Category Archives: Insurers and the Economy

Top Insurance Markets
to See 4.5 Percent GDP Decrease In 2020

The world’s 10 largest insurance markets are cumulatively expected to see their Gross Domestic Product (GDP) decrease by 4.5 percent in 2020 compared to 2019 because of COVID-19, according to Triple-I’s Global Macro and Insurance Outlook: Q4 2020 report.

“All things being equal, higher economic activity drives premium growth higher while lower economic activity drags premium growth down. Going into Q4, economic activity, expressed as year-over-year change in GDP for the world’s 10 largest insurance markets, is expected to decrease by -4.5% in 2020,” writes the report’s author, Dr. Michel Léonard, CBE, Vice President & Senior Economist, Triple-I.

The world’s 10 largest insurance markets, in order, as defined by total premium written in 2018-2019, are: the United States, China, Japan, the United Kingdom, France, Germany, South Korea, Italy, Canada, and Taiwan. The Triple-I’s projection of a 4.5 percent GDP decrease in the world’s 10 largest insurance markets in 2020 as compared to 2019 was weighted based on the total premium written in each one.

“The extent of new lockdowns, the success of vaccine trials and the efficacy of vaccine distribution will determine the pace of economic recovery in 2021, with consensus pointing to Q3 or Q4 2020 as rounding the corner out of the pandemic part of the recession. However, economic activity will not heal and recover until well into 2021 and early 2022,” Dr. Léonard states, adding, “Under best scenarios, economic growth will not start to fully recover until Q2 and Q3 2021 in advanced economies and Q3 and Q4 in developing economies.”

Global GDP is expected to contract between -5.5% and -6.5% in 2020, the report said, citing benchmark forecasts such as the ones issued recently by the International Monetary Fund (IMF) and the Organisation of Economic Co-operation and Development (OECD).

GDP represents the value of the total goods and services an economy produces in a single year whereas premium is the price paid for an insurance policy. Beyond premiums, insurers also generate revenue through investment income.

No Surprises: How Insurers and Their Customers Benefit from Financial Education

By Sean Kevelighan, CEO, Insurance Information Institute

Sean Kevelighan

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.

Large-Scale Solutions to Large-Scale Problems

As a result, a consensus is forming 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. It’s in this spirit that we help inform public discussions about the need for a federal governmental role in protecting the U.S. against future pandemics.

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.  

Economic Data
in the Age of COVID-19

Dr. Steven N. Weisbart, CLU, Triple-I Senior Vice President and Chief Economist

COVID-19 pandemic has not only disrupted our economy – it has complicated the data we routinely use to understand economic developments. This is a bit like finding out the thermometer you use to tell if you have a fever is unreliable.

Here are two examples of why it’s hard to know what’s happening.

 What is the correct unemployment rate?

The April 2020 Bureau of Labor Statistics (BLS) employment report said the U-3 rate – just one of six unemployment measures BLS reports – was 14.75 percent. This number is derived by dividing the number of people counted as unemployed (23.078 million) by the civilian labor force (156.481 million), which is everyone who is either working or unemployed and looking for work.

But when the virus was recognized as a major public health threat in mid-March and April and many businesses and organizations were shut down, throwing many millions out of work, some who were affected decided to retire. This means they were no longer counted as part of the civilian labor force. This is most vividly seen by comparing the civilian labor force in February (164.6 million) with its count in April (156.5 million)—a drop of 8.1 million.

The large number of retirees affected the unemployment rate: if they had not retired, most would likely have been counted as unemployed. To keep the math in our example simple, let’s say 7 million of the retirees had remained in the labor force and been counted as unemployed (maybe the other 1 million would have retired then anyway—virus or no virus). The unemployment count would have been 30 million (23 million counted plus 7 million un-retirees) and the civilian labor force would have been 163.5 million (156.5 counted plus 7 million un-retirees).

The unemployment rate would have been announced as 30 million divided by 163.5 million, or 18.35 percent, instead of 14.75 percent.

So, which one is correct?

Are seasonal adjustments still correct?

Macroeconomists have long recognized that many economic data have seasonal patterns. For example, retail sales often spike in the last quarter of the year because of the holidays. Sales for some items, such as those bought for “back to school,” spike at other times. So, to see what’s really happening, economic data are often adjusted to account for the seasonal effects and reported after these adjustments are made.

To see the effect of seasonal adjustments, look at the following two graphs. The first is employment in the construction industry that is not seasonally adjusted. The second is the same industry and time; the only difference is that its data are seasonally adjusted.

Construction employment obviously dips in the cold months, and the drop shown in the first graph doesn’t represent any significant economic change, so the seasonal adjustment in the lower graph lets us see only changes beyond the seasonal adjustment, such as what happened in 2020.

The problem, from an economic analysis viewpoint, is that the amount of seasonal adjusting to apply is a judgment call, and it is often based on a historical period in which conditions were much as they are now. But what’s happening now has no satisfactory historical precedent.

So should we keep using the seasonal adjustment factors from before, or do they not apply to the current economic situation?

These are just two examples of datasets or analytical approaches whose relevance can be called into question in light of COVID-19 – further complicating the already complex and nuanced endeavor of attempting to understand and anticipate economic developments.   

Fed’s Rate Move Portends Long-Term Challenges for P/C Insurers

Dr. Steven N. Weisbart, CLU, Triple-I Senior Vice President and Chief Economist

“The FOMC’s action will likely keep longer-term rates exceptionally low for several years more.”

The Federal Open Market Committee (FOMC) of the Federal Reserve Board  recently spelled out its objectives and strategies for at least the next several years—describing a financial framework they will maintain longer than the timeframe they typically describe. The length and parameters of this framework will have significant impact on the property/casualty industry.

The FOMC says it will hold short-term interest rates near zero, likely for several years—perhaps to 2023, quite possibly longer. Insurers don’t invest much in short-term instruments – to the extent that they do, it’s to have cash available to pay claims. They primarily invest in intermediate- and longer-term bonds and similar fixed-rate interest-paying instruments that provide steady income, which, together with premiums, covers claims and operating expenses. Insurers raise and lower premiums – partly in response to changes in investment income – to sustain profitable operations.

Because yields on these investments generally track short-term rates, the FOMC’s action will likely keep longer-term rates exceptionally low for several years more.

One signpost the Fed will use to decide when to raise rates is when inflation, as measured by the Personal Consumption Expenditure (PCE) deflator, is sustained at over 2 percent such that the average inflation rate including recent years equals 2 percent. To appreciate what this means, consider Figure 1. It shows that, since 2012, the PCE deflator has been below 2% (vs. same month, prior year) most of the time. The average over this span was 1.40%. But the Fed might not go back that far to calculate its long-run average. For example, since 2017 the PCE deflator averaged 1.69%. If the deflator averages 2.4% from now through 2023, the average from 2017 through 2023 will be 2.01%.

Figure 1

Rates falling since the 1980s

Based on the FOMC’s new framework, intermediate- and longer-term interest rates will, at best, remain at their current historically depressed levels for several years. One consequence of this is that bonds insurers hold to maturity and roll over will be reinvested at lower rates than they currently yield.

Prevailing interest rates have been generally falling since the early 1980s. Figure 2 shows this decline since 2002, as proxied by the yield on constant-maturity 10-year U.S. Treasury notes (the blue line), and its effect on the portfolio yield for the P/C insurance industry over the last two decades (the gold bars).

Figure 2

P/C insurers invest mainly in bonds, but not just U.S. Treasury securities. They also invest in corporate and municipal bonds, both of which generally yield higher rates than U.S. Treasury bonds because they are riskier. Yields on corporate and municipal bonds will likely loosely track Treasury yields.

P/C insurers also receive investment income from dividends on common and preferred stock they hold. These dividends are likely to be affected by corporate profits, which might be depressed for at least as long as the current recession lasts.

A shift to shorter maturities?

How will the insurers respond to these persistent conditions? If recent behavior is any guide, they are likely to shift to shorter-maturity bonds to retain the flexibility to switch back to longer-term, higher-yielding investments when rates eventually rise again. Figure 3 shows this pattern of shortening maturities during the years since 2009 as prevailing rates fell. From 2009 to 2019, the percent of bonds with one-to-five-year maturities rose from 36% to 41%, but those with 10 or more years of maturity fell from 19% to 11%.

Figure 3

What’s notable about this strategy is that – since shorter-term bonds yield less than longer-term bonds – the shift results in an even lower portfolio yield than the industry would have achieved if maturities were unchanged over this time span. It sacrifices near-term opportunities for the flexibility to eventually seize longer-term gains.

If the insurers continue this strategy, the shift to shorter-term bonds, combined with continued low interest rates, could lead to a scenario over the next five years that looks like Figure 4, which includes 2015-2019 yields for historical context.

Figure 4

Of course, future portfolio yields might be different from this scenario. For example, insurers might realize significant capital gains or losses. The portfolio yield in 2012, for example, was nearly two percentage points above the U.S. Treasury 10-year yield that year due to realized capital gains.

On the other hand, if interest rates rise, low-yielding bonds that are available for sale would suffer unrealized capital losses, which would be a direct reduction in policyholder’s surplus.

In a typical year the industry posts capital gains of $5 billion to $10 billion, but any number outside this range would affect the portfolio yield for that year. Capital losses also could result from investments affected by bankruptcies or other business setbacks caused by the recession. Impaired bonds would have to be accounted for on the balance sheet.

Policyholder Surplus Matters: Here’s Why

Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.

 Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill. 

Not as much as you think

But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.

Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.

Call it $400 billion, for simplicity’s sake.

Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.

By extension, $400 billion is where alarms begin going off for the entire industry.

It gets worse – or better, depending on your perspective.

In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve. 

Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels. 

So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.

To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.

Which brings us to today.

Losses ordinary and extraordinary

In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.

Nevertheless, the industry remains financially strong, in large part because the bulk of insurers’ investments are in investment-grade corporate and governmental bonds. And it’s a good thing, too, because the conditions underlying that surplus decline preceded an extremely active hurricane season, atypical wildfire activity, and damages related to civil unrest approaching levels not seen since 1992 – involving losses that are not yet reflected in the surplus.

Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.

And the Atlantic hurricane season has not yet peaked.

The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.

In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.

And the 2020 wildfire season still has a way to go.

All this is on top of routine claims for property and casualty losses.

Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.

No end in sight

Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease. 

If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.

This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.

Fortunately, Americans seem to be beginning to get this.  A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.

Further Reading:

POLL: GOVERNMENT SHOULD PROVIDE BUSINESS INTERRUPTION SUPPORT

TRIPLE-I GLOBAL OUTLOOK: CONTINUED PRESSURE ON INVESTMENTS & PREMIUMS

BATTLING FIRES, CALIFORNIA ALSO STRUGGLES TO KEEP HOMEOWNERS INSURED

LAURA LOSS ESTIMATES: $4 BILLION TO $13 BILLION

ATYPICAL WILDFIRE ACTIVITY? OF COURSE — IT’S 2020

SWISS RE: A KATRINA-LIKE HURRICANE COULD CAUSE UP TO $200 BILLION IN DAMAGE TODAY

U.K. BUSINESS INTERRUPTION LITIGATION SEEMS UNLIKELY TO AFFECT U.S. INSURERS

RECESSION, PANDEMIC TO IMPACT P/C UNDERWRITING RESULTS, NEW REPORT SHOWS

BUSINESS INTERRUPTION VS. EVENT CANCELLATION: WHAT’S THE BIG DIFFERENCE?

CHUBB CEO SAYS BUSINESS INTERRUPTION POLICIES ARE A GOOD VALUE AND WORK AS THEY SHOULD

TRIPLE-I CHIEF ECONOMIST: P/C INDUSTRY STRONG, DESPITE SURPLUS DROP

INSURED LOSSES DUE TO CIVIL UNREST SEEN NEARING 1992 LEVELS

COVID-19 AND SHIPPING RISK

BUSINESS INTERRUPTION COVERAGE: POLICY LANGUAGE RULES

Triple-I Global Outlook: Continued Pressure on Investments & Premiums

The COVID-19 pandemic continues to depress economic growth around the world, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease. 

Forward-looking growth proxies, such as interest rates, government spending, equity markets, and commodity prices, are sending mixed to negative messages about growth into 2021. 

Against this backdrop, Triple-I experts report, the global insurance industry has continued to issue new policies, service existing ones, and process and pay claims. While the final numbers on the extent of the pandemic and recession’s impact on the industry won’t be clear until 2021-2022, early indicators point to flat premium growth in 2020 globally and to significant differences in how the pandemic, monetary policy, and the recession are affecting insurers in the United States versus abroad. 

In its Global Macro and Insurance Outlook for the third quarter, published this week, Triple-I noted that global central banks kept benchmark interest rates mostly on hold in the third quarter at an average of 0.6 percent, reflecting the limits imposed by near-zero interest rates policies. 

Concerns about lower long-term interest rates are increasing as global central banks have pushed rates even lower during the pandemic, the report says. In a recent survey, about 33 percent of U.S. insurers said they assume flat long-term benchmark rates, while 50 percent reported having changed, or say they are in the process of changing, their investment strategy. These changes are likely to accelerate now that the U.S. Federal Reserve officially changed the focus of its monetary policy and central banks around the world follow.  

Interest rates matter because insurers get the bulk of their profits from investment earnings. U.S. insurers, in particular, rely on fixed-income financial instruments like corporate and government bonds.  If lower interest rates put pressure on insurers’ investment earnings, they will have to compensate by raising premiums paid by policyholders or adjusting their risk profiles to reduce claim payouts.   

“COVID-19 and lower economic activity continue to hinder premium growth in property, workers compensation, and auto,” the report says, “while a recent survey indicates that COVID-19 led to a reduction in life premium.” 

The report says it’s too early to determine whether increasing demand for warranty, indemnity, and cyber coverage and a surge of interest in captive insurers will make up for  downward pressure on premium growth across the industry. 

Recession, Pandemic to Impact P/C Underwriting Results, New Report Shows

The COVID-19 pandemic and the recession it started will result in no premium growth for 2020 and a deteriorated combined ratio for the property/casualty industry, according to the new report, Insurance Information Institute (Triple-I) / Milliman P/C Underwriting Projections: 2020-2022. 

Sean Kevelighan

Direct and net premium written will be virtually unchanged from 2019, while the industry combined ratio, a measure of underwriting profitability, is projected to rise to 102 at year-end, up from 99 last year, according to the report, a joint venture of the Insurance Information Institute and Milliman, a provider of actuarial and related products and services. The report, to be published quarterly, was unveiled on August 13 at an exclusive members only virtual webinar moderated by Triple-I CEO Sean Kevelighan.

James Lynch

“The pandemic and the recession it induced drove down exposures in personal auto and several commercial lines,” said James Lynch, FCAS, senior vice president and chief actuary with the Insurance Information Institute (Triple-I). “Overall premiums are projected to be flat,” said Lynch, adding, “a hard commercial lines market is driving rates higher, which offsets some of the deterioration in exposure.”

Jason Kurtz

“Though there is tremendous uncertainty as to size, the pandemic creates insurance losses that were not contemplated in either catastrophe or attritional pricing,” said Jason Kurtz, FCAS, a principal and consulting actuary at Milliman. “Not surprisingly, pandemic losses can cause underwriting results to deteriorate.”

The report noted that a number of legislative and regulatory proposals have the potential to affect pandemic exposures and losses.

A major hurricane or cumulatively severe wildfire season could also impact the combined ratio, the report noted. Right now, the report projects a typical year for catastrophe losses, though most hurricane prognosticators predict more storms than average.

Other Areas to Watch

Other areas to consider include the impact of the pandemic on workers compensation, particularly the shift in the burden of proof onto the employer for certain types of claimants (i.e. presumption) and the changing exposure from people working from home.  Workers compensation saw five consecutive years through 2019 where that line of business posted an underwriting gain; that could change with COVID-19. 

Economic trends also play a role. The report assumes that exposures roughly grow and shrink with the economy. If the recovery is slower or faster than projected, premium growth will be affected.

The report is an analysis by Triple-I and Milliman based on an actuarial model that relies on information from a number of publicly available sources as well as input from thought leaders and experts at both organizations. It predicts that premiums will grow 7 percent in 2021 and 6 percent in 2022 as the economy recovers, and the combined ratio will fall to 99 for both years as the industry prices for the effects of the pandemic and the higher rates charged this year earn out.

The complete webinar, available exclusively to Triple-I members, projected underwriting results for several lines of business: personal auto, homeowners, commercial auto, general liability, property, commercial multiperil and workers compensation.


Triple-I: Insurers Poised to Withstand Challenging Economic Times

The economic uncertainty brought about by COVID-19 has impacted the U.S. insurance industry’s investment portfolios this year yet insurers cumulatively entered 2020 in a strong financial condition, according to a just-released Insurance Information Institute (Triple-I) Economic Snapshot report.

“The good news is the industry is well positioned to provide the safety net we need,” said Dr. Steven Weisbart, Chief Economist and Senior Vice President, Triple-I. “We recognize there’s been deterioration in investment income during the past few months, but the industry was financially strong before the pandemic hit. If a vaccine is discovered, most economists believe the economy will have little trouble bouncing back. Until then, it’s just going to be a longer process than we originally thought.”

The financial fortunes of the U.S.’s property/casualty (P/C) insurers are generally tied to the U.S.’s Gross Domestic Product (GDP) as auto, home, and business (e.g., construction, workers compensation (w/c)) activity are reflective of the economy’s overall health.

Weisbart says while a combination of government restrictions and personal fear is delaying economic recovery, the insurance industry has been able to provide some relief and flexibility for its private-passenger auto insurance policyholders. More than $14 billion in premium relief had been offered to the nation’s drivers in 2020 as of the end of May, a Triple-I analysis found, and insurers continue to monitor the claims experience of motorists.

The Triple-I report shows some additional positive news for insurers. For example, during the past four years the number of owner-occupied homes has risen following a decade during which there was no increase. This is significant for the P/C insurance industry because virtually every owner-occupied home has homeowners insurance while only about half of renters buy renters insurance.

Pandemic-related changes may also affect workers compensation insurance as some states consider changes to the way w/c claims are processed for front-line workers, such as those in health care and law enforcement. On the other hand, some economists suggest w/c claims may experience a decrease due to the number of people working from home.

The Economic Snapshot’s special topic section focuses on life insurance. Although this sector generated its largest pre-tax operating loss of any quarter in at least 18 years, deaths due to the COVID-19 virus weren’t responsible. Instead, the plunge in interest rates was so steep and is expected to last so long that the industry booked an unprecedented increase in aggregate reserves. Reserves rose to $103.5 billion—a $57 billion increase since the third quarter of 2019.

A copy of the 2Q 2020 P/C Industry Economic Snapshot is available to Triple-I members by logging into the members-only portal at www.iii.org.  Please contact members@iii.org for log in instructions, or information about membership.

Gauging Pandemic’s Impact on Insurers

While COVID-19’s impact on the insurance industry will require time to fully understand, litigation, legislation, and concerns about pricing and policy language will be with us for some time to come.

“Significant” changes in policy language seen

The majority of respondents to an Artemis re/insurance market survey believe the COVID-19 pandemic will result in “significant changes” to business interruption (BI) policy wordings.

In fact,  the U.K. Financial Conduct Authority (FCA) is conducting a review focused on obtaining legal clarity on policies connected to the pandemic and which claims are valid and which aren’t.

FCA’s Interim CEO Chris Woolard said recently that while some BI policies are paying out for virus-related issues, others remain “within dispute” due to ambiguities in their wordings.

Outside of the 67.6% who stated a belief that COVID-19 will drive “significant changes” in BI policy wordings, 21.6% expect a “moderate amount” of change, while the remaining 10.8% said the effect will be “limited.”

Loss estimates vary

The Artemis survey also shows 67% of respondents expect the industry to face between $80 billion and $100 billion of underwriting losses due to the pandemic. This is roughly in line with Lloyd’s of London’s earlier estimate of a $107 billion global industry impact.

But analysts from investment bank Berenberg said they believe global COVID-19 claims will be more manageable, estimating a range from $50 billion to $70 billion for the total bill. The analysts don’t specify whether this includes both life and non-life insurance claims from the pandemic, but they do point to the estimate from Lloyd’s of London as being too high.

“We estimate $50-70bn for global COVID-19 claims,” Berenberg’s analysts state. “Significantly less than the $107bn estimate reported by the Lloyd’s of London market estimate on 14 May.”

Las Vegas Hospitality Union Sues Employers

Las Vegas Culinary Workers Union Local 226 is suing several employers on the Las Vegas strip over unsafe working conditions during the coronavirus pandemic, Business Insurance reported.

The union, representing 60,000 workers, said in a statement it is asking for injunctive relief under the Labor-Management Relations Act based on the “hazardous working conditions” workers face.

The lawsuit alleges casino hotels have not protected workers, their families, and their community from the spread of COVID-19 and that current rules and procedures in place for responding to workers contracting COVID-19 have been “wholly and dangerously inadequate.”

The Culinary Union made a number of requests for policy changes, including daily cleaning of guest rooms, mandatory testing of all employees for COVID-19 before returning to work and regular testing thereafter, adequate personal protective equipment for workers, and a requirement that guests wear face masks in all public areas.

Best Warning on COVID-19 Workers’ Comp Laws

Insurance rating agency A.M. Best has warned that legal efforts in several U.S. states to expand workers’ compensation coverage to allow employees to claim for COVID-19 will have a negative impact on re/insurers, Reinsurance News reports.

The crisis has resulted in many employees now working from home, but a significant part of the workforce still needs to be present and public facing, and this is the group new state laws aim to support. For these workers, some states are looking to shift the burden to the insurer to prove that an employee contracting COVID-19 did not do so while on the job.

“This shift in the burden of proof could lead to significant additional losses to a segment already under pressure and result in increased reserve estimates and higher combined ratios,” A.M. Best said.

Given that assumptions used in pricing and actual loss emergence diverge significantly, these legislative changes will result in an increase in loss estimates and could affect earnings.

Businesses Ask Patrons to Waive Right to Sue

As businesses reopen across the U.S. after coronavirus shutdowns, many are requiring customers and workers to sign forms saying they won’t sue if they catch COVID-19, Associated Press reported.

Businesses fear they could be the target of litigation, even if they adhere to safety precautions from the Centers for Disease Control and Prevention and state health officials. But workers’ rights groups say the forms force employees to sign away their rights should they get sick.

So far, at least six states — Utah, North Carolina, Louisiana, Oklahoma, Arkansas and Alabama — have such limits through legislation or executive orders, and others are considering them. Business groups such as the U.S. Chamber of Commerce are lobbying for national liability protections.

P&C COVID-19 Wrap-up
The Path to Reopening

Just as it has played a key role in responding to the COVID-19 pandemic crisis, the insurance industry will be integral to the economic recovery as businesses and communities reopen. 

Aon forms recovery coalition 

Re/insurance broker Aon has formed a coalition of companies and organizations to focus on aiding social and economic recovery in the wake of the COVID-19 pandemic, Reinsurance News reports

Starting in Chicago, the coalition will create a model and framework to inform criteria and guidelines to help restart the economy worldwide, with the aim of scaling the work to other key geographies, including London, New York, Singapore and Tokyo. The coalition will work closely with Illinois Governor J.B. Pritzker’s and Mayor Lightfoot’s offices to ensure alignment with public health and city/state official recommendations. 

The broker believes this will help to assess impact and measurement of efforts, evaluate the latest technologies, and develop guidelines to help navigate the challenges businesses face as society reopens. 

“We have used our expertise to assist clients in maintaining operations and mitigating risk during the pandemic—and believe we have a responsibility to play a larger role in helping the private and public sector navigate the recovery,” said Aon CEO Greg Case. 

Initial coalition members include: Abbott, Accenture, Allstate, Beam Suntory, BMO Harris, CDW, CNA, ComEd, ConAgra, Exelon, Fortuna Brands, Hyatt, JLL, McDonald’s, Mondelez, Morningstar, Motorola Solutions, Sterling Bay, Ulta Beauty, United Airlines, Walgreens, Whirlpool, and Zurich. 

S&P panelists wary of post-COVID-19 headwinds 

A panel of property and casualty insurers at the S&P Global Ratings’ Annual Insurance Conference  raised concerns about the lasting impact of the COVID-19 pandemic, Reinsurance News reports

S&P analysts currently believe COVID-19 related losses will total between $15 billion and $30 billion for the U.S. P&C market alone over the next two years. 

The panelists agreed that coverage for pandemic-induced business interruptions and losses will be a complicated issue for the industry to face, even though viruses are generally not a covered peril for commercial properties. 

“I never envisioned managing through a global pandemic,” said Christopher Swift of The Hartford.  

“Clearly the challenge is how you are operating both internally and externally,” said W. Robert Berkley, Jr., of WR Berkley. “It calls for flexibility, but also for the ability to plan amid uncertainty.” 

Panelists said workers’ compensation claims due to COVID-19 illnesses could be an inflection point, though, as states scrutinize policies given the rising number of these claims. If coverage is expanded, insurers will need to evaluate this risk and price accordingly. 

Moderator Kevin Ahern, managing director and analytical manager, S&P Global Ratings, noted that the U.S. P&C market faces many headwinds, not just those related to COVID-19. These include competitive pressures, the pricing/underwriting/reinsurance environment, and evolving regulatory and legislative developments. 

Iowa Legislature approves COVID-19 liability shield 

Legislation headed to Iowa Gov. Kim Reynolds’ desk would provide liability limitations on potential COVID-19 lawsuits for a broad range of businesses and organizations — among them restaurants, retail establishments, meatpacking plants, churches, medical providers and senior care facilities — provided they followed public health guidance, Business Record reported
 
Senate File 2338, the COVID-19 Response and Back-to-Business Limited Liability Act, would prohibit individuals from filing a civil lawsuit against a business or health care organization unless it relates to a minimum medical condition (a diagnosis of COVID-19 that requires in-patient hospitalization or results in death) or involves an act that was intended to cause harm or that constitutes actual malice. 
 
The legislation would protect tenants, lessees and occupants of any premises — including any commercial, residential, educational, religious, governmental, cultural, charitable or health care facility — in which a person is invited in and is exposed to COVID-19.   

However, liability would extend to anyone who “recklessly disregards a substantial and unnecessary risk that the individual would be exposed to COVID-19,” or exposes the individual to COVID-19 through an act that constitutes actual malice or intentionally exposes the individual to COVID-19. 

The provisions, which would be retroactive to Jan. 1, also shield health care providers from liability for civil damages “for causing or contributing, directly or indirectly, to the death or injury of an individual as a result of the health care provider’s acts or omissions while providing or arranging health care in support of the state’s response to COVID-19.” 

Ill. workers comp measure becomes law 

Legislation signed into law in Illinois will provide worker compensation benefits for front-line and essential workers who contract COVID-19 on the job under certain conditions, Business Insurance reports

Gov. J.B. Pritzker signed H.B. 2455, which will provide death benefits for first responders who were presumably infected with COVID-19 on duty and also revises state code to expand unemployment benefits and enhance sick pay and leave for workers who contract the virus. 

Under the law, employers can rebut claims under certain conditions, including if they can demonstrate the workplace was following current public health guidelines for two weeks before the employee claims to have contracted the virus; provide proof the employee was exposed by another source outside the workplace; or that the employee was working from home for at least 14 days before the claimed injury. 

The law also says first responders, including police officers and firefighter who die after testing positive for COVID-19 or its antibodies, are entitled to death benefits. However, the virus must have been determined to have been contracted between March 9 — the first day of Illinois’ governor-mandated stay-at-home order — and Dec. 31, 2020. Under the law, the date of contraction is either the date of diagnosis with COVID-19 or the date the first responder was unable to work due to symptoms that were later diagnosed as related to COVID-19 infection, whichever occurred first.