Current estimates for the insured loss arising from the Covid-19 pandemic range between US$80bn and US$100bn (1). At the lower end of the range, the pandemic will be one of the five largest Insured events in history, and at the high end of the range, it will be challenging Hurricane Katrina to be the largest. Although the pandemic’s short-term financial implications are significant, the medium to long-term effects are going to be equally challenging for the insurance and reinsurance industry.
Insurers and reinsurers face several challenges in the post-pandemic world on two levels. Firstly, they must manage these changes within their own organisations, and secondly, they have to assess the effects these changes will have on the risks they underwrite. Health and safety in the workplace is a significant issue. For many employees, their workplace has been their home for a significant amount of time. With more flexible working conditions likely to become permanent, home working will become a feature of working life. Employers will face many issues because of this change. Do employees have enough space and the necessary equipment? If they do not, should the employer have to pay for the equipment? Another major issue for employers is managing the quality and performance of work when employees are working remotely. This may impact insurers and reinsurers own work product but could also lead to increased professional indemnity exposures.
The move to home working could lead to significant alterations in the real estate market, which could see changes in risks for commercial property insurers. With a potential reduction in demand for office space and changes to the high street, this could lead to an increase in unoccupied buildings in city centre locations in the short to medium term. An increase in theft and escape of water claims is always a major concern when buildings are not occupied, and insurers will have to look to amending their coverage to avoid adverse claims experience. In the longer term, there may be a move towards changing the use of some offices to mixed commercial and residential use, which could lead to a significant alteration in property portfolios and possibly increased claims frequency as a result of the change in these risks. This significant change to property portfolios will be occurring simultaneously as commercial property insurers in several jurisdictions are struggling to model and price the increasing frequency of medium-sized cat events.
An area that has received significant focus is cyber risks. Whilst many companies have successfully transitioned to remote working, cyber security has not kept pace with the rapidly changing work environment. Cyber insurance results are looking poor for the 2019 and 2020 underwriting years. Whilst rate increases of 30% appear attractive, there is a genuine danger that premiums will be chasing the claims experience if significant improvements in cyber security are not made. Insurers need to work with their insureds to implement risk management to mitigate cyber risks rather than focusing on increasing rates and reducing coverage. Insurers should look to bring together cyber security and cyber insurance for insureds.
The long-term effects of the pandemic on transport are hard to predict. The national lockdowns have reduced accident frequency, and premiums have fallen as a result. Once the lockdown restrictions are reduced or lifted entirely, there is the possibility of an increase in road usage as people continue to avoid public transport. Insurers may find that they have lowered premiums only to see accident frequency rise sharply; this will be the case, particularly if the economy were to make a rapid recovery. Financial lines have seen an increased frequency of notifications because of the pandemic. Probably the most well documented being the professional indemnity claims brought against brokers for failing to advise clients to purchase policies with business interruption coverage for notifiable diseases. In addition, the turmoil that businesses have faced, and the volatility of earnings have led to claims against D&O policies for failure to make adequate disclosure surrounding performance. Also, there have been significant regulatory and compliance issues that could lead to potential claims if not managed carefully.
The successful insurers and reinsurers in the medium to long term will be the ones that make an early start on responding to the changes that the pandemic has created and identifying the longer-term trends from the short-term ones. For many of the issues highlighted, risk management and working closely with brokers and insureds to understand the changing environment they face will be critical. Simply hoping that premiums will stay ahead of claims payments is not a viable long-term strategy. Whilst it is difficult for insurers and reinsurers to plan for the future when they face so many short-term issues, it is essential for their future success. Well-trained and qualified staff with a focus on working with brokers and insureds to manage their risks and reduce claims frequency will be rewarded with long term profitability.
Written by Geoff Piggot
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