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The Rough Notes Company Inc.



November 09
14:10 2020

COVID-19’s impacts have gone well beyond property lines and the effects have woven their way into every industry. What are the top five areas in insurance that could be affected?


The pandemic is having a far-reaching impact on a wide array of coverages

By Michael Wayne

We have survived another presidential election, so far, and are now barreling through the fourth quarter of 2020. While factions may argue the pros and cons of the voting outcome, what isn’t up for debate is a recent Moody’s survey that shows nearly half of cedants (47%) expressed that they are concerned about reinsurers’ use of retrocession.

According to respondent answers, “Over the past five years, some reinsurers have significantly increased their use of retrocession, which is primarily supported by alternative capital. This has boosted their gross capacity and provided them with a stream of fee income from operating sidecars and ILS (Insurance-Linked Securities) management platforms. However, it has also made them increasingly reliant on supply and demand dynamics in the alternative capital market. This is a growing source of operational and execution risk, particularly as alternative capital capacity remains tight and price increases for retrocession outpace reinsurance price increases.”

We are likely to see an uptick in suits where agents and brokers are called on the carpet for the perceived failure to inform a client about the exclusion of virus-related exposures.

The reinsurance market was strained heading into this year. Over the past few years, natural disasters and a lack of retrocession protection had already contributed to reassessments pertaining to capacity and pricing for business property lines. Additionally, massive losses from several casualty lines contributed stress. Then 2020 presented unforeseen actors—COVID-19 and civil unrest—adding fuel to the figurative wildfire. Of course, we continue to have literal wildfires as well, and hurricanes have repeatedly battered the Gulf Coast. COVID-19, according to some estimates, alone will account for upwards of $80 billion in charges for the insurance industry.

As insurance carriers work to determine what they need to do contractually to fall in line with COVID-19 reinsurance exclusions, which will likely be a lengthy process, the industry as a whole is tasked with another challenge. Facing a void where there isn’t a private/public partnership to do so, insurers have the uphill climb of figuring out how to approach pandemic-related property losses and how to price that risk appropriately.

COVID-19’s impacts have been far reaching and have gone well beyond property lines. The effects have woven their way into every industry. Those effects also will invade all lines of business. Here are the Top 5 ways that this could happen:

Workers compensation. By the end of August 2020, 14 states had introduced some measure to have COVID-19 considered a work-related illness. In six states, legislation targeting several kinds of workers created a presumption of coverage. Essential workers, like front-line healthcare workers, and those who face a high risk of exposure during their normal working conditions—such as those in service industries—are looking for protection. For insurers, as well as many employers, the result could be a rise in insurance costs. Considering the current state of the market, and the overall loss of revenue that many have already sustained, that rise could be problematic.

D&O. Since April, a growing number of securities class action lawsuits have been filed. These lawsuits have involved a variety of organizations, among them Norwegian Cruise Line, Zoom Video Communications, Carnival Corporation, Wells Fargo & Company, iAnthus Capital Holdings, and Inovio Pharmaceuticals. Some of these suits question corporate statements related to an organization’s ability to develop coronavirus-related therapies or testing materials; others contain allegations regarding the virus’s impact on business operations or financial performance, and some suits even raise privacy concerns. As businesses begin the reopening process, they will be issuing multiple statements regarding their financial condition and other aspects of their operations. False or erroneous information could spell trouble.

E&O. The potential exists for a variety of E&O claims to be filed. In particular, three specific areas seem to be primed for E&O claims. First, we are likely to see an uptick in suits where agents and brokers are called on the carpet for the perceived failure to inform a client about the exclusion of virus-related exposures. Second, agents and brokers are likely to have E&O claims filed against them when a client believes they did not provide adequate business income or extra expense coverage. With many individuals now settled into their home offices and using their own Wi-Fi connections, it’s no wonder that the third area that is ripe for E&O claims could be network and cybersecurity cases. An organization may be doomed by a lack of appropriate protection and ignorance of best practices.

General liability. Several cases have already made headlines, painting the insurance industry as an epic villain for not writing countless checks to cover the monumental financial losses that businesses have incurred because of COVID-19. No matter how many suits are filed, however, pandemic-related losses are specifically excluded from general liability coverage. With their eyes open to the realities of mandatory stay-at-home orders and shutdowns, carriers are pushing to have COVID-19 excluded from specific industries’ GL coverage. Going forward, agents and brokers will need to be alert for such exclusions.

Surety. While the construction industry is back to work in most sectors, the initial lockdowns that halted the production of building materials for contractors were a gut punch that, combined with imposed shutdowns, brought the industry to its knees. More than ever, business relationships will be tested as best practices are implemented to mitigate work stoppages, ensure budgets are adhered to, and maintain a steady flow of jobs.

Coverage must be assessed to determine the impacts of all of these factors so carriers can adjust policies and increase premiums if necessary. To protect client relationships and prevent E&O claims, agents must be familiar with policy terms and conditions and understand exclusions.

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