Behind the mask

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With claims related to the coronavirus pandemic widely expected to represent the biggest industry insured loss of all time, the focus in coming quarters is likely to be on how closely the impact on (re)insurers’ 2020 annual results – and any resulting loss creep into 2021 – matches the range of loss estimates made to date. 

Back in May, Lloyd’s estimated industry-wide 2020 underwriting losses from Covid-19 at $107bn, with the Lloyd’s market itself set to absorb $3bn-$4.3bn of the total. Lloyd’s also predicted an industry combined investment loss of $96bn, bringing the total projected loss to the (re)insurance industry to $203bn. 

As sister publication Insurance Insider reflected in April in the article ‘Coronavirus: The biggest insured loss in history?’, the pandemic is a highly complex event, which is playing out across multiple lines of business and many countries, is poorly modelled, and has impacted insurance coverage with myriad different wordings and regulatory and judicial approaches. 

However, some industry sectors particularly affected by the outbreak have had the dubious distinction of being able to estimate the magnitude of their exposure relatively quickly. We cover the likely impact on some of the key lines affected by major Covid-19 claims below. 

Contingency 

In the middle of February, weeks before the sheer scale of Covid-19’s impact had been realised, contingency market practitioners warned Insurance Insider that the pandemic could be “catastrophic” for the sector if event cancellations spread beyond China to affect the wider Asian continent.   

Since then, coronavirus has caused a near total cessation of mass gatherings across the globe, including sporting fixtures, music festivals and business conferences.  

The word has become a cliché, but for the contingency market, perhaps more than any other line of insurance business, the impact of Covid-19 has been unprecedented.  

It is impossible to put a precise figure on the scale of the losses, but extrapolation from a Swiss Re disclosure in March suggests the potential industry-wide event cancellation loss could stretch to as much as $6.3bn.  

The reinsurer said on an analyst call that it had a 15 percent market share in the global event cancellation market and that its losses could come in at between $550mn and $950mn, suggesting an industry-wide loss of between $3.7bn and $6.3bn.  

Lloyd’s has said that event cancellation losses are expected to be the biggest source of claims for the marketplace, accounting for 31 percent of its total loss estimate.  

All this, despite the fact that the contingency market has a relatively small level of premium income compared to classes such as property, which are also expected to suffer significant payouts.  

The extent of the market’s woes stems from the fact that it has offered pandemic cover as a buyback for a number of years, meaning the sort of cancellations that have occurred due to Covid-19 have been specifically covered.  

Cancellation as a result of communicable diseases is a standard exclusion on contingency contracts, but it was possible to purchase the cover for an additional premium.  

The market had a heightened awareness of the threats potentially posed by pandemics after the outbreaks of Sars in 2003, swine flu in 2009 and the Zika virus in 2015.  

Underwriters escaped damaging losses amid the previous outbreaks, which provoked little in the way of government response compared with Covid-19. 

To trigger a payout under a policy covered for communicable disease, an insured typically needs to prove that it was necessary to cancel the event and it had not been called off due to disinclination or a possible lack of attendees.  

Since governments across the globe implemented the widespread cancellation of mass gatherings, there has been a slew of claims.  

AmWins said at the beginning of April that contingency claims were flooding into the London market at an “alarming rate”.  

One of the most damaging losses is believed to be the Tokyo Olympics, one of the biggest insured events for the market.  

It was announced in March that the games had been postponed until 2021, which will still trigger a large loss, albeit a less significant one than from an outright cancellation.  

The International Olympic Committee is believed to buy around $800mn of cover, and there are other policies connected with the event, such as those for broadcasters and contractors working on the Olympics.  

Some insurers have detailed their potential exposure to the cancellation, including Allianz, which said that its postponement exposure was $40mn, and Munich Re, which has said it has an exposure in the triple-digit millions of euros.  

The Wimbledon tennis tournament also had pandemic cover in place, and is reportedly expecting a payout of £100mn ($125mn).  

Its policy is believed to have cost £1.5mn per year, with the All England Club, which hosts the tournament, having opted to take out pandemic cover after the outbreak of Sars in 2003.  

Less high profile events such as business conferences have also been cancelled in their thousands, and the aggregation of costs is expected to be significant.  

The impact for the contingency sector has been twofold. Not only has it suffered devastating losses, but there is now a drought of premium as the volume of business has reduced. With little clear guidance from legislators on when mass gatherings will be able to take place again and the added fact that much of the contingency market’s business tends to be written around six months before an event takes place, the outlook for the sector is uncertain at present.  

For business passing through the market, pandemic exclusions have become the norm, despite it now being one of the most concerning risks for clients. 

All indications suggest that the market will undergo a significant hardening once business picks up, as underwriters attempt to recoup some of their losses. 

A report from Miller in April said that contingency rates had increased by up to 50 percent on stressed business, whilst market insiders have reported privately that the rises can be above 100 percent.  

Meanwhile, carriers not currently participating in the small market are weighing up the potential opportunities.  

Stephen Catlin and Paul Brand’s start-up (re)insurer Convex has been the first to act, hiring Axa XL underwriter Luke Killeya to build a book of business.  

A&H and travel  

By contrast, the London accident and health (A&H) market is not expected to be impacted as dramatically as the contingency sector.   

The majority of personal accident contracts written in the London market are unlikely to be affected, as it does not appear that Covid-19 causes permanent or temporary disability.  

The lack of exposure relates both to the nature of the contract that the market typically writes and the demographic of those insured. 

The market typically provides insurance for either temporary or total disablement, with a schedule of benefits paid out once the policy is triggered. 

The medical impact of the disease does not appear to induce either form of disability, with patients either recovering or dying. 

All evidence suggests that young people without underlying health conditions are at a comparatively low risk from the disease compared to the elderly.  

That is not to say that the class of business will escape unscathed, however. 

PwC said in a recent report that the A&H market is nonetheless expected to sustain a number of losses.  

Carriers including Axis and Beazley have already flagged that they expect to suffer A&H losses from the pandemic.  

However, a number of A&H underwriters also write books of travel insurance – especially for business travel – which could sustain large losses. The business tends to be written on behalf of MGAs.  

On top of that, there is concern in the long term that a downturn in economic activity could lead to a reduction in premium income.  

“I think we are all going to be facing the problem of people not working,” said one market source. “We are in the business of insuring people. Business will dry up.” 

Business interruption 

Business interruption (BI) insurance has become one of the most prominent battlegrounds to emerge from the pandemic, as coverage disputes have begun to mount. 

The cover is typically triggered by property damage, but many insureds who have had to shutter businesses due to the pandemic and the associated lockdown measures had anticipated that certain policy wordings around denial of access and contagious diseases meant they would have grounds for a viable claim.  

However, some insurers have disputed claims, citing that any ambiguity in the wordings around these areas of coverage were not intended to extend to a systemic risk like a pandemic.  

Insurers have also noted that, in some cases, contagious diseases are specifically excluded from coverage, meaning that Covid-19-related BI claims are not valid.  

In April, a BI coverage bill was circulated in the US Congress by California Democrat Congressman Mike Thompson that intended to compel insurers to make retrospective and prospective payments for BI. The bill was widely opposed by US insurance industry associations, which argued it would result in the “unconstitutional” violation of insurance contracts.  

Separately, Chubb chairman and CEO Evan Greenberg suggested in April that the forced payment of BI from the pandemic would bankrupt the sector, adding that Covid-19 could be largest insured event in the industry’s history. 

A report by the American Property and Casualty Insurance Association said that losses to small businesses from BI caused by coronavirus could range from $255bn to $431bn per month, compared to annual insurance premiums of $71bn.  

This was echoed in the UK by the Association of British Insurers (ABI), with director general Huw Evans saying in April that forcing insurers to pay Covid-19 BI cover was a “shortcut for insolvency”.  

He added that Covid-19 losses in the UK could exceed £1bn, with BI making up a significant portion of that.  

Some companies have honoured claims, with Axa making payments to around 200 of its restaurant clients. Axa said it has identified 1,700 restaurant polices in which unclear wordings may make the carrier vulnerable to BI claims stemming from the lockdown, adding that there is “some debate” over BI coverage. The carrier has begun talks with the restaurant owners concerned.   

Hiscox, meanwhile, is reported to have denied claims to many of its customers, having offered compensation to a selection of policyholders for making assurances about Covid-19-related BI claims that it later withdrew. 

The company is also the subject of a lawsuit brought by Mishcon de Reya on behalf of the recently formed Hiscox Action Group, which is seeking £52mn in BI claims related to the Covid-19 lockdown. 

Separately, Markel has stated that it will settle UK BI claims with $325mn of the net virus reserves it set aside in the first quarter, primarily for UK BI claims and global contingency losses.  

There have been widespread calls for BI cover to be backed by the state in both the US and the UK – or for the coverage to be reformed so that it will respond better to pandemic risk.  

In the UK in March, the ABI’s Evans noted that any expansion of BI cover to encompass pandemics would need “very significant state support”.   

There have been suggestions, notably by the ABI, that UK terrorism mutual Pool Re could supply around £1bn of its £6.6bn reserves to create a relief fund for distressed SMEs that lack pandemic insurance cover. 

The notion was rejected by the board of Pool Re, which is understood to have stressed that its first duty is to preserve its reserves to ensure resilience in the face of a major terrorist attack. 

However, the creation of a steering committee to discuss proposals for a Pandemic Re solution, led by Stephen Catlin, has seen representatives from Pool Re come on board as the group works on an industry-led proposal to address future pandemic risk. Michael Dawson, active underwriter of specialist nuclear Syndicate 1176, will chair the initiative’s project committee.  

Meanwhile, in the US, a bill proposing a $750bn pandemic backstop was introduced in Congress in May. The Pandemic Risk Insurance Act would see the state act as insurer of last resort, paying a proportion of the losses from future pandemics.  

An alternative bill, the Business Continuity Protection Program, previously put forward by three US (re)insurance trade bodies, was intended to create a legal obligation for the federal government to make direct payments to small businesses if another pandemic strikes.  

In the UK, meanwhile, the Financial Conduct Authority is pursuing an expedited High Court test case to bring clarity to policyholders and insurers over BI insurance wordings.  

Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA and Zurich are all set to participate in the case, which has identified 17 policy wordings that could be in dispute.   

Despite the hope that this will set a precedent both for settling claims and future policy wordings around pandemic-related BI claims, there are concerns that there will be prolonged legal battles over wordings as multiple individuals and groups bring legal actions aimed at getting a BI payout.  

Sources also fear that the disputes over BI losses have done and will do untold reputational damage to insurers if they are viewed by insureds as having shirked their responsibilities – even where the coverage does not explicitly include pandemics.  

Trade credit and surety 

Trade credit insurance has been singled out as one of the lines most impacted by coronavirus. The coverage typically pays a percentage of a receivable or invoice that is unpaid due to insolvency, bankruptcy or defaulting by the buyer of the invoiced goods or services. 

With a recent report from French trade credit insurer Coface suggesting that global business insolvencies could rise by 33 percent by the end of 2021, compared to 2019, it is clear just how big a problem pandemic-related losses could be for this class of business.  

The highest increases are predicted in Hong Kong, Poland and Australia, where Coface estimated a business percentage change from 2019 to 2021 of 76 percent, 66 percent and 53 percent, respectively.  

In addition, insolvencies in the US are expected to rise by 43 percent, with increases in UK insolvencies pegged at 37 percent.  

The Coface report added that the worst affected sectors would be the energy, textile/clothing, retail, automotive, metals and transport sectors, as lockdown is expected to have impacted 50 percent or more of turnover in these industries. 

With coronavirus having affected supply chains around the world and forced governments to enforce lockdown measures, multiple industry sectors have been simultaneously impacted, amplifying the potential for heavy losses.  

It is also widely accepted that the disruption caused by coronavirus will trigger a recession, leading more businesses to become insolvent or bankrupt, and leading in turn to more trade credit insurance claims further down the line.  

Potential losses are also very dependent on the occurrence of a “second wave” of Covid-19 infection, with the Coface report stating that global GDP could rebound by 5.1 percent – but only if there is no second wave. 

Lloyd’s coronavirus loss estimate from May said the proportion of losses likely to stem from credit lines was around 11 percent.  

The Corporation, which estimated that $28bn of its $107bn industry insured loss total would be paid out in 2020, said there would be further payouts across classes such as credit insurance. 

Analysts at Morgan Stanley also released a report in May, which suggested an initial estimate for losses to primary credit insurers of between $15bn and $46bn over the next several years.  

The analysts added that reinsurers could shoulder between 20 percent and 30 percent of this loss burden.  

The biggest areas of exposure are in Europe, the report said, with the three big credit insurers – Allianz-backed Euler Hermes, Paris-based Coface and Dutch firm Atradius – taking the lion’s share of losses. 

However, the introduction of trade credit backstops in several countries is expected to have a mitigating effect on any potential losses.  

In the UK, the government has introduced a £10bn backstop, available for nine months, whereby insurers share 90 percent of their premiums with the state in return for maintaining coverage.  

Similar schemes have also been introduced in Canada, Germany, France and the Netherlands.  

Trade credit insurers in the US are also understood to have started discussions with the Treasury and Federal Reserve about a possible backstop for claims payments.  

Insurers are thought to be looking for around $60bn in government support, with Euler Hermes North America CEO James Daly spearheading discussions.  

The schemes have been welcomed by the big three trade credit insurers, with broker sources in the UK telling this publication that insurers had warned that they would have to reduce or remove credit limits in the absence of backstop measures.  

Some sources noted that the introduction of backstops in some countries could create an uneven loss picture.  

However, others added that although the losses could be high, trade credit insurers increased their capitalisation following the financial crisis in 2009, and are now better prepared for paying claims.  

They also argued that a crisis such as this could raise awareness of the cover, especially in countries where the penetration is low, ultimately driving uptake of trade credit insurance.  

Samuel Casey and Anna Sagar cover contingency and A&H and travel, and business interruption and trade credit and surety, respectively, for sister publication Insurance Insider. 

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