The impact of Covid on the future of insurance

From business interruption disputes and rising reinsurance costs to dealing with reputational damage, the pandemic has had a profound effect on the industry. What lies ahead?

The pandemic’s effect on the insurance industry has been severe, unfolding at a time when insurers were already facing significant changes owing to Brexit.

And while much of the impact was immediate and predictable, Covid’s longer-term consequences are worrying insurers.

According to Edward Rushton, head of insurance and reinsurance at LexisNexis UK, business interruption has caused the most headaches.

He says claims will continue to be litigated and arbitrated as courts and ombudsmen work through a backlog of cases. “Beyond the direct claims are reinsurance claims. This is going to get really complicated and I expect Covid-19 reinsurance issues to be the subject of disputes throughout 2022 and quite possibly into the next decade.”

Covid triggered a spike in the number of policyholders claiming on their cover, the costs insurers had to fork out and the volume of disputed claims. The Financial Ombudsman Service said it received 90,000 more complaints than expected during the pandemic. 

Insurance broker Howden puts the insured losses so far from Covid-19 at $44bn (£33bn), representing the third largest cost to insurers of any catastrophe, behind Hurricane Katrina and the 9/11 attacks.

As well as navigating disputes, insurers have had to quickly adapt to the rise of remote working. Digital transformation projects have been accelerated, with more money invested in technology and software. “Digital platforms have helped firms to cope, and we expect more digitisation to come; this is something the insurance industry has not always been at the forefront of,” notes Scott Eason, head of insurance at professional services consultancy Barnett Waddingham.

Remote working and digitalisation have also led to an uptick in cyber risk and ransomware attacks, leading to more expensive – and restrictive – cyber insurance. The cost of cyber cover rose 92% in the UK in the fourth quarter last year compared with the same period in 2020, according to the insurance broker Marsh. Rushton adds: “Professional indemnity lines may also feel a lasting impact as hybrid or home working becomes more common, since the risk profile is significantly different to a predominantly office-based organisation.”

Business interruption policies

Business interruption cover has been one of the most frequently litigated aspects of the pandemic. “We have seen a number of judgements across the globe where courts have ruled in favour of business interruption policyholders against insurers,” says Eason. “This has generally resulted in an increase in the cost of insurance through higher premiums.”

An FCA test case in the Supreme Court last year resolved some key contractual uncertainties and ordered six insurers to pay out for business losses resulting from Covid. As a result, many business interruption products have been withdrawn or curtailed. 

Hiscox, one of the insurers in the case, has added pandemic exclusions to its business interruption policies.

Insurers claim it’s not possible to insure against a pandemic because it poses a systemic risk. Despite calls for a government-backed reinsurance scheme to resolve this (like Pool Re and Flood Re have done with terrorism and flood risks respectively), sources say it is unlikely to be set up any time soon.

“The availability of pandemic cover in future may be very limited unless such a public/private partnership is forged,” notes Rushton.

The test case did not resolve all the issues in policy wording, and disputes over business interruption continue. 

Last month restauraunt company Corbin & King, owner of the Wolseley, won a case against Axa allowing it to claim separately for each of its premises and for each mandatory closure, rather than claiming for a single loss for all premises.

“This is seen as a big win for policyholders and will likely result in insurers settling outstanding claims for much greater sums than they would have otherwise,” Rushton says.

The impact on reinsurance 

Major reinsurers have had large Covid-related losses since the start of the pandemic. “Excess mortality is an ongoing concern for life reinsurers,” notes Eason. “On the non-life side, business interruption is a concern where we still do not know the true extent of losses.”

While losses are reducing – partly due to higher renewal rates and more restrictive cover – the impact on reinsurers could take years to materialise.

Rushton explains: “Reinsurers may be entitled to reopen questions as to whether the original insured loss was properly settled. This adds pressure on reinsureds – including direct insurers – to be more stringent in their claims handling, which fuels potential disputes at the direct level.”

He says it’s becoming more costly for insurers to use reinsurance to protect themselves against future mass claims, especially those arising from any pandemic. “If the cost of appropriate reinsurance is too high, direct insurers will be reluctant to incur inwards liability and, in some cases, may withdraw products from the market.”

Innovation and reputation

As focus on the pandemic recedes, other issues are coming to the fore. 

“Insurtech” will continue to be a big trend. According to Rushton, insurers and brokers will increasingly look to acquire start-ups to keep pace with innovations in underwriting and claims handling, such as pay per drive insurance or parametric crop insurance. The use of artificial intelligence in underwriting will likely become more widespread.

Meanwhile, insurers must brace themselves for further claims resulting from the pandemic; as already seen in the US, there could be more to come from marine liability and demurrage.

Finally, repairing reputational damage will be a key focus. “Rightly or wrongly, insurers are facing reputational risk due to alleged non-payment of valid claims,” Eason says. “This boils down to a mismatch in expectation between what insureds thought they were covered for versus what their actual insurance was meant to do.”