The pandemic affected almost every link in the property/casualty value chain, but the industry weathered the stress well, according to Triple-I’s chief actuary, James Lynch.
“The U.S.’s property/casualty (P/C) insurers provided premium relief, retained employees, and weathered a capital market downturn while navigating this year’s COVID-19 pandemic,” he said at the Casualty Actuarial Society’s (CAS) virtual annual meeting on November 10.
“Private-passenger auto insurers returned around $14 billion in premiums this year to the nation’s drivers as miles driven dropped dramatically in the pandemic’s early months. This resulted in a five percent reduction in the cost of auto insurance for the typical driver in 2020 as compared to 2019. At the same time, the U.S.’s auto, home, and business insurers continued to employ two million-plus Americans as the industry responded to numerous natural disasters as well as the aftermath of civil unrest.”
This year’s record-setting hurricanes and wildfires, coupled with civil disorders in multiple states, have caused insured loss payouts totaling tens of billions of dollars. The policyholders’ surplus—the amount of money remaining after the industry’s cumulative liabilities are subtracted from its assets—stood at $826 billion as of June 30, 2020, down from a record-high $848 billion as of Dec. 31, 2019.
The economic uncertainty in the U.S.’s capital markets in 2020’s first-quarter caused unrealized capital losses (stock declines) in insurer investment portfolios, Lynch said. Insurers who have faced lawsuits related to pandemic-caused losses also have faced the financial challenges of defending themselves, he added.
“Business income (BI) insurance coverage disputes captured media attention. Yet lawmakers nationwide have to date resisted calls to rewrite these policies retroactively as insurers faced a steady stream of lawsuits over their unwillingness to pay these claims,” Lynch said, explaining how BI coverage, also known as business interruption insurance, is generally triggered only when a business incurs direct physical damage to the business’ property.
“Thanks for inviting me to be part of such an august panel. I wanted to spend a few moments talking about what Insurance Information Institute research indicates are significant changes happening in the sector right now and what may lie ahead.
Not surprisingly, the pandemic has had an enormous influence. Triple-I estimates that insurers will return $14 billion to customers because of the dramatic decrease in driving. Even with that, most insurers have shown improved results.
A good rule of thumb is that insurers returned about 15 percent of second quarter premiums. Fast Track data show that loss costs in the second quarter were between 7 and 40 percent lower than a year earlier, depending on coverage.
A closer look at the numbers show what might be a disturbing long-term trend. Frequency was way down in every coverage, but some coverages showed disturbing spikes in claim severity. Property damage frequency was down more than 30 percent from a year earlier, but severity was up almost 20 percent. This was likely caused by faster driving.
Since the spring lockdowns have eased, customers are driving more again, but they still haven’t returned to the levels of a year ago. Right now people are driving about 12 percent fewer miles than they did a year ago.
However, there is ample evidence that drivers are still going faster than they did, particularly at rush hours. That’s why mileage driven this year is down 12 percent, but traffic fatalities are up 4 percent. The concern is that frequency patterns will return to the norm, but fast driving will keep claim severity high, putting upward pressure on rates.
There’s good news for insurers though. Telematic information was an important reason insurers could return money quickly to their customers, and that fact seems to have brought positive attention to usage-based insurance. Research by Arity shows that 58 percent of drivers surveyed this year are comfortable with insurers monitoring distracted driving to price insurance, up from 39 percent a year ago. There were similar increases for monitoring miles driven, speed and where a person drives.
There are lots of other questions about where the industry is going, and I guess I’ll step back and let us talk about those as a group.”
By James Ballot, Senior Advisor, Strategic Communications, Triple-I
It’s been more than eight months since COVID-19 first struck the U.S., and millions of small business owners are still hurting. All the while, a few plaintiffs’ attorneys are treating the pandemic as another opportunity to profit from costly insurance litigation.
At a time when businessowners are looking for leadership to bring much needed financial support, these same attorneys are hoping legislators and judges will help them retroactively rewrite business income (interruption) (BI) insurance contracts. One key figure in this effort is John Houghtaling, a New Orleans-based plaintiffs’ lawyer who was featured in a recent Bloomberg Businessweek profile.
Adds Michael Barry, Head of Media and Public Affairs, at the Insurance Information Institute, “Not one business interruption insurance policy in the U.S. was written on the assumption nearly every business would be interrupted at the same time.” Barry adds, “This is why regulators and judges are consistently siding with insurers who argue direct physical damage to property is needed to trigger a business interruption policy.”
Irrespective of insurers’ and trial attorneys’ competing points of view, the authors of the Bloomberg Businessweek article cite the need for timely and decisive action: “A yearslong legal battle might not be much help to struggling businesses,” the article states. As the end of 2020 approaches, litigation seeking to compel insurers to cover pandemic-related income losses appears likelier to further the lawyers’ interests as opposed to those of businessowners seeking financial support.
Other potential solutions are on the table, most of which are taking shape around the idea that the federal government is the only entity with the reach and financial resources to help businesses recover from an event the magnitude of a global pandemic. On this point, a growing consensus of legal scholars and insurance industry experts concur, with Stefan Holzberger, AM Best chief rating officer, concluding in commentary to a recent report, that “pandemic risk does not afford insurance companies any geographic diversification due to its global nature … Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses.”
As a counterpoint to statements made by Houghtaling and other plaintiffs’ attorneys, Sherman Joyce, President of the American Tort Reform Association presents a competing vision for how American businesses can unite to recover economically from the COVID-19 pandemic: “Americans’ elected representatives — not the trial bar — should have the authority to regulate business within the U.S.” Joyce continues, “The courts must restore that balance of power by rejecting the dreaded return of regulation through litigation.”
I’ve been living and working at my father’s house since the onset of COVID-19, keeping him from having to venture out and risk infection. Late last week, his furnace died, and we were fortunate to have family nearby to move in with while we wait for it to be fixed.
I’ve been truly grateful and mindful of people – especially the elderly – who don’t have such options. Then, this morning, I read this National Journal article, which threw light on the subject from a different angle.
“Throughout the pandemic, states and cities have put in place moratoriums on utility shutoffs,” the Journal writes, “but many have expired and more will be lifted in the coming weeks.”
The pandemic’s economic dislocations have put many people in situations in which they may not be able to pay basic bills, like rent, electricity, heating, and water. Not only that – even people who can move in with family or friends may be putting themselves in danger of infection.
People can’t remain in a home safely without water, said Rianna Eckel, senior organizer for Food & Water Watch, which advocates on environmental and resources issues.
“You can’t do basic things like wash your hands, which is one of the top safety recommendations,” she said. “You can’t bathe or shower; you can’t flush your toilet; you can’t cook; you can’t really clean. That raises the risk for COVID transmissions because you’ll have families who are going to neighbors’ houses, going to friends’ houses, so that they can wash some clothes and cook or maybe take a shower.”
Similar concerns apply to electricity, gas, and steam utilities.
“Those are critical to the ability to heat your home, to cook, refrigeration to preserve foods or medication,” said Emily Benfer, a law professor at Wake Forest University. “You need electricity to use medical equipment. So all of these are necessary to sheltering in place and to maintaining health, let alone preventing the spread of the virus.”
Benfer added, “The COVID-19 pandemic and social-distancing requirements have created a situation in which utility shutoff is a life-threatening emergency for the majority of Americans.”
In our case, family members had all just been tested for COVID-19 out of concern about a possible exposure (we came up negative). This precaution, too, isn’t readily available to many people. Especially people who have to choose between paying for electricity or food.
Lawmakers and advocates have been pressing for a moratorium on water shutoffs, calling for the Centers for Disease Control and Prevention to use the same authority it exercised when the agency issued a stop to evictions. In a House-passed bill providing COVID-19 emergency funding, $1.5 billion was included to assist low-income households with water bills.
“It’s incumbent on utilities to figure out a way to make sure that people’s health is not put at risk by having widespread shutoffs, because that’s just going to make the pandemic all that much worse,” said Erik Olson, a health expert at the Natural Resources Defense Council. “The answer to this problem is not to be shutting off low-income people’s water all over the country.”
Beyond the clear humanitarian concerns, if these issues are not addressed effectively, they could lead to litigation and insurance claims to be resolved for some time to come.
Hurricane Delta last month triggered a 17 million peso (US $800,000) insurance payout to the Trust for the Integrated Management of the Coastal Zone, Social Development, and Security for the State of Quintana Roo, Mexico. The parametric policy, deployed last year, cost the trust nearly 5 million pesos (US $230,000), covering 150 square kilometers (58 square miles) of coastal ecosystems for the entire 2020 hurricane season.
Recent research illustrates the benefits provided by mangroves, barrier islands, and coral reefs – natural features that frequently fall victim to development – by limiting tropical storm damage, particularly from storm surge. Unlike traditional insurance, which pays for damage if it occurs, parametric insurance pays when specific conditions are met – regardless of whether damage is incurred. Without the need for claims adjustment, policyholders quickly get their benefit and can begin their recovery. In the case of the coral reef coverage, the swift payout will allow for quick damage assessments, debris removal, and initial repairs to be carried out.
Quintana Roo partnered with hotel owners, the Nature Conservancy, and the National Parks Commission to pilot a conservation strategy involving a parametric policy that pays out if wind speeds greater than 100 knots hit a predefined area.
Similar approaches could be applied to protecting mangroves, commercial fish stocks that can be harmed by overfishing or habitat loss, or other intrinsically valuable assets that are hard to insure with traditional approaches.
SIR conducted a survey of insurance industry professionals in May to understand the impact of COVID-19 on the business climate. The survey asked how the pandemic was impacting staffing, budgets, work-from-home arrangements, business travel and professional development.
At the time of the survey, 97 percent of carrier respondents said staffing levels have not decreased. When asked about work-from-home arrangements, only 10 percent of respondents said they plan to return to the office full-time once restrictions are lifted.
Travel restrictions will remain in place indefinitely for most respondents. Even when travel restrictions are lifted, nearly everyone will remain cautious of traveling nationally, and nearly three-quarters expect their travel budgets to be reduced.
Micheal Myers, Lead Competitive Intelligence Analyst at USAA and President of SIR, said, “This was an extremely insightful and timely survey of industry professionals. SIR put the insights into action by quickly pivoting from planning an in-person conference to meeting virtually (with record attendance). We also published COVID-related research reference library to help researchers solve business problems. As is consistent with SIR’s mission, we provided these resources to members and non-members alike to advance the industry.”
Over 180 professionals responded to the survey; 67 percent were carriers and 33 percent were suppliers/vendors. A variety of lines and businesses were represented, including commercial, personal, life and health.
By Sean Kevelighan, CEO, Insurance Information Institute
Insurers have responded quickly and effectively to 2020’s extraordinary volume of hurricanes, wildfires, and civil unrest. These events are resulting cumulatively in billions of dollars in insured claim payouts.
Yet a recent Forbes article stated that the owners of one of the largest Broadway theater chains were “shocked to learn that its insurance companies would not cover most of its losses during the COVID-19 pandemic.”
Making people more prepared and resilient is our fundamental goal at the Insurance Information Institute (Triple-I). We seek every opportunity to educate customers about how their insurance works before they suffer an insured loss. Part of this mission is to explain how pandemics are uninsurable. That’s because, unlike covered events, which are limited in time and geography, pandemics simultaneously affect everybody. This is something we’ve explained in briefings to legislators, legal experts and consumer and trade media.
Still, while insurers, regulators and the U.S. government work to deliver relief to business financially affected by future pandemics, we need to stay focused on the present. And to do this, we need to take a quick look into the past:
Insurance has been around for 350 years as a way for households, businesses and communities to recover and rebound after wildfires, hurricanes and other catastrophes. Time and again insurers have been there for their customers because that’s what they do. For example, in the months after 9/11, insurers paid out tens of billions of dollars to keep affected businesses afloat while New York and Washington, DC rebuilt from the rubble.
In 2020, insurers continue to perform their vital societal role, covering insured losses from record hurricane and wildfire seasons, as well as the most destructive civil demonstrations in more than a quarter-century. Insurance simplifies a rather complex risk management process and creates products that deliver simpler ways for people to be more prepared and resilient. Covering these hazards demands immense capital resources.
Questions? Your Policy Documents Have the Answers
Insurance is heavily regulated, and as the Triple-I reaffirmed at September’s annual summit of the National Association of Insurance Commissioners (NAIC), the industry we represent relies on a strong working partnership with regulators and government agencies across America to help make insurance work better for everybody.
One of the tangible results of this partnership is something that anybody can literally hold in their hands: insurance policy documents. Reading these documents to understand what you’re purchasing is an essential part of preparedness.
Business income (interruption) or BI insurance losses caused by a pandemic are not covered because direct physical damage, such as that caused by a hurricane or a fire, is what triggers a standard BI policy. As many courts and academics around the country have stated, neither a virus nor bacteria leads to the direct physical damage of a business’s structure. This contract language is well-established; moreover, every policy is approved by individual states before they are issued to BI policy holders.
We view it as a success when nobody is shocked by what’s covered, and what’s not, under their insurance policies. This is why the Triple-I regularly urges business owners to become familiar with their insurance documents and have regular conversations with their agent or broker to discuss anything they don’t understand.
In an age when we’re all accustomed to just clicking the “terms and conditions” box, ignoring agreements, paradoxically, has become something everybody can agree with. Social scientists consider this to be a form of cognitive dissonance: We know we should read our insurance policies, and yet few of us do. This is a behavioral pattern we’re all guilty of and the Triple-I understands there are many demands on a customer’s time.
Which brings us back to an essential point, that insurance companies prioritize their efforts and resources into making sure that everybody knows about the coverage they have and need.
Pandemics are uninsurable because insurers don’t collect premiums to cover business losses due to viruses and other pathogens. There are products available for this purpose, but an overwhelming majority of businesses decline to purchase them. These exclusions and the availability of pandemic insurance is a fact well known by many experienced professionals—notably risk managers and trial attorneys. The Triple-I is willing to work with anybody to make the public better aware of the risks and how to prepare for them.
The next pandemic surely will come. How insurers, their customers, and the federal government respond now will ensure our resources and energies are devoted to saving lives from all the threats the U.S. faces.