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Coronavirus - Impact on the Insurance Market

By: Brian Polino, CPCU | Senior Production Underwriter, Vice President

 Thu, April 9, 2020
Coronavirus
Coronavirus
The COVID-19 (coronavirus) pandemic has disrupted daily life across the globe, shaken financial markets, stoked fear in many, and ground the hospitality industry to a near halt. Thankfully, coronavirus is a temporary burden, and we all hope that this pandemic is as short-lived as possible so that the wheels of American (and world) industry get back to turning very soon.

As we all work from home, we at Halcyon Underwriters, wanted to pause for a moment to reflect on how coronavirus might impact our industry going-forward for the rest of 2020 and beyond. We hope our insights help equip you with the right tools and knowledge to better serve our policyholders during this time of global burden. Accordingly, we’ve broken down the potential impacts to our industry into 3 categories: 1) Insurance Coverages, 2) Exposure Units and Premium Effects, and 3) the Insurance Market Cycle.

Here are our thoughts:

Insurance Coverages

Business Interruption

Although the wording of each policy must be individually scrutinized, generally speaking, there is no coverage for business interruption claims caused by the novel coronavirus.

Property policies cover physical loss or damage to insured property resulting from a covered peril. Without physical damage from a covered peril, as is the case with coronavirus, income loss associated with people choosing not to patronize a business does not trigger property insurance coverage. Moreover, civil authority coverage also requires a direct physical loss to a property other than the covered property. Where there is no direct physical loss or if the cause of the loss is excluded, which is the case with coronavirus, then there is no civil authority coverage. The same can be said for contingent business interruption, which also requires covered direct physical damage to property of a customer or supplier. The coronavirus would not constitute physical damage to property, so the insured’s financial loss resulting from the inability of a supplier to supply the insured due to the effects of the coronavirus would not be covered.

General Liability

Manufacturers of medical protective equipment or antiviral drugs may face product liability suits and entities that interact with the public (i.e., schools, hotels, restaurants, airlines, supermarkets) may see litigation if customers believe they can link their illnesses to those businesses. However, proximate cause would be difficult to trace and hard to litigate.

Workers Compensation

Workers Comp coverage will respond to coronavirus injuries, but losses must arise from the course of employment. For most industries, it will be difficult to determine that the loss to the employee arose during the course of employment.

Hired and Non-Owned Auto

As restaurants temporarily change their business model to carry-out and delivery since civil authority has closed their dining halls to patrons, we will likely see increased claims from HNOA exposures of employee delivery.

Directors & Officers

There will likely be some D&O claims for bad decisions made by corporate boards; however, any such claims will be remote in nature and not widespread across the industry.

Litigation Costs and Legislation

Despite coverage denials, insurers are likely to be hit with increased litigation costs. Litigation, particularly in this era of social inflation, has become a cost of doing business.

Already, one such claim has been filed. Oceana Grill, a New Orleans restaurant, filed suit against Lloyds claiming business interruption applies since their all-risk policy with Lloyds does not exclude losses from a virus or global pandemic. Oceana said an extension of coverage includes business closure by order of civil authority and that coronavirus has indeed caused direct physical loss to covered property.

Moreover, politics and legislation will also come into play. New Jersey’s legislature introduced a bill (Bill A3844) that would retroactively expand business interruption coverage to include coverage for small businesses forced to close by civil authority due to coronavirus. Insurers required to pay the claims would be reimbursed by the state Department of Banking and Insurance, which would collect a special assessment from insurance companies in the state. It is unclear if the bill will ever come up for a vote. The bill also would be unconstitutional as the Contracts Clause of the U.S. Constitution says that no state shall pass any law “impairing the Obligation of Contracts”.

In summary, forcing insurance carriers to cover COVID-19 business-interruption claims would effectively bankrupt the industry in the interest of trying to save others. With this scenario of complete industry bankruptcy very nearly impossible and absent runaway, baseless litigation, the insurance industry will weather the coronavirus exposure just fine.

Even though the insurance industry is not equipped to handle pandemics at the present state, Zachary S. Finn, a clinical professor at the Davey Risk Management & Insurance Program, Lacy School of Business, Butler University, is calling for a long-term, government-sponsored reinsurance solution to backstop the next pandemic. Professor Finn is proposing a measure he calls the Amended Terrorism, Pandemic Risk Insurance Act of 2020. This act would essentially amend the Terrorism Risk Insurance Act (TRIA) to include pandemics.

Exposure Units and Premium Effects

Due to business interruptions caused by the coronavirus, we anticipate requests for mid-term sales/payroll decreases, reduced monthly reporting for workers comp payrolls, premium deferrals, and government-mandated cancellation/non-renewal suspensions. These incidences will largely be contained to the hospitality industry; however, all businesses will be somewhat affected in the short run.

Moreover, with the resulting decreasing exposures and premium deferrals, carriers and brokers alike will begin to feel some stress to their top-lines in the 2nd and 3rd quarters of this year. But for diversified market participants not overly exposed to the hospitality industry, most expect minimal effects and very little impact beyond 2020.

Insurance Market Cycle

Auto and Umbrella Rates

Just about every broker and insured out there is frustrated with the dramatic increases in commercial auto and excess rates that have persisted the past few years. Will the coronavirus cause economic disruption that will finally bring an end to the firming auto and excess markets?

Most market observers think not. It might, for a time, reduce rates for affected industries (i.e. hospitality), but the effects of the coronavirus will be temporary. Increasing loss costs trends and social inflation, on the other hand, are not temporary. Lack of profitability in auto and excess are real long term tends and will likely outweigh any short term drops in rates due to the coronavirus.

Workers Comp Rates

If the current state of shelter-in-place rules were to remain in place for the next 6-months causing long-term economic damage, we might see a real uptick in lost-time claims and litigation that would reverse the multi-year reduction in workers comp rates. However, given the temporary nature posed by coronavirus and the highly unlikelihood of a complete economic shutdown, most market observers see any sharp increases in rates as unlikely.

Submission Flow & Renewal Competition

The greatest impact of this whole virus might be increased renewal retention and less shopping in the short-term as business owners are focused on the immediate challenges posed by coronavirus. Changing an insurance broker is not necessarily top of mind for business owners during this time.

While we do expect new business activity to slow down in the interim while the nation is practicing social distancing and working from home, we expect submission flow will rebound to normal levels rather quickly as the firming market for auto and excess continues to drive more accounts to market.

Conclusion - Remember, coronavirus is not the only variable!

We hope our above insights help you better navigate the challenges posed by your clients over the coming months, especially during the upcoming renewal seasons of the 2nd and 3rd quarters. Remember, coronavirus is a fluid situation and only time will tell what the lasting effects will be. But fortunately, the major disruptions and extreme financial effects of coronavirus will only be temporary. Coronavirus isn’t the only variable out there; add in social inflation plus a strong Atlantic hurricane season and we are all in for an ever-changing marketplace. At Halcyon Underwriters, we like to call it business as usual in this exciting world of insurance!

This content is strictly informational and should not be used as specific advice on insurance products, legal, accounting, and/or tax related matters. Insureds should always contact the appropriate licensed professional for their insurance, legal, accounting, or tax needs.

Contact Us

Halcyon Underwriters

Attn: Compliance Dept.
555 Winderley Place Ste. 420
Maitland, FL 32751

Telephone
(407) 660-1881

Toll Free
(800) 393-9090

Fax
(407) 660-0525

Email
compliance@halcyonuw.com


Should you wish to file a customer service issue, compliment or complaint, you may do so by emailing
the Compliance Officer at compliance@halcyonuw.com or contacting verbally at (321) 527-2180.


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