The Coronavirus has presented individuals and businesses with a range of unprecedented challenges. While it is still very early days, we wanted to share our thoughts on what all of this might mean for the risk and insurance community.
In this brief note, we set out what the likely claims outcome will look like, how insurers will react over both the long and the short term, and what to expect at renewal.
How much of the impact can be mitigated by insurance?
As you would expect, most of the discourse around insurance and the ongoing pandemic has focused on claims for insurable losses. In fact, Mactavish believes the value of commercial insurance claims paid out as result of the impact of Coronavirus will be much smaller than many predict because it will predominantly fall outside of traditional “Business Interruption” insurance.
To be insured against the virus, organisations would have had to opt in for ‘contagious disease’ extensions on their policies – relatively few do. Even when policyholders have bought these extensions, they tend to be limited in both the range of diseases covered and the financial limit of cover, as well as being subject to a wide range of conditions. In practice, this means very few offer any real protection in a situation such as this.
Despite this, if you do have any doubt about whether or not you have coverage in place we would encourage you to get in touch so that our technical team can offer you guidance.
What are the likely outcomes for the insurance market?
Although insurers may not be on the hook for virus related claims we expect Coronavirus to have a dramatic impact on their businesses. Insurers traditionally make money in two ways: underwriting and investments.
As you will have seen, the past few weeks have recorded almost unprecedented drops in asset prices and investor confidence. In addition, interest rates have been cut across the developed world. This means that insurers will be looking at drastically reduced investment income for the period ahead and will be holding assets in reserves which are worth considerably less than they were at the start of the year. Although some of this reflects long-term trends in the industry, the situation will be exacerbated and catalysed by the pandemic.
While the market was already hardening, we now expect that to accelerate drastically. Insurers will be forced to retrench in order to preserve their commercial viability and all-important credit rating. It is our belief that we will see exponentially higher rates (as insurers look to compensate for lost investment income), wholesale withdrawal from some sectors and classes of business, and a much tougher claims environment.
These will likely not be temporary changes. Many of us remember the last hard market in the aftermath of the World Trade Center attacks. The difference this time is that the crisis we face, and its economic impact is likely to extend years into the future. In fact, we believe that insurers may look to build books of business that are entirely sustainable on underwriting profits alone.
An entirely different approach to risk
As we write, many of our clients are trying to cope with managing organisations with rapidly changing risk profiles. Whether it’s the move to remote working, employee health and safety or alternative distribution models, we are all looking for solutions that allow us to manage through the period ahead.
This not only places a burden on you, as buyers, but also on insurers and brokers – many of whom will be overwhelmed by the increased workload placed upon them. That, in combination with insurers withdrawing from some markets means that in the short-term you can expect less support from your broker than you would normally expect.
Looking further out, it is our view that we will a witness a seismic change in the way that risk is managed across the economy. Companies will be forced to retain more risk (or to seek alternative methods of risk transfer), this will cause them to reserve more capital and may limit their ability to grow.
Finally, at all stages of the crisis, it has become apparent that businesses, insurers and brokers have seriously underestimated the concentration of risk across both individual organisations and the economy as a whole. Once the dust has settled, we expect risk management to move up the corporate agenda.
If you are preparing for renewal, or are looking for new insurances to reflect you changing operating model our commercial and technical teams are on hand to offer you support. Similarly, if you have a claim that is being disputed by your insurer, our team of experts led by former Law Commissioner David Hertzell is here to guide you to a better outcome.