouldn’t let a crisis go to waste.

While we see the discussion about prospective solutions to be positive, we also note a more troublesome intersection of government and insurance in recent legislative efforts to retroactively force insurance companies to pay all business interruption claims — regardless of the contents of signed contracts. While we understand the impetus to help the many businesses suddenly in great need, we expect that, should any of this legislation pass, the courts would acknowledge that such moves would actually undermine the entire foundation of our industry — mutual agreement on the terms of risk transfer. We assume that, in the end, all parties would agree on the importance of upholding the sanctity of a contract, but it is a possible risk.

What to do

The realities of this marketplace are challenging. The personal, social and economic upheaval we’re all experiencing now make it only more so. What to do about it? We offer line-by-line suggestions and insight in the pages that follow. Below we offer a list that may contain the obvious but is at least a place to start:

• Comply with all governmental directives to reduce potential harm and mitigate potential liability.
• Gather your policies and have an expert review. Your policies will be the biggest and likely sole factor in determining coverage.
• Review cancellation clauses, minimum earned premium provisions, collateral positions, etc.
• Comply with all policy conditions. Note especially warranties, vacancy clauses, etc. and alert your insurers about material changes in your operations so as not to jeopardize coverage.
• Review exposure data, as it is changing rapidly.
• Be careful in dealing with your workforce.
• Maintain records, especially payrolls, class codes, etc., as workers are furloughed or laid off. These will be critical in an audit.
• Be wary of actual or inadvertent discrimination based on ethnicity, race, etc. toward employees or customers.
• Be sure to address the risks that may arise in idle or closed facilities.
• Given the challenges with collecting engineering data remotely, be ready to establish protocols for re-establishing inspections and site visits.
• The global insurance market is operating. But there is considerable distraction and uncertainty. Underwriting decisions may take longer than expected. Allow ample time for renewals.
• Accept the switch to video conferencing in lieu of face-to-face meetings. Remember to brush your hair, at least occasionally.

A word of encouragement

Our task here is mostly to talk about the business of insurance. But this is a people business. At a moment like this, we cannot ignore the human toll around us. Our hearts go out to everyone who faces personal loss in whatever form that loss may take. Perhaps the best encouragement we can offer is a reminder that the hottest fires forge the strongest steel. Together, we will get through this and we will come out stronger.

Looking forward, looking back

Comparing our updated rate predictions for 2020 to those in our initial 2020 issue published last fall, we not only continue to see rates move upward, but for the first time in the history of this publication, not a single line is predicting overall decreases. Three lines (workers compensation, kidnap & ransom and terrorism) are expecting a mix of small decreases and increases, and two lines (surety and international casualty) are expecting flat rates. In every other line, we expect increases. In 11 cases, our experts predict steeper increases than they did in the fall. In the one mitigating trend we can spot, eight lines are likely to see increases no greater — and in some cases smaller — than predicted in our last issue. However, where the upper end of forecast rate increases are predicted to be smaller than we predicted in the fall, it is mostly because some insureds later in the year will be experiencing year-over-year rate increases, which may be moderating. But the overall trend is clear, and the COVID-19 pandemic and ensuing economic disruption could yield further market hardening in many instances.

Here are highlights from our 2020 predictions:

• Property rate increases are edging upward, but overall not accelerating.
• The commercial liability marketplace, particularly for umbrella/excess liability, has become dramatically more challenging since our autumn report.
• Workers compensation rates remain competitive.
• Forecast auto rate increases continue to hold at +6% to +12%.
• D&O buyers already bracing for significant price hikes could face further upheaval given the overall economic uncertainty.
• In many lines, the ultimate impact of the pandemic and the economic downturn remains to be seen.

Like the times we find ourselves in, these predictions are pushing the envelope of our previous experience. One thing is certain: the insurance marketplace will be challenging throughout 2020.

Overall, 23 lines are expected to see price increases and five will see a mix of both increases and decreases (or flat renewals).

* The 2020 spring update figures reflect the addition of managed care errors & omissions as a separate line of business. The 2020 figures reflect the addition of personal lines and financial institutions — FINEX as separate entries. The 2019 figures reflect the addition of marine, cargo and senior living/long-term care as separate lines of business. The 2018 spring update figures reflect the absence of marine in that issue; the 2017 figures reflect the addition of international coverage as a separate line; and the 2018 figures reflect the addition of product recall and the subtraction of employee benefits, which are no longer covered in this report. Casualty lines are discussed in one combined report but are included in this table as separate items (GL, umbrella/excess, auto and workers compensation).

For more insight on how you can prepare for a marketplace in flux, contact your local Willis Towers Watson representative.