By Anthony Cappelletti
The COVID-19 pandemic has necessitated rules of physical distancing that have shut down many non-essential businesses. People are being told to stay at home unless they work in an essential business (e.g., hospital staff, food supply-chain worker). Some retailers can operate effectively on a virtual basis. Some cannot. Some restaurants can operate on a take-out basis. Some cannot. Office workers are now working remotely from their homes.
Economic activity has declined, unemployment has increased, and the stock markets have declined sharply. Most businesses are feeling the effects of this. The business of insurance is no exception to this. But the business of insurance also includes unique challenges that vary by line of business.
When people consider the effects of the pandemic on the insurance industry, the effects on health and life insurance are reasonably clear. However, there are issues that the GI industry must deal with through the pandemic—beyond the changing economic conditions that all industries must deal with.
COMMERCIAL PROPERTY/BUSINESS INTERRUPTION
The cost of commercial property claims may be higher than normal due to supply chain issues created by the pandemic. An increase in claims for burglary, vandalism and arson on empty commercial properties is possible during stay-at-home orders. However, these claims are not the main concern for commercial property insurers during the pandemic.
Physical damage to properties is not the only coverage provided in commercial property policies to consider. These policies typically include business interruption (BI) coverage. BI coverage provides compensation for lost income (and some expenses) due to a business being shut down as a result of a direct physical loss.
Some policies specifically exclude disease as an insured peril. So, this should exclude coverage for BI losses from a COVID‑19 pandemic shutdown. For those policies that do not specifically exclude disease as an insured peril, disease has typically not been viewed as causing a direct physical loss. So, once again, this should exclude coverage for BI losses from a COVID-19 pandemic shutdown—unless the case law in a jurisdiction has held that disease does constitute a direct physical loss. However, that would still not apply in this case unless the disease had actually physically contaminated the operation. There are cases where actual physical contamination can likely be argued successfully. An example would be a food processing plant in which its workforce had an outbreak of COVID-19. This would necessitate a shutdown of the plant so that all of the equipment can be sanitized, and all of the potentially contaminated food disposed of appropriately.
Simply being shut down by government order to help reduce the spread of a disease in a community would not be the same as physical contamination of a property from disease. Furthermore, insurers have not priced in coverage for BI from pandemics. When pandemic BI coverage is offered, it is generally not selected by insureds as it is deemed too expensive.
In reality, the analysis of business interruption claims is significantly more complex than determining whether property has sustained a “direct physical loss.”
PropertyCasualty360, April 14, 2020
But that is not the end of the story. There are currently legal challenges to the exclusion of pandemics from BI coverage. These challenges could be successful for policies that do not specifically exclude disease. There have been at least six class action suits filed in U.S. federal courts on behalf of small businesses that were shut down due to the pandemic and had purchased all-risk special property insurance coverage with business interruption coverage. These class actions are for policies that did not have a virus exclusion or included coverage for actions of civil authority.
Insurers rejecting claims for BI are exposed to bad faith lawsuits by policyholders under the allegation that the claims were wrongfully denied. Whether or not these lawsuits are successful, there will be legal expenses.
In addition to this, some states are considering legislation that would compel insurers to pay BI claims for losses due to the COVID-19 pandemic shutdown. The business interruption losses created by the COVID-19 pandemic shutdown are substantial. In the U.S., any government legislation forcing coverage across the country could expose insurers to losses in the hundreds of billions for a risk that it did not price for. This could weaken the solvency position of at least a few insurers. There are proposals at the federal level in the U.S. to create a government reinsurance program similar to the Terrorism Risk and Insurance Act that would cover pandemic losses for insurers. It remains to be seen whether any of these proposed legislative actions will be enacted.
Another issue for commercial property insurers is that some small businesses that were struggling before the pandemic may be tempted to seek insurance compensation as a solution to their financial difficulty. Insurers will need to be aware of this potential for fraudulent claims.
One more issue for commercial property insurers is that a significant number of small businesses may not survive a lengthy shutdown despite government aid programs. This could cause a significant decline in premium volume for this line of business. The timing of the economic recovery will determine how quickly insurers will be able to replace lost business.
WORKERS COMPENSATION
Workers compensation insurers can expect claims from workers that were infected through work. These claims will be from those working in essential businesses (e.g., health care facilities, long-term care homes, grocery stores, pharmacies). This will occur in tandem with overall reduced premium levels from the economic downturn as workers compensation premiums are often based on number of employees.
The increase in work-from-home arrangements for businesses moving forward could create an increase in new claims as employers will have a difficult time providing for the health and safety of employees in the course of their employment (e.g., workspace ergonomics, tripping hazards). It is generally not clear how workers compensation laws apply to work-from-home arrangements. Laws vary by jurisdiction. Individual situations are unique. Generally speaking, workers compensation claims can arise from employee injury or illness wherever it occurs. The key is that it must be work-related. It sounds clear but what is considered work-related is often not clear. Factors to consider:
- What part of the home is considered the dedicated workspace? The answer to this is not simple as workspace and personal space in the home are often comingled. The path from the workspace to the kitchen could be viewed as part of the workspace while working. A slip-and-fall claim in a dedicated home workspace would likely meet the work-related requirement. A slip-and-fall in another part of the home would depend on the specific facts.
- Was the activity causing the injury related to work? For example, is getting injured going for a coffee break outside the dedicated workspace related to work? How about going outside to get mail (or delivered packages) which may include some work-related material?
- Does getting injured during work hours while on the way from the workspace to another area of the home in order to perform a personal chore invalidate a claim as not being work-related? The answer to this would likely depend on unique details of the situation.
- Is the injured party an employee or an independent contractor? Independent contractors are not covered by workers compensation. This may seem straight forward. However, despite the fact that a company may classify someone as an independent contractor, they may actually be regarded as an employee. The answer to this would lie in the specifics of the employment situation.
The bottom line for work-from-home arrangements and workers compensation: If an employee makes a claim for a work-related injury, it will be extremely difficult for the employer (or the insurer) to disprove the claim.
There may also be an increase in claims severity for open claims that were incurred before the pandemic. There are a couple of reasons for this. One reason is that the provision of medical and rehabilitation services required by the claimant may be more costly to administer due to challenges from the pandemic. Another reason is that many workplaces have laid off a great deal of the workplace. With no job to return to, claimants collecting income replacement benefits will have little motivation to move forward in their rehabilitation to return to work.
Of further note is that workers compensation insurance is a long-tailed line of business. It relies on investment returns for profitability. The low interest rate environment exacerbated by the economic slowdown from the pandemic may make this line unprofitable without significant rate increases.
For instance, as unemployment rises, payroll will decrease—reducing the need for workers’compensation products in countries that offer it …
McKinsey & Company, April 2020
GENERAL LIABILITY
General liability insurers should expect some increase in losses. This would likely be from lawsuits alleging negligently exposing persons to COVID-19.
Employee layoffs will be scrutinized to see if there is any disparate effect on any protected classes (e.g., age, gender, race, religion). Lawsuits for this are possible.
Premiums for this line will see a significant reduction as premiums are often based on revenue.
AUTOMOBILE
With many people staying at home during the pandemic, coupled with the sizeable increase in unemployment, people are driving much less. Once packed highways are now relatively clear of traffic. With this reduction in traffic, there should be a significant decrease in automobile insurance claims. In anticipation of this, many automobile insurers have been providing customers with rebates or re-rating them to a classification that reflects the lower exposure.
U.S. auto insurers will return more than $10 billion to their customers nationwide …
Insurance Information Institute, April 11, 2020
Further reductions in premiums and claims may come about as the number of vehicles insured is reduced. This could come about if a significant number of unemployed choose to give up automobile ownership. Also, some multiple-vehicle households may choose to keep one vehicle parked and drop the liability coverage for that vehicle. Some of this reduction may be permanent as work-from-home becomes the new normal for much of the workforce even after this pandemic ends. Many insureds will seek policies that tie premiums directly to the amount driven. Many usage-based-insurance policies with telematics include some form of this. MetroMile uses a pay-per-mile system of charging premiums. Most automobile insurance companies will introduce some form of pay-per-mile premium system if they have not done so already.
For commercial automobile, some large businesses may operate with smaller fleets during the pandemic. Many small businesses are part of the shutdown and may suspend coverage. Any recovery from this decline in commercial automobile insurance recovers will be linked to the economic recovery.
Not all affects from the pandemic will result in declining premiums and claims for automobile insurance. There is the potential for some increase in claim costs per vehicle insured. If the pandemic worsens, the cost of repairing a vehicle could increase through scarcity pricing of parts and labor.
HOMEOWNERS/TENANTS
With residents staying at home full time, homeowners and tenants could have more exposure to property damage loss. This could be from increased risk of kitchen fires as more people will be cooking their own meals. There is also increased exposure to liability coverage. A homeowner could be sued by a guest if they acquired COVID-19 in the home of the policyholder. There may also be an increase in claims for cybercrime theft as more people shop online.
With the worsening economy, some tenants’ policyholders may drop coverage and some homeowners’ policyholders may reduce coverage.
As was the case for commercial property, it is possible that the general cost of homeowners’ claims may increase due to supply chain issues created by the pandemic.
OTHER GI PRODUCTS
Agricultural insurance products: Narrow focus products such as “crop hail” will not be affected. However, whole-farm or farm income insurance products could be affected. This may come about as the pandemic disrupts any of planting, harvesting, or shipping of product (to food processing plants/restaurants/food retailers).
Credit and Surety: There will likely be an increase in claims for 2020 due to the weakened economy. Reduction of global trade and economic activity should reduce the number of policies moving forward.
Cyber insurance: With office settings closed due to stay home orders, many people are working from home. Company networks will be less secure. Insurers writing cyber insurance policies should expect greater exposure from this. However, there should be greater demand as companies will seek protection against this increase in exposure.
Directors and Officers: This line may see an increase in claims stemming from suits claiming that management was unprepared for the pandemic causing unnecessary losses.
Event cancellation insurance: This specialty line should see a significant increase in 2020 claims for policies that did not exclude pandemics. There are two forces of demand regarding this coverage. As fewer events are planned, demand should decrease. However, for events that are being planned there will be great demand for coverage that includes pandemics and civil actions.
Medical malpractice: Medical professionals and medical facilities are at the front line in the fight against this pandemic. However, those that contracted the virus while being treated by a physician in a medical facility may allege that there was negligence in exposing them to the virus. There may also be exposure to claims from procedures being postponed due to the pandemic where the postponement causes the patient’s condition to deteriorate significantly.
Travel insurance: Pandemics are usually excluded from these policies. There will be claims from policies without this exclusion. In addition to this, some insurers have waived this exclusion as a goodwill gesture. Demand for this coverage in the future will depend on demand for travel in general (which could be greatly reduced) and whether or not pandemics are specifically included in the policy wording.
FINAL THOUGHTS
Another element to the effect of the pandemic on the GI industry is losses from catastrophic events during a pandemic. Catastrophic wildfire, flood, terrorism and windstorm events can, and do, occur. A significant catastrophic event occurring during this pandemic will create unique challenges in addition to the effects of scarcity pricing. These challenges will certainly increase the cost of any catastrophe claims.
“The fact that flooding season and, in due course, forest fire season is coinciding with coronavirus in Canada is posing some special challenges.”
Chrystia Freeland, deputy prime minister of Canada, April 27, 2020[1]
The GI industry will definitely be affected by the pandemic. How it will ultimately fare will not be known for some time. Some effects will be known quickly, some effects will not be known for a while. There are many uncertainties for everyone at this time. My hope is that by the time this article is published, the pandemic is past us and uncertainties will be diminished.
Anthony Cappelletti, FSA, FCIA, FCAS, is a staff fellow for the SOA. He can be contacted at acappelletti@soa.org.
[1] In response to questions regarding the severe flooding (and mandatory evacuation) in Fort McMurray during the stay-at-home orders for the COVID-19 pandemic as reported by CTV Edmonton.