Social inflation, COVID-19 and the rise of insurtechs: the lawyers’ view

COVID-19 is having wide-reaching legal impacts on the re/insurance industry in the US, with multiple dilemmas coming to the fore. One of these centres around workers’ compensation: a number of states have enacted workers’ compensation presumptions that change the basic parameters of compensable liability so that COVID-19 can be included.

While the full effect of this remains to be seen, Rowe Snider, a partner in law firm Locke Lord’s Business Litigation and Arbitration group, says this is an area to watch.

“Traditionally, in contrast to occupational diseases, communicable diseases in the US have not been compensable within the workers’ compensation system,” Snider said.

“COVID-19 is now covered under these presumptions in a particular way and we don’t yet know exactly what the ultimate impact of these presumptions will be.

“The pandemic in the US, going from the date of our shutdown, is about six months old and that’s a relatively short timeframe to assess the impact on workers’ compensation.

“Traditionally there has been a unilateral burden on claimants in the US to prove their claim in our agencies that handle workers’ compensation—these new presumptions make serious changes in those rules,” he explained.

“The question is whether that changing balance will survive the pandemic: will it be seen as an approach more favourable to claimants in handling these claims, particularly with regard to the burden of proof, and what will be the long-term implications of that?

“There is also a legitimate question about what kind of safety net is needed for a pandemic situation of the type we face now, versus what is the role of the government and the insurance industry in addressing this type of risk?”

Dealing with BI
Another hot topic is business interruption (BI). In contrast to the UK, insurers in the US have so far been winning a large majority of the cases on coverage for BI. The central issue is that in most instances, cover is triggered by physical or property damage—and most US courts are concluding the COVID-19 shutdown is not physical damage.

“It is still early days on this in the US—there are around 700 or 800 major cases in the courts now—but it will be interesting to watch whether the momentum in the cases shifts towards policyholders and whether some kind of public law solution is going to reduce the pressure going forward on the need for a form of safety net for this kind of risk,” said Snider.

He also expects that the impact of COVID-19 could lead to insolvencies—but only among the smaller, weaker players.

“We’ve had some presentations from the Insurance Information Institute that suggest the solvency impact on the P&C world won’t show up until 2022 or 2023 because of lags in reporting claims, but we are looking at a potential significant uptick in insolvencies,” he said.

“However, I don’t think anyone in the industry thinks the major players are in jeopardy over this.”

He added that regulators might force stronger companies to take over smaller companies that face insolvency, and that a number of states have enacted legislation to allow portfolio transfers, whole insurance transfers or company divisions so that legacy books of business can be transferred and isolated in a single entity.

“We expect to see an uptick in that activity as well—potentially with books of COVID-19 claims, as those develop,” Snider said.

More tech appetite
The COVID-19 pandemic has accelerated digitisation within the industry, with an increased appetite from insureds to be able to do business quickly, easily and remotely.

Ben Sykes, also a partner at Locke Lord, says this has given insurtechs an advantage, particularly because of their intense focus on the consumer experience, which they have streamlined to the point of being able to pay claims almost immediately.

“Companies that are trying to become more consumer-centric are winning the battle for consumer trust, and while some of that may be simply a marketing aspect, it has real implications for decreasing the impact of social inflation, because the consumers are less likely to be challenging claims,” Sykes said.

However, he sounded a note of caution about insurtechs’ ability to sustain their momentum.

“Currently many of the prominent insurtechs of this world have combined loss ratios over 100 percent,” he said.

“The question is whether their claims technology artificial intelligence is able to scale quickly enough that they are able to get those down in sufficient time while the market for their stock is still strong.

“If they do not, they are in trouble—that is why we are seeing a number of these insurtech companies go to the public market now, because they want to be seen in the market as tech companies first, and insurance companies second.”

Another potential challenge in the insurtech space relates to companies providing third party underwriting services based on algorithms. The question is whether the algorithms may be discriminatory towards certain clients.

“There’s a big push right now to analyse that,” he said.

“The National Association of Insurance Commissioners is taking a look at whether there should be a disparate impact test—to check, for example, whether someone of a specific gender or race gets higher rates based on factors that are not superficially tied to race or gender.

“That sort of analysis requires a lot of work to ensure your algorithm is not discriminatory.”

Education is needed
While insurtechs’ focus on client satisfaction may help combat social inflation to some degree, the problem is not going to go away easily.

Locke Lord partner Alan Levin believes part of the solution to social inflation may lie in education.

“As an industry we have been challenged in convincing insureds we are on their side and the pandemic hasn’t helped that,” Levin said.

“The industry is going to have to play a bigger role in educating the customer about the real effects of social inflation. Insurers need to work with the reinsurers on this.

“We all know they continue to work on ways to lower the cost of insurance, but the social inflation effects are significant, and I think they are going to be exacerbated by the pandemic.”

He added that with a contentious presidential election process looming in the US, a solution from the federal government may not be forthcoming.

“The industry and the trades need to work together to educate insureds in a constructive manner,” he concluded.

While the pandemic has dominated conversations about the re/insurance world this autumn, Snider noted that other socially significant trends would still be having an enormous impact on the industry without COVID-19.

“We have the climate change debate raging in the US at a public policy level; the wildfires in California have been a dominant subject; and there are the social, economic, and racial justice issues which will have an impact on insurance and the ability of courts and policymakers to address solutions for what we are facing going forward,” he said.

“All of these would be significant with or without the pandemic, so they are important things for the re/insurance industry to notice and get ahead of.”