Lessons learned: what COVID-19 has taught the re/insurance industry

The fallout from the ongoing battles over COVID-19 coverage is expected to impact the entire re/insurance industry, particularly on policy wording. Just last month, the UK’s Financial Conduct Authority filed a ‘leapfrog’ application to the UK Supreme Court to appeal the High Court’s ruling in the COVID-19 business interruption insurance test case.

But a panel of industry veterans believe the effects could reach even further. They think the challenges of managing COVID-19 will prompt changes in the industry—and that it still has an important role to play in managing future pandemics.

“On a macro level, I would hope that there will be reflection and soul-searching on the part of the insurance industry,” Aaron Le Marquer, partner at Fenchurch Law.

“In the early stages of the pandemic, when it became clear it would be a global catastrophic event and that such significant losses were being incurred around the world, I saw quite a few statements being very rapidly being put out by insurers saying ‘our exposures are very low and we’re not going to be touched by it’.”

While concern over stock prices was a valid reason to issue these statements, said Le Marquer, in terms of the industry’s reputation “it seems to me to be a terrible message to be putting out, that if there is a global catastrophe the insurance sector should have no part to play in addressing that”.

Le Marquer was speaking during a panel discussion 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.

During the session, called “COVID-19 litigation and threats”, Le Marquer, alongside three other industry veterans, provided an overview of the ongoing lawsuits and litigation being fought across the re/insurance industry.

“It seems to me that the industry should have a part to play on systemic risks and I hope it will find a way to do that effectively,” he added.

The pandemic has been a driver of fear among stakeholders and much of the loss has been fuelled by people afraid to do things, said Nir Kossovsky, co-founder and CEO of Steel City Re.

Kossovsky explained that the insurance industry needs to look at the lessons learned and understand the other types of major events that could have massive stakeholder impact, such as a major cyber event that renders all credit cards useless.

“The industry needs to recognise that there will be these sorts of massive events that will ultimately result in injury or harm, and that the industry will be asked to cover,” he added.

Words matter
COVID-19 litigation is already influencing policy wording. David Loughran, senior vice president of product and chief economist at Praedicat, explained that if the market can move to coverage language that is more affirmative (ie, covering certain events such as the pandemic or some aspect of the pandemic) this would create certainty.

“It’s good for insureds as they know for a fact that they’re transferring the risk they want to transfer,” said Loughran.

“It’s also good for insurers who can then manage those aggregations explicitly and price appropriately.”

Sridhar Manyem, director, credit rating criteria research and analytics at AM Best, added that general commercial property policies are already including more explicit language which excludes pandemics from coverage.

“General liability policies have been less explicit in terms of their pandemic policies and I think they’re going to be subject to more interpretation and litigation. Given the social inflation and litigation financing aspects, these are only going to have adverse effects,” Manyem said.

Loughran agreed, adding that the pandemic is indicative of a broader issue in the market: that policy wording can be ambiguous, which causes problems for both insurers and insureds.

“A market that moves towards more explicit affirmative coverage for catastrophic risks that specific companies face is a better market and leads to more sustainable growth,” he added.

According to Le Marquer, many policyholders in the UK have found that they’re having these policy exclusions added on at renewal.

“It’s a quick fix but that doesn’t address the problem going forward of the next risk that hasn’t been foreseen and that is not catered for adequately in existing wordings,” he added.

Problem-solving
In May this year, insurance groups in the US unveiled the Business Continuity Protection Program, a federal programme which would allow businesses to purchase revenue replacement coverage for up to 80 percent of payroll and other expenses.

“We know that pandemic is not a completely insurable risk so solutions involving governments are definitely warranted,” said Manyem. “There has to be some kind of public-private partnerships around the world to tackle this scenario in future.”

Kossovsky claimed that much of the discussion on the coverage language can be reduced to alternative ways of viewing losses. One alternative, he suggested, is to use various parameters for triggers.

He explained: “Parametric insurances are less ambiguous as they provide the insurer with a far greater sense of what their exposures are on an actuarial basis.

“They also provide a very clear definition for the consumer or the purchaser of the insurance contract.

“Eliminating ambiguity and setting expectations better will be a part of the key to protecting the reputation of the industry and economic solvency,” he concluded.

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