The coronavirus pandemic and resulting lockdowns have significantly impacted commercial and specialty lines of insurance, both in terms of claims volumes and financial losses. The rapid spread of COVID-19 in the first half of 2020 caused drastic lockdowns, forcing the closure of businesses, cancellation of events and a general curtailment of economic activity around the globe. In April, 3.9 billion people—almost half the world’s population—were largely confined to their homes. Many markets experienced deep contractions during lockdowns. The U.K. economy shrank by almost a quarter, for example.
The COVID-19 pandemic is one of the largest economic loss events in history for companies and insurers alike. However, it is not only the magnitude of the impact that is unprecedented. Claims trends and risk exposures are also likely to evolve in both the mid- and long-term as a result of the pandemic. For example, claims in some lines of business, such as entertainment insurance, have surged.
On the other hand, traditional property and liability claims have been subdued with the reduction in economic activity during lockdown phases—most notably in the aviation and cargo sector, but also across a range of other industries, as there have been fewer accidents at work, on the roads and in public spaces with many people staying home. The suspension of courts and trials has also had a positive impact on U.S. claims settlements as some claimants and plaintiffs have become more open to negotiating settlements out of court rather than endure lengthy waiting periods for their case to be scheduled.
Estimates vary widely, but some reports indicate that insurers could pay claims related to the coronavirus pandemic of around $80 billion in the United States and United Kingdom alone. This is comparable to the market-shifting losses from hurricanes Harvey, Irma and Maria in 2017. Lloyd’s predicted the figure could reach up to $110 billion ($203 billion when investment losses are factored in), on par with some of the biggest claims years in the insurance industry’s history.
In general, claims activity is likely to pick up again once businesses reopen and economic activity resumes. For now, businesses are experiencing the following claims trends amid the pandemic:
Property damage/business interruption. COVID-19 did not significantly impact property damage claims as loss drivers like weather are not correlated. However, as production lines restart and ramp up, this can exacerbate the risk of machinery damage, breakdown, and even fire and explosion. Holiday shutdown periods are typically followed by a spike in machinery breakdown and fire claims, so a similar risk scenario could present itself after a pandemic shutdown.
COVID-19 has caused global business closures and disruptions, which may not be covered without physical damage to trigger policies. However, the pandemic has impacted the settlement of standard business interruption claims in different ways. While shuttered factories do not produce large business interruption claims, they present a different risk profile. Fewer people onsite and postponed maintenance and safety inspections could mean that fire, water or other damage to facilities may go unnoticed, delaying necessary repairs and prolonging costly disruptions.
Liability. Liability claims are typically long-tail with a lag in reporting, so general liability and workers compensation claims related to COVID-19 may still materialize. However, the experience of past infectious disease outbreaks suggests insurers will see few successful claims under general liability policies due to exclusions and the fact that causation is hard to prove. For example, with the SARS outbreak, insurers did not experience a notable spike in claims, and liability insurance lines were largely unaffected. The situation with COVID-19 is similar, so one can anticipate a liability claims experience comparable to previous outbreaks.
A number of coronavirus outbreaks have been linked to high-risk environments such as gyms, casinos, nursing homes, cruise ships and food/meat processing plants. Additionally, because many establishments have been temporarily closed, slip and fall notifications are down. Liability claims notifications for COVID-related losses have typically been from U.S. mid-sized corporations against general liability policies or workers’ compensation, including those made under pollution wording for COVID-19 infections. However, most claims will not be covered due to infectious disease exclusions.
The pandemic has not had a negative impact on product liability and recall claims thus far—in fact, it may have temporarily lowered claims. For example, there was a 77% reduction in automotive recalls in Europe, the Middle East and Africa during the second quarter of 2020 compared to a year earlier, according to Stericycle’s Recall Index Insight Report. Most of that reduction can be attributed to the pandemic and declines in overall production levels, although changes to production facilities due to social distancing and the economic impact of COVID-19 could shape claims going forward. The pandemic will likely have the greatest impact on supply chains in the automotive, food and beverage, and pharmaceuticals sectors. Longer-term social changes in consumer behavior could also affect product recall claims in the months and even years to come.
Directors and officers. In addition to event-driven litigation, a wave of insolvencies presents potential sources of D&O claims. To date, only a relatively small number of securities class action lawsuits related to COVID-19 have been filed in the United States. These include suits against cruise ship companies that suffered outbreaks, as well as litigation regarding the business impact of the pandemic on companies’ financial performance or operations. Investors have also filed claims against firms making misrepresentations about COVID-related therapies, testing or personal protective equipment.
The pandemic could trigger further litigation against companies and their directors and officers if it appears boards failed to adequately prepare for a pandemic or prolonged periods of reduced income.
Insolvencies are another area of potential concern. Economists at Euler Hermes are predicting an “insolvency time bomb” through the first half of 2021 as a consequence of the pandemic. The Euler Hermes Global Insolvency Index is likely to hit a record high of +35% by 2021, cumulated over a two-year period, with half of the countries recording a new high since the 2009 financial crisis. S&P warned that 2020 will set a 10-year U.S. bankruptcy record and predicted the trend will likely continue into 2021. Further, 2020 will probably set a record for mega-bankruptcies of companies worth over $1 billion, while the rate among companies worth over $100 million will rival levels from the 2008 financial crisis. These insolvencies could lead stakeholders to go after directors with allegations that boards failed to prepare.
Aviation. The aviation industry has seen few claims directly related to the pandemic thus far. In a small number of liability notifications, passengers have sued airlines for cancellations or disruptions. Punctuated by a record 94% year-over-year drop in April, global air traffic declined massively in 2020. As a result of the reduction, there was also a decrease in slip and fall accidents at airports—traditionally one of the most frequent causes of aviation claims.
Although a large proportion of the world’s airline fleet has been grounded, loss exposures do not just disappear. Instead, they change and can create new risk accumulations. For example, grounded aircraft might be exposed to damage from hurricanes, tornadoes or hailstorms. The risk of shunting or ground incidents also increases and can result in costly claims.
Entertainment. The entertainment and events industry has been one of the hardest hit by the pandemic, with lockdowns and subsequent measures to curb the spread of COVID-19 canceling live events and closing theaters, cinemas and theme parks. Film and television production has ground to a halt, while the threat of further outbreaks and social distancing measures make for a challenging environment as the industry looks for ways to restart.
Insurers and policyholders have faced difficult decisions about whether to wait, cancel or postpone events, given the uncertainties around the duration of the pandemic and social distancing rules. Organizers will do everything they can to ensure events still occur, but delaying the decision to cancel can drive up costs.
Changing Risk Landscape
As businesses begin to restart, risks are likely to change. Opening factories and restarting production lines heighten risks of machinery breakdown and fire, while any changes to the workplace could increase the risk of human error. Returning workers might not be up to speed, while others could be required to take on new or adjusted roles they are not suited for. Organizations may also need to change business models; adhere to new rules, regulations and processes; and adapt to new ways of working.
There is also the potential for claims arising in the mid-term from liability-related lines, such as D&O and professional liability, as well as workers compensation, in the event of perceived failures to adequately protect against the outbreak.
COVID-19 is accelerating many trends such as a growing reliance on technology and rising awareness of the vulnerabilities of complex global supply chains. Going forward, many businesses are expected to review and de-risk their supply chains and build in more resilience. This could involve some reshoring of critical production areas because of disruption caused by the pandemic. Such a move would likely impact frequency of claims and the costs of any future business interruptions.
Meanwhile, the growth of remote work means that companies may have lower property assets and fewer employees on site, and there will likely be corresponding changes in workers compensation and cyberrisks. During the pandemic, cyberrisk exposures have increased, with reports of surges in the number of ransomware and business email compromise attacks.
COVID-19 has also reinforced the need for digitalization of claims handling. Remote claims inspections and assessments for tornadoes, floods or major industry accidents are now possible through satellite, drone or image-capture technology and may be more widely adopted. This could lower costs for insurers and speed payments for insureds.
Learning from Experience
Since the onset of the coronavirus pandemic, insurers have sought to clarify wordings for infectious diseases and inform policyholders of exclusions or the extent of cover, where it exists. This should help ensure that future pandemics or a resurgence of COVID-19 will lead to fewer notifications under traditional policies where cover does not exist.
As a known risk, COVID-19 is generally not considered insurable, although affirmative cover has historically been available for infectious diseases under specialist non-damage business interruption or entertainment policies. Due to the size and global nature of pandemics, however, the industry is unable to cover business interruption for large infectious disease outbreaks, at least without government support. To that end, a number of government-backed insurance solutions to protect businesses against pandemics are being considered in Europe and the United States. This evolving issue will be critical for both insurers and insureds to watch moving forward.