As Covid-19 claims begin to materialise and is continuing to have an effect on the economy, insurers are starting to adapt their underwriting strategies. While developments remain fluid, some general tendencies are becoming apparent. Acknowledging these trends should help in the preparation for policy renewals.

The effect on claims 

So far, the insurance classes most affected by the pandemic were contingency and travel. There have been some claims in property, but there is still uncertainty around some of the wordings related to business interruption (BI) which the Financial Conduct Authority's (FCA's) test case aims to clarify.  

Insurers are also increasingly seeing COVID-19 related claims for losses in directors' and officers' (D&O) liability insurance. Some shareholders for example have filed COVID-19 related lawsuits against directors of cruise lines operators. Litigation tied to the fall-off in the stock market could also result in D&O claims for insurers. 

While there have been many concerns around higher cyber risk during lockdown as staff mainly worked from home, potentially using unsecured personal technology devices and home Wi-Fi networks, a sharp increase in standalone cyber insurance claims has yet to materialise.

In professional liability, claims may be driven by alleged wrongful termination following layoffs in employment practices liability. 

Bankruptcy risks have increased during the pandemic and is affecting the trade credit line of insurance that protects against the non-payment of outstanding debt. However, many governments are issuing guarantees and are taking over risk from trade credit insurers to help revive the economy.

In a recent disclosure to investors, Chubb has estimated that its second quarter 2020 results will include COVID-19 related losses of $1.37bn, representing the bulk of its $1.81bn of pre-tax global net catastrophe losses during the period. 

Of the total COVID-19 losses, the highest number of claims are in entertainment and commercial property-related business interruption and accident and health (A&H) products including travel insurance products, followed by claims relating to liability insurance products, including professional liability (directors and officers, employment practices, professional liability, etc.), workers' compensation and other liability related products. At the same time, many insurance lines such as commercial motor may be benefiting from the decline in economic activity due to the lockdown through lower claims as a large share of the workforce continues to work from home. This may not be consistent across all industry sectors since logistics experienced a spike in driving due to increased home delivery and supermarket sales.

Covid-19 claims trends in liability insurance are less clear at this stage. Some market observers expect them to centre on employment liability, others believe public liability policies will be most affected. There is already considerable noise about COVID-19 being regarded as a disease and the consequences this may entail for liability insurers. Public liability insurers may face some challenges, particularly around hospitality, retail and care homes. If the lifting of lockdown restrictions triggers a new wave of infections, chances of a claimant to be successful in court when arguing that defendants did not offer appropriate protection are likely to rise in a second wave or subsequent spikes, courts are likely to assume a higher knowledge and awareness and businesses that failed to comply with rules or take the right measures will be more likely to be considered negligent.

Proving causation may remain difficult, but social inflation and loss of income may nevertheless inflate claims costs and defence costs.

Such lawsuits could for example target schools and hospitals, potentially resulting in claims on general liability policies. The ability to establish negligence will be crucial to determine if a claim is successful. Third-party liability claims can be expected as individuals allege that they contracted COVID-19 at hotels, gaming establishments and on airplanes. In workers compensation, some claims may become expensive when the policy covers the cost of an employee's lost wages. 

 The reaction of insurers

Despite significant uncertainty, insurers have started to adapt their underwriting strategy to reflect a changed risk environment in the affected insurance classes. This can mean a reduction of capacity in some lines, a tightening of terms and conditions or increased premium. Insurers are also keen to create a buffer that makes up for the negative impact the pandemic had on their investment portfolios. Already before COVID-19 insurers have been keen to address unsatisfactory profitability levels by charging more for the protection they offer. Insurers are struggling with cover intent on many lines which is exacerbated by the potential size of the COVID-19 event from both a claims and profitability perspective. The fact that the crisis is a truly global event that is not geographically isolated or is impacting only one sector is unprecedented. This explains why COVID-19 has accelerated a market that was already starting to harden in 2019 and is creating greater focus and scrutiny on premium rates, terms, conditions and coverage.

Insurers will try to manage portfolio volatility through capacity adaptations particularly in industries they perceive have been particularly impacted by COVID-19. This will lead to greater focus on terms, conditions and exclusionary language for communicable disease exposures.

At renewal, property/liability insurers may therefore try to reduce the scope of the coverage in the impacted lines of insurance, potentially demanding pandemic and bankruptcy exclusions while pushing for higher rates. 

 Preparing for renewal

It is worth noting the importance of maintaining and retaining good records of health and safety and risk management initiatives to build up good defensibility material, ensuring that the company has adhered or continues to adhere to best and most up to date advice from a regulatory, government or industry trade bodies. Providing robust duty of care records is now more important than ever for liability policies.

COVID-19 may have changed the risk profile of companies in hospitality or manufacturing in not only the short but potentially mid and long term.  While some changes may be temporary, they may result in new and differing product offerings long term. Such issues may involve products that will have a different level of product safety and regulation such as masks or ventilators or, in hospitality, different occupancy or changed use of premises. Nevertheless, the outcome of renewal negotiations will also reflect the quality of the relationship between the insurer and the individual client as well as the claims history of the business in general. As ever, an early and careful preparation of renewals will be crucial to achieve the best possible deal.