It’s no longer just a water balloon; insurance has become a water balloon morphed with a Rubik’s Cube. Squeeze here, bulges there, twist row here, colors change there. Insurance is not a business for the faint of heart but needs to be an industry WITH heart. Focus has been on COVID-19 issues but all those other perils and occurrences must still be attended and planned for, and the industry’s reputation- always a fragile characteristic- needs consistent effort to prop up.
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Contrarian’s reality of business interruption cover
The insurance world sat on its hands during the early emergence of the coronavirus outbreak, aware that supply chain issues were occurring in China, businesses were being shut down, and economic ripple effects were being felt into western economies, comfortable in the exclusion of cover for systemic risks. However, as the insurance effects of COVID-19 became more acute when business interruption cover was being considered and denied for cover, insureds, legislators and the plaintiffs’ bar held sway over the narrative. Seems the concerns have gone a little underground but that just may be a fools’ game to believe. Insurance companies defend the multi-hundred billion dollar issue on a 9-5 basis; plaintiffs and eager attorney firms team up 24/7. Sure, insurance industry orgs like NAMIC and APCIA have put out position papers describing the many problems ex post facto changes to insurance contracts re: business interruption insurance changes would cause the industry, and of late the US Treasury Department has advised it is in opposition to having insurance companies take undue responsibility for the BI claims, but of course insurance in the U.S. is not regulated by federal law, and zeal within local jurisdictions is swayed by sentiment.
In addition, policies and coverage differ across the spectrum of carriers’ contracts and certainly across what bespoke risk underwriting provides. I wonder if insurance carriers are taking the issue seriously enough to have internal ‘war games’ where policies need to be defended provision by provision? Determining cover with a lean to the customer now is much less costly in terms of direct financial cost and indirect reputational cost litigation would present, even as the issue in the U.S. potentially progresses toward a constitutional battle.
Even with this news today out of the state of Louisiana via Business Insurance, Louisiana-lawmakers-scrap-bill-to-make-interruption-coverage-retroactive, insurers need to find other ways to provide risk management service for their customers. Just because some peril or circumstance isn’t covered- now- doesn’t mean other avenues to assistance can’t be considered.
Insurers in the UK are dealing with a similar issue and business sentiment, just to a lesser economic degree per the Evening Standard. Whether the concern is a “shortcut to insolvency” as the Association of British Insurers stated in response to U.K.-based risk management association Airmic Ltd’s remarks urging carriers to be responsive to insureds’ needs:
With many corporates facing an existential threat from global governments’ lockdown measures and a deep recession likely to follow, we expect brokers and insurers to demonstrate fairness and flexibility with regards to claims and renewals. The harsh market is already straining relations with many corporate clients, and insurers’ rigid interpretation of wording regarding the pandemic could accelerate this deterioration.
Airmic believes insurers have a choice. They can either interpret ambiguous contract wordings with their balance sheet in mind, or they can act as partners to long-standing customers who seek business protection. All parties will benefit from a partnership approach to the current crisis.
24/7 efforts and networking of attorneys, insureds, and plaintiff advocates vs. 9-5 defense. Perhaps still a false security (digital communication works, collaboration is effective, and 33 1/3 % of tens of billions of USD is a lot of motivation.)
Insurance and reinsurance company capital buffers have become smaller as a result of stock markets being down 20% or more- does that matter?
Insurance companies are often considered more holders of float than risk managers; a less than stellar underwriting performance in a given year can be mitigated for effect by effective investment of premium float- use of premium dollars paid in that have yet to be accounted for as earned based on policy duration. Berkshire Hathaway’s founder and CEO, Warren Buffet has been the industry’s float cheerleader for many years, and that attitude has served him and his company well. However, even the estimable Mr. Buffet’s firm has been rocked by the loss of value due to the effects of COVID-19 and volatility within stock exchanges (see below.)
Sample of insurance company performances- US P&C carriers
One quarter does not a trend make, but it’s expected investment results for the second quarter of 2020 will be as volatile, and long-term expectations for P&L performance is uncertain. Underwriting performance for personal lines may reflect better than average based on auto usage and stay at home efforts lessening some homeowners’ policy claim severity. U.S. Fed actions will settle markets some, but carriers have less appetite for higher return but higher risk vehicles for that portion of float that is not bound to Stat accounting requirements. Perhaps carriers need to begin to plan for intangible asset variances from a risk management standpoint, something that seemed a very company-localized concern just a few months ago. Is there now a market for parametric products that deal with trigger events relative to macro consideration of intangible assets? Another look at the work of John Donald and Dr. Marcus Schmalbach (See “Heartbeat in the Fog” ) gives some thought on the subject.
There are aspects of insurance reserves that do not get as much scrutiny, that being reinsurance and insurance linked securities (ILS). Rei authority Artemis noted recently that as global stock markets ran 20% or more lower along with impairment of other assets classes the “capital buffers of reinsurance companies have become smaller as a result.” Lesser values for primary insurers’ securities portfolios, and potentially less capacity in and higher cost for reinsurance- certainly not an ideal short or mid-term prospects. As for ILS- even though that aspect of risk financing is a relatively small part of the whole that sector remains tight from significant events from 2017-18 (thanks for the perspective, Tom Johansmayer of Verisk PCS.)
For now P&C carriers have wiggle room on the claim side, but new territory to navigate in terms of investment. If for some significant reason carriers feel they need to establish large reserves to defend and potentially pay BI claims that will affect loss and expense ratios. Managing core businesses- sales, claims, and service needs to continue with a weather eye on securities’ markets.
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