Insurers adjust casualty underwriting for COVID-19
After a long period of strong competition between insurers in the UK and plenty of capital available, insurers’ underwriting results deteriorated for several reasons, including global natural catastrophe disasters, but also a change in the calculation of the UK’s bodily injury Ogden discount rate, as well as the introduction of the General Data Protection Regulation (GDPR) in the EU. As a result, insurers started to review their business portfolios fundamentally.
In general, insurers are implementing higher underwriter discipline with far more business requiring sign off at a senior manager level within insurers, scrutinising coverage extensions and inner limits for professional indemnity and financial loss, to name but a few. Capacity is being reviewed and if insurers do not believe they can get the expected return on capital they may either exit certain lines of coverage or reduce the limits deployed.
While the impact of the pandemic on casualty claims is still uncertain, insurers are already taking action.
The potential COVID-19 impact
For now, Covid-19 claims trends in casualty insurance are unforeseeable, but some market observers compare COVID-19 to the effect asbestos had on the insurance market which is estimated to have cost the industry around $100 billion and almost brought down the Lloyd’s market.
Claims may centre on workers’ compensation.There is already considerable noise about COVID-19 being regarded as a disease and the consequences this may entail for casualty insurers. Some believe public liability policies will be most affected. Insurers may indeed face some challenges in this area, particularly around hospitality, retail and care homes.
If the lifting of lockdown restrictions trigger a new wave of infections, chances that a claimant will be successful in court when arguing that defendants did not offer appropriate protection are likely to increase. In a second wave or subsequent spikes, courts are likely to assume a higher knowledge and awareness of the COVID-19 implications, 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 and defence costs.
Such lawsuits could target schools and hospitals, for example, 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 employers’ liability, some claims may become expensive when the policy covers the cost of an employee’s lost wages.
Insurers take action
In preparation for potential claims, casualty insurers are taking precautionary measures:
• COVID-19 exclusions are growing momentum with some insurers applying to all risks, and others focusing on areas of key exposure such as healthcare, leisure and hospitality.
• Some Insurers will not look at new business where there is potentially heavy COVID-19 exposure.
• Despite adapting most liability programmes to reflect the lower exposure as clients’ businesses experienced during the lockdown, insurers are increasing rates to reflect the perceived price for the risk and a potential increase in claims once business resumes.
• Global programmes with US policies remains an area of concern as rates continue to increase significantly in the US, applying rate pressure on global programmes.
• Decision-making is being taken away from underwriters, with quotations requiring senior management sign-off taking significantly more time, and detaching the broker from the ultimate decision maker.
• Terms are taking far longer - three weeks or more – with frequent alterations such as capacity restrictions or exclusionary language leading up to renewal.
• COVID-19 exclusions and communicable disease clauses are frequently being applied from renewal, with an expectation that insurer flexibility will be restricted once reinsurance renewals prohibit underwriters from adopting a case-by-case stance.
Communicable disease language differs significantly between insurers and brokers are concerned the exclusions may unintentionally impact on non-COVID covers. There are also political implications such as in the US where litigation around policy wordings ended up disregarding certain policy restrictions.
Many insurers are asking for more information as they push their reinsurers to allow them underwrite the risk and apply restrictions where needed rather than reinsurers applying a total exclusion across their book.
Due to this more disciplined approach, insurers are requiring significantly more underwriting information so they can document their files appropriately. What this means for clients and prospects in the short term is that insurers are no longer looking at automatic pricing reductions without a sound technical rationale for why a reduction is merited.
Insurers are reluctant to absorb any exposure increases within existing pricing and are looking to charge for increased exposures. Many insurers start negotiations demanding a rate increase.
This cycle is likely to continue and the market may even harden further over the short to medium term until additional capacity arrives and/or insurers reach their set profitability levels.
Long Term Agreements (LTA’s) are becoming harder to place for primary business without incremental increases (up to 10%). Certain Insurers are however willing to spread an initial increase over a set period which can mitigate an increase (ie. a proposed 5% increase. 3% increase in year 1 and 2% in year 2.
Opportunities in a challenging market:
• Alternative markets may assist in obtaining sufficient capacity
• Submit more robust information such as:
1. Detailed Property value
2. Liability claims experiences in spreadsheet format
3. Risk Engineering Surveys within the past 4 years
• The increase in electronic trading on platforms such as Placing Platform Limited (PPL) is improving documentation and driving efficiencies for both brokers and insurers.
For further information, please contact:
James Pryke, Partner, Retail Property & Casualty
T: + 44 (0) 20 7933 2895
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