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When hard times hit, companies and individuals turn to their insurance policies for support. However, the Covid-19 crisis has highlighted the complexities of claiming on insurance in the wake of a pandemic. For the insurance industry itself, the crisis has presented its own challenges, and insurers must now consider, for example, how to reshape policies for a post-Covid-19 world.
When the pandemic hit earlier this year, many businesses found their insurers would not cover for a pandemic through business interruption insurance. Meanwhile, holidaymakers, trapped abroad, discovered their travel insurance would not help them get home.
As governments and companies globally grapple with the challenges thrown up by the Covid-19 pandemic, the debate over how insurers should respond continues to rage.
Senior Vice-Chair of the IBA Closely Held and Growing Business Enterprises Committee
Issues with insurance were highlighted early on in the pandemic. In the United Kingdom in March, pubs and restaurants in particular expressed concern that the government – at one point before the more extensive UK lockdown – advised customers to stay away but stopped short of telling pubs and restaurants to close, an order which could have enabled them to file business interruption claims.
The UK financial regulator, the Financial Conduct Authority (FCA), has brought a court action to seek legal clarity on business interruption insurance. It’s an attempt to resolve doubt for businesses that are uncertain over the status of their claims, and takes the form of a test case against a pool of eight insurers. The FCA has identified 17 policy wordings capturing key issues under dispute, and wants to establish whether businesses with these policies are covered in respect of loss sustained due to the pandemic.
The announcement of the case came soon after hundreds of small businesses wrote to the Association of British Insurers (ABI) to say a refusal to pay business interruption insurance would result in the collapse of thousands of firms.
The ABI said the sector expected to pay out at least £1.7bn in claims as a result of the Covid-19 pandemic, but added insurers could not pay out on claims for which they had not charged a premium and that most business policies did not cover pandemics.
‘No country in the world routinely provides affordable standard insurance cover against the risks of a global, viral pandemic but we will continue to look for future insurance solutions, while ensuring we fulfil the promises we have made to protect your businesses against the risks included in your insurance contract,’ said ABI Director General Huw Evans, responding to the letter from small businesses.
In the US, several states are proposing to bring in legislation that would require insurers to cover claims relating to the pandemic, regardless of policy wording. The US National Association of Insurance Commissioners issued a statement at the end of March opposing the proposals, saying this would ‘create substantial solvency risks for the sector, [and] significantly undermine the ability of insurers to pay other types of claims’.
Member association Insurance Ireland has introduced a range of measures to help business and individual customers through the crisis, including reduced premiums, extension of cover for volunteering and an agreement that government advice to close a business in the context of Covid-19 had the same force as a direction.
Insurers are already beginning to identify risks related to Covid-19 litigation. A report by UK law firm RPC and its global allies, published in late May, anticipates a spike in notifications on directors’ and officers’ policies, with shareholder class actions already filed in the US. Firms around the world are also expecting litigation against directors of companies that may have failed to put into place Covid-19-related contingency plans.
There’s likely to be a raft of claims generated from a range of sectors. In an analysis published in May, consulting firm PwC suggested that ‘Companies that provide travel, short-term disability, business interruption and other specialty lines of insurance are likely to face mounting claims.’
PwC also noted that the pandemic could cause losses across a variety of business lines, resulting in a domino effect of claims. It suggested that insurers should update loss recognition testing models, reassess volatility and make additional provisions for adverse circumstances in anticipation of increased claims and pressure on liquidity.
The impact for insurance customers is less clear at the moment. Alejandro Paya, Senior Vice-Chair of the IBA Closely Held and Growing Business Enterprises Committee and a partner at Cuatrecasas, says he is expecting more Covid-related exclusions in warranties and indemnities insurance taken out ahead of M&A deals, but he still thinks those companies that are planning deals will be able to find cover.
‘Insurers may have an appetite to try deals because there are fewer deals,’ Paya notes. ‘I haven’t heard of costs increasing, but it’s difficult to say because I haven’t insured any new deals. For those deals that make sense there will be insurance, of course.’
The RPC report suggests that adding Covid-19 exclusions into future insurance policies will be challenging, with broad or vague exclusions potentially giving rise to future claims, but with underwriters ‘compelled’ to introduce exclusions as re-insurers will be unwilling to assume liability for Covid-19 risks.
In other areas, there are also questions over the future cost of cover. Tony Sault, UK general insurance market lead at EY, told the Financial Times in June that, after rising before the pandemic, motor insurance pricing is likely to remain flat or depressed for the rest of 2020. Conversely, travel insurance premiums are predicted to increase.
The FCA has provided guidance to insurers on how to re-assess the value of their products, directing them to review product lines by the end of the year. Insurers worldwide will have to undertake similar exercises to make sure what they are offering clients is fit for purpose in the post-pandemic world.
The crisis will also certainly prompt those looking for insurance to closely examine policy wordings before buying what remains a crucial safety net for millions of businesses and individuals worldwide.