The impact of COVID-19 is being felt across many sectors of business, and insurers play a pivotal role during times of economic stress, by helping companies manage risks and cushion against insured losses.
COVID-19 Insurance

However, insurers are being impacted by increased claims, higher risks, and the economic uncertainty on their own business models. So how will this impact businesses’ risk management and insurance programmes and what can you do to manage your costs when coming to renew and manage your cover?

As part of a series of webinars, we hosted a session on the impact of COVID-19 on the insurance and reinsurance markets. We spoke to three Gallagher experts – Simon Collings, Managing Director of National Broking & Placement, Oli Homer, Head of M&A, and Neil Bramley, Reinsurance Account Executive of Capsicum Re - who discussed the likely industry response in terms of pricing and availability of cover.

Market backdrop pre COVID-19

The COVID-19 pandemic arrived against a backdrop of a hardening insurance market for some lines of business. A ‘hard’ market is typically characterised by a high demand for insurance coverage and a reduced supply, which leads to increased rates.

Simon explained, “In certain sectors, including food, waste, and heavy transport, and lines of business such as Professional Indemnity (PI) insurance, which covers companies in the event that a client loses money as a result of a breach of duty in their advice, services, designs or advice, and Directors and Officers (D&O) insurance, which covers the cost of defending and paying compensation claims made against a directors and key managers for alleged wrongful acts, insurers were starting to impose strict underwriting standards and issue a limited number of policies,” Simon said. “We were also seeing some rate increases being implemented in property, motor and casualty insurance which covers against loss or liability that arises from damage or injury.”

Furthermore insurers operating in Lloyd’s had been impacted by the ‘Decile 10’, a performance review focused on improving profitability of certain classes of business and as a result were pulling back on some lines of business. “Marine cargo and construction markets were particularly impacted by this and cover was becoming harder to find,” added Simon.

Commenting on reinsurance, Neil advised that the market tends to go through cycles of high prices/limited capacity and low prices/significant capacity and the cost of reinsurance is a major factor impacting insurers’ pricing decisions. “Typically, the reinsurance market drives insurance pricing trends,” he explained. “If reinsurers increase their costs significantly, insurers react by increasing the premiums clients pay. It’s only natural that as one rises, so does the other.”

“Like the insurance market, the reinsurance market was also showing signs of hardening, influenced by recent major loss events,” added Neil “The US reinsurance market had major issues with hurricanes Harvey, Irma and Maria, which all incurred significant losses. There were also notable incidents in the aviation markets, such as the Ethiopian Airlines crash and the subsequent worldwide grounding of the Boeing 737 Max fleet.”

Implications of COVID-19

With rates being pushed up as insurers respond to the crisis, the COVID-19 outbreak has accelerated the pricing situation, said Simon. “Insurers have been hit by claims across many lines of business, and there are some that have been particularly badly hit. For example, insurers providing contingency insurance - notably event cancellation,” he added.

“We’ve seen a quick reaction from the property insurance market – where many insurers have implemented exclusions, particularly relating to business interruption, leading to further reductions in availability of cover.

“Exclusions are also starting to be applied to casualty insurance, e.g. public liability insurance, which covers the cost of claims made by third parties for incidents that occur in connection with a company’s business activities – notably for institutions such as care homes and leisure and hospitality venues, for example.”

Neil added that there have been some unexpected side effects of the pandemic on the reinsurance market – particularly in the aviation sector. “While the risk of catastrophe in the air or collision has reduced, there has been a significant increase in the accumulation of value on runways across the world where these aircraft are now grounded.

“There has also been an impact on the cyber market, with data security being compromised now that people are working outside of the more controlled office environment, as well as on the marine and energy markets, with oil price having significantly reduced.”

As COVID-19 is still an ongoing situation, with losses still coming in, Simon advised that it is still unclear as to what the ultimate impact on the (re)insurance industry will be. “I think the challenge in this instance is that nobody knows how long this is going to last for.”

Neil emphasised that the full impact on the reinsurance market still won’t be known until the end of the year at least, with this year’s hurricane season having the potential to compound the ongoing hit to reinsurers further. “The general consensus is this is going to be an above average hurricane season – but we have our fingers crossed that this is a year where the wind doesn’t blow.”

Implications for insurance buyers

“The likely impact for those looking to renew their business’ insurance programme is unfortunately an increase in costs,” Simon said. “The broking process will likely become more protracted; choices become more limited and wordings will become tighter.”

“There may be increased scrutiny on customers by insurers, where they’ll be looking for businesses to have up-to-date surveys, and we’re also likely to see tightening of some wordings, together with a reduced capacity in certain lines.”