Insureds could turn guns on brokers over COVID-19 BI cases

The re/insurance industry will today (September 15) discover the outcome of a business interruption (BI) test case brought by the UK’s Financial Conduct Authority against insurers with ‘questionable' wordings in the UK in light of COVID-19 claims.

But whatever the outcome of the case which will decide whether insurers will ultimately be liable for BI losses related to the COVID-19 pandemic there will still be some unfulfilled expectations on the part of insureds, according to Charles Manchester, chief executive of Manchester Underwriting Management.

“I’m expecting them to turn their guns on the brokers that advised them. Whether they’ll ultimately get satisfaction against the brokers, I suspect not, but the costs incurred are going to be massive,” he stated.

Manchester was speaking in an interview held on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are held live on a weekly basis and content is available on demand at any time to members.

Manchester explained that the professional indemnity market generates a relatively small pot of premium and the exposure could be very large.

He added: “To coin a phrase, it’s fair to say that the market for professional indemnity for insurance brokers and managing general agents (MGAs) is pretty much in lockdown. If your current insurer offers renewal terms, then tear their arms off.

“If they don’t, then you might have trouble getting a quote at all.”

However, the COVID-19 pandemic is not impacting this market just through liability for losses.

Markets are being hit by the expectation of the deepest recession for 100 years, said Manchester. Unemployment will hit certain professions harder than others Manchester cites the example of when there has been a correction in the economy, historically it hits house prices, and if this happens, it will probably hurt valuers and solicitors.

“For all lines of business though, the correlation between the claims experience and the economy is extraordinary. Pretty much everything gets worse during a downturn in the economy,” he added.

A COVID-19 catalyst
Turning to the hardening market, Manchester said: “Certainly in longer tail lines of business and also now beginning to seep through to shorter tails, there has been too much capacity and insufficient premium to go around.

“Consequently, terms and conditions became ever broader and rates got ever lower,” he explained.

While some in the industry have questioned whether there would be a hard market again, said Manchester, “you can’t keep piling in losses and cutting things to the bone, and stay in business”.

He added that at some point there has to be a correction, and this started a couple of years ago with the Lloyd’s remediation programme, accelerating as catastrophe after catastrophe has started to happen.

Unsurprisingly, COVID-19 has acted as a catalyst for the hardening market.

The more obvious way the pandemic is changing the market is in the directly related losses, such as BI.

“We don’t yet know how that will unwind, but we do know it creates a lot of uncertainty. If you add up the numbers, they could be almost existential for some insurers,” claimed Manchester.

Indirect losses are going to impact areas such as the D&O and professional indemnity markets, he explained.

“When there’s that degree of uncertainty, it spooks the horses,” said Manchester. “Wherever there’s uncertainty, you’re going to get a hardening.”

MGAs ‘must add value’
Manchester serves as chairman of the Managing General Agents’ Association. Speaking with that hat on, he explained: “COVID-19 is a massive driver. What we don’t know and this affects all of us in the industry is how many customers are going to be there to buy insurance in six months’ time?”

He added that the insurance industry is a tremendously resilient sector and people need to buy insurance, whatever the economic climate, provided they’re still in business.

However, the pandemic and its resulting recession have forced the closure of many businesses in the hospitality or travel sectors. The income for MGAs focused on these industries will be “devastated”, warned Manchester.

He added: “It is exacerbating what was already a hard market in many specialty lines, and many MGAs tend to focus on specialty lines. Consequently, the issue of capacity constraints and availability is raising itself quite seriously for MGAs.”

In any situation, however, there are going to be winners and losers. For the MGAs that have demonstrated over the past years that they have real value, they are still going to have capacity and be able to take advantage of a hardened market where they’ll get better rates, according to the chairman.

He concluded with some words of advice: “You’re going to have to compromise in a hard market you might get less commission but then you’ll have higher rates.

“It’s going to be a tough period for many MGAs but the ones that are really adding value should be able to make it through.”

To watch the full video interview on which this write-up is based, click here and visit Intelligent Insurer’s Re/insurance Lounge.