The COVID-19 impact on insurance

Insurers are facing higher claims in some insurance classes and lower premium in others due to the COVID-19 outbreak and both are likely to have consequences for insurance buyers for example in form of higher premium and the introduction of exclusions.

Insurance classes most affected by the coronavirus outbreak:

• Aviation will see a dramatic reduction in premium as airlines ground the majority of their fleets and experts predict many airlines to either falter or require state support. Insurers have been trying to increase rates in aviation to improve profitability and they are likely to continue doing so when the sector recovers from the crisis.

• Contingency policies are responding to a wave of event cancellations worldwide. While the worst has been avoided for insurers since the Olympic Games in Japan have only been postponed and not cancelled altogether, insurance buyers face COVID-19 exclusions in new policies and at renewals or, alternatively, significant rate increases. 

• Contingent Business Interruption may be hit hard if US legislation forces insurers to pay COVID-19 related claims although policies explicitly excluded virus-related losses. Legislation is currently underway in New Jersey (opens a new window) which would force business interruption insurers to provide coverage for this crisis, and then spread that financial burden via a new special purpose apportionment on other, non-business interruption carriers insuring New Jersey risks. While benefitting insurance-buyers in the short term this has the potential to transform the market as insurers try to recover claims cost for a risk that insureds have paid no premium for. 

• Directors & officers (D&O) lawsuits are starting to reach courts in the US and are likely to continue for years after the crisis concludes. Securities lawsuits in the US may accuse companies of failing to adequately inform investors of the risks from a global pandemic, supply chain disruptions, or other collateral effects. Outside the US, D&O claims are likely to focus on wrongful or fraudulent trading in relation to businesses going into administration.

• Employers Liability is expected to face only limited impact from COVID-19 claims.

• Marine insurance is susceptible to extensive business interruption, delay in delivery, and spoilage/contamination claims, which may provide impetus for another attempt at rate increases. Protection & Indemnity (P&I) policies are likely to respond if there is a COVID-19 outbreak on board while cargo insurance contracts are likely to cover customary delays and interruptions in transit that are beyond the control of the insured.

• Medical Expenses policies are likely to pay for testing and treatment for COVID-19.

• Personal Accident (PA) and Travel policies are covering the cost for repatriation of stranded individuals, cancelled trips or individuals falling ill during travel.

• Permanent Health Insurance (PHI) or income protection policies are set to cover cost for individuals that are hospitalised and incapacitated to work due to infection.

• Trade Credit insurance will cover losses in case of customers’ failure to pay for purchased goods but insurers are likely to adapt coverage for countries/regions that are experiencing the most severe impact of the virus for new policies or renewals. Claims from global insolvencies are anticipated to reach 2008 proportions. Surety markets are likely to be similarly impacted. Re/insurance markets weathered the last global economic crisis, but much will depend this time on the potential to reschedule/recover claims positions.

• Workers Compensation claims will depend on local legislation and court decisions but may cover cases where provided workers compensation was not adequate to cover the cost of medical bills or lost wages, as well as cases where the employer was negligent.

In the short term, insurers will adapt the cover they offer in each insurance class according to claims volumes, but in addition, COVID-19 is likely to have consequences for insurance buyers in the medium-term as insurers adjust their portfolios to reflect the impact of the epidemic on financial markets and the global economy.  

Insurers are likely to face progressively difficult conditions in the immediate future, both in terms of navigating challenging market conditions and in maintaining operations, while taking steps to protect employees and customers.

A decline in economic activity usually translates into decreasing premium income for insurers and therefore slower growth and profitability both in underwriting and in investment portfolios. Interest rate declines combined with a drop in equity markets due to the COVID-19 outbreak will weigh heavily on the entire insurance industry, but property-casualty insurers tend to be especially vulnerable to stock market fluctuations, as they hold more liquid assets in case of catastrophic losses. 

Potential impact of COVID-19 on insurers:

Short term balance sheet effect:

  • The financial markets crashing reduces assets especial in equity investments

  • Falling bond yields reduce investment income

  • Solvency issues may result from a shrinking balance sheet

  • Delayed premium payments and client insolvencies may further add pressure

Mid-term insurance market impact:

  • Continued push for higher rates as insurers try to compensate for impacted assets and liabilities

  • Reduced client base

  • More M&A activity among insurers

  • Reduced capacity for certain class lines

Impact on reinsurers

Financial market disruption stemming from the spread of the coronavirus is also impacting the reinsurance sector. Prolonged stress on equity and credit markets combined with declines in interest rates are likely to weaken earnings and erode capital headroom of reinsurers.

Event cancellations due to the coronavirus may be partially covered by insurance, and reinsurers could face substantial losses. The largest upcoming event is the Tokyo Olympics, which was due to start in July, but has been postponed to 2021. Insurance coverage for the event is likely to total about $2 billion, according to industry experts. The risk is spread among several insurers and reinsurers but some reinsurers have exposure of hundreds of millions of dollars, equivalent to a meaningful proportion of recent annual earnings.

Following the COVID-19 crisis, reinsurers will also seek to improve their balance sheet and profitability through higher rates, which insurers are likely to pass on to their clients. 

For further information, please contact your usual Lockton contact or any of our offices (opens a new window).