The impact of Covid on the future of insurance

The pandemic’s effect on the insur­ance indus­try has been severe, unfold­ing at a time when insur­ers were already fac­ing sig­nif­i­cant changes owing to Brex­it.

And while much of the impact was imme­di­ate and pre­dictable, Covid’s longer-term con­se­quences are wor­ry­ing insur­ers.

Accord­ing to Edward Rush­ton, head of insur­ance and rein­sur­ance at Lex­is­Nex­is UK, busi­ness inter­rup­tion has caused the most headaches.

He says claims will con­tin­ue to be lit­i­gat­ed and arbi­trat­ed as courts and ombuds­men work through a back­log of cas­es. “Beyond the direct claims are rein­sur­ance claims. This is going to get real­ly com­pli­cat­ed and I expect Covid-19 rein­sur­ance issues to be the sub­ject of dis­putes through­out 2022 and quite pos­si­bly into the next decade.”

Covid trig­gered a spike in the num­ber of pol­i­cy­hold­ers claim­ing on their cov­er, the costs insur­ers had to fork out and the vol­ume of dis­put­ed claims. The Finan­cial Ombuds­man Ser­vice said it received 90,000 more com­plaints than expect­ed dur­ing the pan­dem­ic. 

Insur­ance bro­ker How­den puts the insured loss­es so far from Covid-19 at $44bn (£33bn), rep­re­sent­ing the third largest cost to insur­ers of any cat­a­stro­phe, behind Hur­ri­cane Kat­ri­na and the 9/11 attacks.

As well as nav­i­gat­ing dis­putes, insur­ers have had to quick­ly adapt to the rise of remote work­ing. Dig­i­tal trans­for­ma­tion projects have been accel­er­at­ed, with more mon­ey invest­ed in tech­nol­o­gy and soft­ware. “Dig­i­tal plat­forms have helped firms to cope, and we expect more digi­ti­sa­tion to come; this is some­thing the insur­ance indus­try has not always been at the fore­front of,” notes Scott Eason, head of insur­ance at pro­fes­sion­al ser­vices con­sul­tan­cy Bar­nett Wadding­ham.

Remote work­ing and dig­i­tal­i­sa­tion have also led to an uptick in cyber risk and ran­somware attacks, lead­ing to more expen­sive – and restric­tive – cyber insur­ance. The cost of cyber cov­er rose 92% in the UK in the fourth quar­ter last year com­pared with the same peri­od in 2020, accord­ing to the insur­ance bro­ker Marsh. Rush­ton adds: “Pro­fes­sion­al indem­ni­ty lines may also feel a last­ing impact as hybrid or home work­ing becomes more com­mon, since the risk pro­file is sig­nif­i­cant­ly dif­fer­ent to a pre­dom­i­nant­ly office-based organ­i­sa­tion.”

Business interruption policies

Busi­ness inter­rup­tion cov­er has been one of the most fre­quent­ly lit­i­gat­ed aspects of the pan­dem­ic. “We have seen a num­ber of judge­ments across the globe where courts have ruled in favour of busi­ness inter­rup­tion pol­i­cy­hold­ers against insur­ers,” says Eason. “This has gen­er­al­ly result­ed in an increase in the cost of insur­ance through high­er pre­mi­ums.”

An FCA test case in the Supreme Court last year resolved some key con­trac­tu­al uncer­tain­ties and ordered six insur­ers to pay out for busi­ness loss­es result­ing from Covid. As a result, many busi­ness inter­rup­tion prod­ucts have been with­drawn or cur­tailed. 

His­cox, one of the insur­ers in the case, has added pan­dem­ic exclu­sions to its busi­ness inter­rup­tion poli­cies.

Insur­ers claim it’s not pos­si­ble to insure against a pan­dem­ic because it pos­es a sys­temic risk. Despite calls for a gov­ern­ment-backed rein­sur­ance scheme to resolve this (like Pool Re and Flood Re have done with ter­ror­ism and flood risks respec­tive­ly), sources say it is unlike­ly to be set up any time soon.

“The avail­abil­i­ty of pan­dem­ic cov­er in future may be very lim­it­ed unless such a public/private part­ner­ship is forged,” notes Rush­ton.

The test case did not resolve all the issues in pol­i­cy word­ing, and dis­putes over busi­ness inter­rup­tion con­tin­ue. 

Last month restau­raunt com­pa­ny Corbin & King, own­er of the Wolse­ley, won a case against Axa allow­ing it to claim sep­a­rate­ly for each of its premis­es and for each manda­to­ry clo­sure, rather than claim­ing for a sin­gle loss for all premis­es.

“This is seen as a big win for pol­i­cy­hold­ers and will like­ly result in insur­ers set­tling out­stand­ing claims for much greater sums than they would have oth­er­wise,” Rush­ton says.

The impact on reinsurance 

Major rein­sur­ers have had large Covid-relat­ed loss­es since the start of the pan­dem­ic. “Excess mor­tal­i­ty is an ongo­ing con­cern for life rein­sur­ers,” notes Eason. “On the non-life side, busi­ness inter­rup­tion is a con­cern where we still do not know the true extent of loss­es.”

While loss­es are reduc­ing – part­ly due to high­er renew­al rates and more restric­tive cov­er – the impact on rein­sur­ers could take years to mate­ri­alise.

Rush­ton explains: “Rein­sur­ers may be enti­tled to reopen ques­tions as to whether the orig­i­nal insured loss was prop­er­ly set­tled. This adds pres­sure on rein­sureds – includ­ing direct insur­ers – to be more strin­gent in their claims han­dling, which fuels poten­tial dis­putes at the direct lev­el.”

He says it’s becom­ing more cost­ly for insur­ers to use rein­sur­ance to pro­tect them­selves against future mass claims, espe­cial­ly those aris­ing from any pan­dem­ic. “If the cost of appro­pri­ate rein­sur­ance is too high, direct insur­ers will be reluc­tant to incur inwards lia­bil­i­ty and, in some cas­es, may with­draw prod­ucts from the mar­ket.”

Innovation and reputation

As focus on the pan­dem­ic recedes, oth­er issues are com­ing to the fore. 

“Insurtech” will con­tin­ue to be a big trend. Accord­ing to Rush­ton, insur­ers and bro­kers will increas­ing­ly look to acquire start-ups to keep pace with inno­va­tions in under­writ­ing and claims han­dling, such as pay per dri­ve insur­ance or para­met­ric crop insur­ance. The use of arti­fi­cial intel­li­gence in under­writ­ing will like­ly become more wide­spread.

Mean­while, insur­ers must brace them­selves for fur­ther claims result­ing from the pan­dem­ic; as already seen in the US, there could be more to come from marine lia­bil­i­ty and demur­rage.

Final­ly, repair­ing rep­u­ta­tion­al dam­age will be a key focus. “Right­ly or wrong­ly, insur­ers are fac­ing rep­u­ta­tion­al risk due to alleged non-pay­ment of valid claims,” Eason says. “This boils down to a mis­match in expec­ta­tion between what insureds thought they were cov­ered for ver­sus what their actu­al insur­ance was meant to do.”