As communities around the world continue to grapple with the coronavirus pandemic, much remains uncertain for businesses, but the impact on the property/casualty insurance industry is becoming more evident. Claims activity in multiple industry sectors makes clear that companies of all sizes are experiencing substantial losses due to the unprecedented disruption of normal business operations. Many questions around business interruption insurance persist and will be critical in assessing the toll of the pandemic. These are far from the only policies implicated, however. Companies have begun filing a growing number of COVID-19-related claims for losses in directors and officers (D&O) liability, workers compensation, standalone cyber, professional liability, employment practices liability (EPL), and trade credit.
By early May, for example, one large third-party claims administrator had already received 275,000 coronavirus-related claims worldwide and expected that number to reach 300,000 in the coming months. Meanwhile, Willis Towers Watson estimated that general insurance losses from the pandemic could total up to $80 billion.
As risk professionals enter their policy renewal seasons, insurance brokers have cautioned that property/casualty insurers may try to truncate coverage in the aforementioned lines of insurance, with many asking for pandemic and bankruptcy exclusions. Pricing is also likely to increase across a number of specific lines. “This is a pretty big event for the industry and will cause the hardening market to harden further and lengthen well into 2022,” said Joseph Peiser, global head of broking at Willis Towers Watson.
Nevertheless, the capitalization of property/casualty insurers remains strong, as does the asset side of the balance sheet, which may moderate the overall impact.
“We devised a capital stress test focused on insurer assets to consider the implications and the vast majority of our rated property/casualty companies held up quite well from an asset and liquidity standpoint,” said Stefan Holzberger, chief rating officer at A.M. Best. “This is not to say certain insurers will not see a spike in claims activity in such lines as workers compensation, D&O, EPL and so on, but a portion of this will be ceded off to the reinsurance sector, which is likely to provide additional capacity and support to the primary markets going forward.”
By mid-May, a handful of shareholder claims and event-driven derivative actions related to COVID-19 had been filed against the directors and officers of Norwegian Cruise Lines, Zoom and health care software provider SCWorx Corp., among others. Other D&O claims may follow. “I do see D&O litigation increasing meaningfully, but the hard part is proving negligence in preventing a pandemic of this scope and size that no one anticipated,” said Tracy Dolin, senior director and insurance sector lead at S&P Global Ratings. “The burden of proof is on the insured.”
Financial losses may also fuel these claims. “We’ve been asking our clients questions about the operational and financial impact of COVID-19 to assess the possibility of a D&O claim, which has been challenging for them to answer at this stage,” said Christine Williams, CEO of Aon’s financial services group. “However, there is definitely a heightened awareness that litigation tied to the substantial fall-off in the stock market could rear its head, with shareholders looking to insurers to recover their financial losses.”
It is too early to tell what a typical COVID-19 claim might look like going forward. “The claims we’ve seen so far are somewhat different, but there is the possibility we’ll see litigation arising out of alleged misrepresentations in the financial statement,” said Sarah Downey, managing director and D&O product lead at Marsh. For example, she cited the case of a company exaggerating its preparedness for the pandemic, which later turned out to have a substantial impact.
According to Peiser, risk professionals should prepare for D&O premium increases between 20% and 50%, depending on the industry sector. “For distressed industries like retail, hospitality and health care, it could be even worse, given a dramatic fall-off in insurance capacity for these sectors.”
Several D&O insurers are also trying to impose both bankruptcy and COVID-19 exclusions in their policies, but have not necessarily been successful. “Mostly we’re seeing a drive-up in price and a shrinking in capacity on any one risk,” Peiser said. “My reinsurance colleagues tell me that, if risk managers thought the April 1 D&O renewal was tough, it will be much tougher come July 1 renewals.”
To moderate the impact at renewal, risk professionals should work closely with their brokers to prepare responses to carrier D&O questionnaires. “This is not your typical renewal where you complete the application and send it in,” said Travis McElvany, executive vice president at HUB. “You need to work with an executive liability specialist to ensure you’ve addressed all the questions appropriately, otherwise you may end up with a bankruptcy exclusion.”
In workers compensation, one of the largest lines of commercial insurance, ratings agencies are concerned about so-called “silent” or non-affirmative COVID-19 claims. “The issue is if employees in essential businesses contract the virus and attribute it to the work they’re doing,” Dolin said. “Statutory law requires that an illness be sustained during the course of employment for workers compensation to be looked upon as a remedy. This is difficult to prove in a pandemic situation, but some states have a different perspective.”
For example, traditional “burden of proof” rules have been eased for first responders in states like Illinois and Missouri, which may sharply increase claims frequency and severity. “Since there is no statutory limit for workers compensation claims, some claims could potentially be quite expensive,” she said.
The outlook for the market is further complicated by the indemnity portion of workers compensation, which absorbs the cost of an employee’s lost wages, as well as the likelihood of insurers having to return premiums previously collected. “We have had a very soft market in workers comp for many years, with the big component being the strength of the economy and the robust employment figures,” said Jessica Cullen, managing director of the casualty practice at Gallagher. “With many people being laid off or furloughed, insurers will have to return premiums at some point, which will impact their profitability.”
Some are equally concerned about the possibility of higher workers compensation claims activity once employees return to work. “Businesses must comply with regulations like HIPAA and EEOC and OSHA guidelines, all of which have been updated to address COVID-19 exposure and safe working conditions,” McElvany said. “If these rules are not enforced, it could lead to a worrisome spike in workers compensation claims.”
Overall, many brokers project that rates are likely headed upwards. “It’s too early to tell right now, since carriers have to file for rate increases and that takes time for regulators to review,” Cullen said. “So many smaller businesses have been hurt economically, so regulators may decide that now is not the time to impose rate hikes.”
In the meantime, risk professionals at companies that have allowed or will soon allow employees to return to the workplace should emphasize hygiene. “If your office has an open floor plan, you may want to consider putting up partitions,” she said. “You also may want to phase in employees’ return to the workplace or operate in shifts for a while to reduce the number of employees coming in close contact, with a percentage of the workforce continuing to work from home.”
Many are concerned that at-home workers using unsecured personal technology devices and home Wi-Fi networks can increase the likelihood of cyberattacks, potentially triggering an avalanche of standalone cyber insurance claims. While there has been a sharp increase in phishing attacks, this anticipated claims surge has not yet materialized, according to Robert Parisi, managing director and cyberrisk insurance specialist at Marsh.
Nevertheless, the risk remains high, especially since hackers can linger inside corporate networks for months before organizations detect an incident. As a result, risk managers should anticipate difficult questions about cybersecurity during the renewal process.
“Buyers will be asked about their written ‘Bring Your Own Device’ (BYOD) policies,” McElvany said. “Insurers will want to see written requirements governing security protocols like two-factor user authentication. If a data breach occurs and it is clear the BYOD security protocols were not followed, the policy may not respond to the event.”
Even though cyber claims have yet to spike, Marsh’s Cyber Risk Update showed an average premium increase of 5% for standalone cyber insurance in the first quarter. “I don’t see the market falling off the cliff,” Parisi said. “Rather, I see cautious underwriting with no retraction in coverage availability, terms and conditions, which is a good sign. Nevertheless, COVID-19 has broadly altered the industry’s prospects, so I expect cyber underwriters to maintain a cautious posture through this year and next.”
As of mid-May, more than 36 million people had filed for unemployment in the United States during the pandemic. Whenever a mass layoff of employees occurs, an increase in EPL claims for wrongful termination often follows. “We haven’t seen the uptick yet, but that doesn’t mean it isn’t coming,” Peiser said. “In any event, EPL rates were going up already, and they’ll now go up more.”
To mitigate the upward trend, McElvany encouraged risk managers to be clear during the renewal process about potential plans to downsize the organization and measures to proactively manage workplace hygiene exposures. “When an employee refuses to return to work because of COVID exposure and the company considers job termination as the recourse, an open workers compensation claim can morph quickly into an EPL claim,” he said.
While commercial automobile and umbrella claims are trending downwards due to fewer people driving, insurers are bracing for a possible overflow of third-party liability claims, given the large number of people allegedly contracting COVID-19 at hotels, gaming establishments and on airplanes. “They’ll likely assert the business didn’t take measures quickly enough to reduce transmission risks,” Peiser said.
For the time being, however, courts across the country are closed, providing a respite of sorts. “When the courts do reopen, they’ll look to expedite criminal cases before civil cases because of the right to a speedy trial,” he said. “It may take many months to a year for civil matters to be heard, possibly making plaintiff attorneys more amenable to negotiated settlements.”
Increased bankruptcy risks also affect the trade credit line of insurance, which protects against the non-payment of outstanding debt. For example, when a retail store chain files for bankruptcy protection, companies that supply the stores with merchandise often find their inventory stranded and invoices unpaid.
Many trade credit insurers in the period leading up to the pandemic in the United States had forecast declining business performance and responded by reducing or eliminating coverage. “The major trade credit firms continue to operate and accept applications, but gaining coverage for both small- and middle-market business has become much more difficult as the volume of claims has increased significantly,” said Kevin Warren, director of carrier strategies in HUB’s trade credit practice.
This will drive premiums up. “Trade credit insurers are preparing for a dramatic spike in insolvencies worldwide,” Peiser said. “We’ve seen intense underwriting reviews, reductions in available limits, non-renewals and even some cancellations.”
He recommended collaborating with brokers to explain to insurers the company’s management of counterparty credit risks, which can produce more positive coverage terms and conditions and, to a lesser degree, pricing. “When trade credit insurance is renewed, albeit likely at lower limits, the rate increase has not been stratospheric—more in the 10%-plus range,” Peiser said.