Update on the impacts of Coronavirus or COVID-19 – April 2020

We thought it important to update you after much press coverage and speculation.

Lloyd’s CEO John Neal’s comments in the FT and Insider interviews concerned the global insurance market, rather than the London market specifically. They echoed similar sentiments to Evan Greenberg (Chubb’s CEO and a member of President Trump’s business advisory panel). In simple terms, governments have imposed lockdowns to minimise the further spread of the virus and we, the insurance industry, should not be required to pay for the consequences thereof. The implications of COVID-19 are much bigger than the insurance industry as equity markets have been impacted and therefore balance sheets and the viability of some businesses and economies called in to question. The message is for co-operation with governments to produce a workable answer/solution for this and any future pandemics. The insurance industry wants to be seen to be playing its part but will not allow policy wordings to be retrospectively re-written.

It is clear that the insurance industry is likely to be impacted by claims in a number of lines of business.

Property/Business Interruption (BI)

Much of the adverse publicity in the newspapers relates to BI in the UK. The fundamental issue, relating to all BI policies written world-wide, is that property damage (a ‘physical damage trigger’) must have occurred before a claim can be made. Some policies give an extension to the cover to include pandemic or other contagious disease and /or shut down by a local authority or government. Most Lloyd’s syndicates have little or no exposure to this business, which is broadly written by the major composite UK and European insurers such as Aviva, RSA, Allianz (Cornhill) and Zurich (Eagle Star). Hiscox has been appearing in the press on account of their stance of declining BI claims to small UK (SME) businesses, despite a policy wording which suggests that there might be cover. These policies are written by the Hiscox insurance company and NOT by their Lloyd’s syndicates. The Association of British Insurers (ABI) has encouraged insurers to pay all claims speedily, where either the pandemic extension has been given or an extension has been given which could be thought to give the cover, which may include Hiscox. In all other cases, it has reaffirmed its stance that BI policies do not cover COVID-19 claims.

BI in the US is written widely by Lloyd’s syndicates. The fundamental premise on virtually every policy form is the same as in the UK i.e. that there can be no BI claim without a physical damage trigger. The entire US insurance industry believes this to be the case and that to over-rule retrospectively an agreed contract would be against the US Constitution. Various US lawyers are seeking to extend the definition of physical damage to include enforced Civil Authority closure and the like. At the same time, various Democrats have attempted to introduce legislation requiring BI policies retrospectively to respond to COVID-19 claims. The US insurance industry’s response has been that it simply will not pay every COVID-19 BI claim in the US, particularly given that it was never covered in the first place and to do so would bankrupt the industry.

Encouragingly, a new cross-party Bill entitled ‘Never Again Small Business Protection Act 2020’ was proposed in the US Congress on 14th April. Rather than seeking retrospectively to re-define the scope of insurance policies, the Bill sets out a mechanism whereby the federal government would provide a financial backstop for future losses incurred by small- and medium-sized businesses arising from any government ordered shutdown.

Some property policies in the US do currently give a small sublimit of cover for pandemic claims and these claims are being paid promptly. In addition, it is likely that some of the more vague policy wordings issued will provide unintended coverage, which will result in claims being paid. Furthermore, the cost of fighting legal challenges will not be insignificant. In combination, however, we understand the sum of these property losses should be akin to a large US natural catastrophe, rather than a systemic loss which threatens the existence of the insurance market.

Other classes of business

Contingency/cancellation/postponement of major sporting events such as the Tokyo Olympics, Wimbledon, Euro 2020, US Masters etc, together with virtually every business conference/trade fair throughout the remainder of this year will trigger claims where pandemic cover has been bought.

Travel insurance is not written widely by Lloyd’s syndicates, but some do and they will pick up claims for extensive travel cancellation.

Some Marine liability policies will be hit by claims from passengers and crew members on cruise ships for exposure to COVID-19, but most vessel operators have been able to demonstrate that they have not breached relevant government/health authority guidelines and regulations. Hull and machinery policies are written on a ‘named peril’ basis, of which pandemic is not a standard peril. It is, therefore, not considered to be a major loss for the global marine market, apart from a reduction in activity, leading to reduced premium income, particularly in the Cargo market. The Energy market will be also impacted by the dramatic fall in the oil price and a reduction in economic activity, thereby reducing the amount of premium available.

The Aviation market will suffer a dramatic reduction in activity on the airline account, thereby reducing the premium payable, but the claims activity will also drop away.

With the disruption to trade and the collapse in the oil price, the Trade Credit, Surety and Political Risk markets could experience an increase in claims.

The Casualty market, in the form of Directors & Officers (D&O) and Errors & Omissions (E&O) classes could be affected by claims over what precautions were or were not taken in the lead up to the pandemic and what insurance was bought (or not). If a deep recession follows, exposure to recession-related claims will increase. In addition, Healthcare, including hospitals and nursing homes, are likely to be subject to COVID-19 claims.

We currently believe that the Accident & Health, Cyber, Motor, Nuclear, Terrorism markets, to name just a few, should be broadly unaffected by claims arising from COVID-19.

Clearly the length of the lockdown will be crucial, as will the speed of economic recovery thereafter. These two factors will determine the level of premiums received for the remainder of the year. Most underwriters are suggesting an increasingly hardening market going forwards, with many suggesting it might resemble that following 9/11.

The Saturday Telegraph reported some very dramatic numbers, which included that the pandemic could “sting” Hiscox and Beazley with combined claims of $345 BILLION (£280bn). In their reports to the Stock Exchange last week, the actual combined figures were $345 MILLION, which is the equivalent of 7-8% of their annual premiums (albeit the Hiscox estimate did not include BI losses).

John Neal told the press that “the chances of the market making anything other than a notable loss in 2020 are zero.” Lloyd’s reports on an annually accounted basis, so virtually all the claims will be reported within the calendar year 2020 results. As members, we underwrite on a three-year account basis and it currently looks as if claims will be spread across both 2019, which had reasonable profit potential pre COVID-19, and 2020 which has the benefit of considerably higher rates in many classes. We have had multiple, detailed discussions with all of our syndicates. Several will not be too adversely affected by COVID-19 related claims and some not affected at all. This leads us to believe that it is not a given that we will incur an overall loss on the 2020 year, but we are at a very early stage of development.

At a member level we are seeing an initial solvency loading of under 2% in connection with COVID-19 related losses. Additional assets needed for June CIL are more related to the fall in the stock market over recent weeks, rather than insured losses. We expect that a further loading may be imposed for the November CIL exercise, specifically for COVID-19, should the volume of claims over the next few months merit it.

Lloyd’s will be reporting its view on the impact on the market in May.

We will keep you updated as we receive any further information.