California Insurance Commissioner ordered insurance companies to issue automobile policy refunds for March and April due to lower auto collision risk during the shelter-in-place. USAA voluntarily issued $520 million in refunds to insurers due to lower auto accidents. Meanwhile, premiums on other policies are expected to increase substantially and there are major legal battles on business interruption claims.
Expect insurance costs to fluctuate dramatically. The global pandemic has created a world with unprecedented risk and uncertainty. Attitudes towards risk mitigation have completely transformed. Insurance has gone from being a minor administrative role in the backdrop to a lead actor in the core operations at the center stage of business.
Risk mitigation will take center stage. Insurance will go from being a routine, annual renewal, with quick signoff by CFO to a full discussion with the leadership team and board. Many insurance companies will encourage a more robust fresh look at all policies. For example, Jan Berthold, Senior Vice President of Heffernan Insurance, indicated they’re doing a full risk assessment process. They use a 125-point checklist and one-on-one interviews with all key executives. This assessment gives a current and across-the-board report of the risks and uncovers any blind spots.
What role do companies play in this new theatre?
Benchmark rising costs. Costs are expected to rise in every aspect of insurance market. One advice from Berthold is for companies to ask their insurance brokers for benchmarking data on comparable companies and what risks are covered and the average policy coverage, premiums and deductibles.
Brace for more health insurance costs. Thousands are infected with the virus and need health care. In addition, treatment of the COVID-19 patients has created complexities for treating other patients. Hospitals may face duty-of-care litigation. They may pass along these costs, resulting in higher health insurance premiums.
Expect business interruption. Historically only 30% of companies had business interruption insurance. COVID-19 interrupted 100% of the businesses. More companies will seek business interruption insurance protection in the future. For now, companies should apply for coverage under all their policies as there may be some ways to recover. Some businesses are claiming that the virus attaches to surfaces and reduces the property value so property insurance coverage would apply. Wimbledon, which had pandemic insurance, is recovering $141 million.
For now, companies should apply for claims under various policies as recovery may be possible under other coverage.
Watch for workers compensations risk for working-at-home. There is currently a litigation in process for an employee who was working from home and tripped over the family dog. Berthold suggests employers have a work-at-home agreement to clarify such topics as the number of hours to be worked or how confidential information can be accessed and stored or the safety protocols to follow.
Beware of cyber scammers. The cyber protections at home (firewalls, virus protections, spamware on home machines and networks) may not be as robust as the corporate setup. Unfortunately, scammers take advantage of panic and confusion during a crisis so there’s more cyber security risk. One new vulnerable point is for scammers to approach companies for fraudulent offers of Payroll Protection Program loans for small businesses.
Reduce property insurance expenses. With more employees working from home, there may be less need for office space. As shopping habits shift to online even more during the crisis, companies may need less retail space. So companies could reduce their footprint to save on rent/mortgages, property taxes, utilities, and property insurance. However, the other risk mitigation strategy is to protect against supply chain disruptions and many companies will keep more inventory. This will mean less office and retail space to insure but insurance for the reserves stored in the warehouse.
Check D&O insurance meets the new crisis needs. Companies that are going through layoffs will have more claims. The distressed economy will push many companies into financial distress and bankruptcies. Creditors could sue to recover some damages to avoid going into distress themselves.
Allow time for more stringent underwriting. Insurance underwriters will assess the financial risk closely to try to minimize future claims. For example, many insurance companies will exclude communicable diseases in their business interruption policy.
Drive auto insurance rates down. Traffic has significantly diminished with many employees working from home. So collision rates should come down. Companies can reduce number of corporate vehicles and lower mileage for virtual employees
What does all this mean for insurance companies?
Insurance companies are taking center stage with a more difficult role than ever before. They are critical actors in the global financial market as institutional investors in equity and corporate bonds. As these financial assets have dropped in value, insurance companies have less funds to pay out claims. At the same time revenues will be down as companies may looks to reduce expenses by shaving insurance costs. Claims from their clients will increase significantly at the same time as their investments and revenues to pay for those claims have dropped dramatically. Insurance companies with weaker investments or riskier policies and higher claims will be between a rock and a hard place.