COVID-19 (coronavirus) has had a devastating impact on people’s lives across the world and has caused the global economy to stall, the impact to affect businesses for years to come. Insurance companies face losses as a result of the pandemic but have by and large been prepared for such an outbreak as part of their risk-management which requires insurers to prepare for a 1-in-100 year event.

This is the first of several summaries of the market over the course of the pandemic in which we consider emerging issues for the insurance market as well as regulatory developments.

General market issues

  • There are few indications so far that COVID-19 is a significant threat to insurers’ balance sheets. Although the crisis will test insurers’ resilience; it is not currently expected to lead to mass ratings downgrades. Solvency II has helped shore up regulatory capital within the EU. Low interest rates and depressed asset values will likely have a negative impact on life insurance companies.
  • Insurance companies across the EU and including the UK have been asked to consider distributions carefully in the current environment. EIOPA has urged all insurers to temporarily suspend  dividend payments.
  • Lloyd’s of London has made it clear that it will pay all claims within pandemic or contagious disease extensions, stating that “all valid claims will be paid as quickly as possible”.
  • A rise in D&O and cyber liability claims made as a result of COVID-19 can be expected. Business leaders may face claims following the publication of results before the impact of the virus on the business was fully understood.
  • Legislative measures proposed in various US states could mean that business interruption insurance claims must be paid, regardless of whether the policy extended to covering diseases. Similar measures in the UK and EU have not been seen to date.
  • A New Orleans case could have the result that COVID-19 contamination will count as a physical loss, extending business interruption coverage to thousands of policies in the US. If so extended, losses to insurance industry could be up to $383bn.
  • Uncertainty may increase private equity and trade investment in the insurance sector as opportunistic deals arise, but in the immediate short term M&A activity in the sector is expected to be low.

Affected lines of business

Many businesses are facing losses as a result of the COVID-19 pandemic, although in many cases disease/pandemic extensions have not been bought by policyholders. The lines affected are:

  • Event cancellation – Event cancellation insurance typically responds to events beyond the control of the policyholder. Many event cancellation policies exclude communicable disease/pandemics as a trigger of coverage.  Even where a policy could potentially respond on its wording, questions could arise where an event not initially postponed or cancelled after a ”Notifiable disease” or pandemic was declared was subsequently cancelled or postponed.
  • Business interruption – The aim of business interruption (BI) cover is to restore the policyholder to the position they were in before the event occurred in terms of lost profits or additional expenditure. Thus, there may be cover for loss of profits/extra expense in circumstances where there has been disruption to supply chains or denial of access to business premises by government order and, depending on the extensions to cover available, even a loss of use of premises due to virus contamination. The specific wording of the relevant BI policy will need to be considered for certainty of coverage, but it is common for a BI policy to generally include a requirement that insured “property” has sustained damage  which will mean that BI coverage is not available for COVID-19 related losses. Extensions for contagious diseases or pandemics have not been widely bought by policyholders, even when bought such extensions may not cover COVID-19 disruption.
  • Trade credit insurance – Trade credit policies may respond in circumstances where there have been physical disasters that may impact customers but frequently with exclusions for such things as nuclear disasters or terrorism. Importantly, however, trade credit policies typically do not depend upon physical loss or damage for recovery.
  • Travel – In many instances, policies will cover the costs of cancellation in the event that a government authority has advised against travel after the trip was purchased. Although many policies include cancellation cover, policies are highly unlikely to cover cancellation of travel booked after you are aware of official advice not to travel.
  • Directors and officers liability – Directors and officers may need to consider their obligations in respect of reporting and disclosure obligations in fast changing and often confusing circumstances.
  • Cyber liability – As more employees are required to rely on home working, vulnerabilities may open up in corporate IT systems. An increase in phishing emails purporting to convey public health advice on COVID-19 and opportunistic attacks will test how robust companies’ data security systems are.

UK regulatory response

  • The PRA has published a ‘Dear CEO’ letter from Sam Woods, Deputy Governor, to the CEOs of UK insurers regarding distribution of profits.
  • PRA amends regulatory reporting requirements in response to COVID-19, allowing up to 8 additional weeks for some regulatory reporting.
  • The FCA has published a statement on what it expects insurers and brokers to do during the pandemic. Firms should consider the needs of their customers and show flexibility in how they are being treated during this time, particularly as policyholders will have to change their behaviour during the pandemic. Firms must have plans in place to mitigate the operational impact of the virus. Senior Managers should be given responsibility for business continuity and managing the impact of coronavirus. The FCA has in particular raised concerns about: the treatment of policyholders at renewal, mid-term adjustments and product suspensions.

Reinsurance issues

Whenever catastrophic losses are presented, there may be difficult questions of policy interpretation to be resolved but such questions revolve around what the policies at issue actually cover. An insurer that is compelled to pay COVID-19 BI losses as a result of legislation, may face challenges in securing recovery under reinsurance contracts governed by English law. US and continental European traditions make an important distinction between the concepts of follow the fortunes and follow the settlements, with the latter more likely to protect an insurer that settles under legislative or regulatory mandate or, perhaps even, pressure.

UK Government interventions

  • Mel Stride MP, Committee Chair of the House of Commons Treasury Committee, has written a letter to Huw Evans, Director General of the Association of British Insurers seeking responses to a series of questions about how insurance companies are responding to the coronavirus.
  • The UK Government has made comments to the effect that by requiring businesses to close during lockdown they could recover under BI policies.