Expert interview series: COVID-19 is about to become the largest insurance loss event in history. Here’s what commercial insurers should know.
Chris Cheatham, the CEO of Risk Genius, expects serious ripple effects from the legal and regulatory actions around business interruption in insurance.
What is happening within the insurance industry amidst the current pandemic?
I focus primarily on the commercial insurance market, so that’s what I’m going to talk about. As the pandemic ramped up, the insurance carriers and the underwriters started preparing for it. They were trying to understand their policy language and their levels of exposure.
But I don’t think anyone fully understood what was about to happen.
What is the price insurers are paying as a result of overlooked issues with virus exclusions from their policies?
We went through SARS in 2003, and everyone saw what happened when there was a widespread virus event. And so, insurers had modeled out the impacts of a virus on insurance. And as a result, they had excluded viruses from a lot of the property insurance policies.
However, many casualty policies do not include virus exclusions, and these policies also do not require physical damage of property. As a result, you will likely see many claims from employees and consumers against businesses stemming from COVID-19.
Do insurers underestimate the effect of COVID-19 on their risk exposures?
Absolutely. As I mentioned, in reality, a lot of policies do not have virus exclusions.
And some insurance leaders have seen it coming. Both the CEO of AIG, Brian Duperreault, and the CEO of Chubb, Evan Greenberg, both have said that COVID-19 will be the largest insurance loss event in history.
And I think what people have found is that on the property side, most policies exclude viruses, but many don’t. Particularly, when you start looking at other markets, like the Lloyd’s of London market, this narrative is playing out.
On the casualty side, we’re still waiting to see how bad it gets because businesses are starting to open back up, workers and consumers are coming back to the places of business. And if they get sick, there will be lawsuits. It’s inevitable.
How can commercial insurers prepare for what’s coming?
You determine your risk tolerance, and then you act accordingly.
First of all, it is essential to pay attention to the regulatory landscape. Here in the United States, we’re seeing states passing immunity laws, business immunity laws, that state if you open back up, then you will be immune from COVID-19 lawsuits. And there are different flavors of that.
You’re also seeing businesses make people sign waivers. Probably one of the more famous examples is if you’re going to go to the Donald Trump rally coming up, you have to sign a waiver stating that you won’t sue if you get COVID-19.
However, some states have passed presumptions of liability. So, if you get sick on the job and you’re a health worker, you’re presumed to have gotten sick at work. And that has insurance implications.
So it’s been really interesting to monitor the regulatory approaches. There’s more regulatory action coming, so insurers must be agile in the way they are reacting to it.
How did insurers react to the crisis?
Some insurance companies were more aware of the problem of pandemics than others. They anticipated that a pandemic would be a large loss event, so they were very diligent in getting virus exclusions attached to their policies.
Others were less concerned or just didn’t have the knowledge or the information about pandemics and what it could do to insurance. And so, they did not exclude viruses or didn’t exclude them completely.
Yet other insurers decided to take a more aggressive stance in the marketplace and they were actually willing to go out and underwrite and insure for a pandemic.
Within the insurance industry, there are different flavors of who understood what was about to happen if a pandemic occurred. There’s actually a great article, by the way, about the guy who saw this all coming. He tried to create an insurance product for pandemics, and nobody bought it.
What are the unintended consequences of COVID-19 for insurers?
We haven’t seen the full extent of the effects yet, but we can already see some fundamental shifts.
I think it’s really going to, from a macro insurance level, accelerate digital transformation. COVID-19 is forcing a lot of people in our industry to figure out how to use their computers, and use Zoom, and go digital.
It’s also created what I call “The Great Forms Rewrite.” Insurance companies across the globe are reexamining insurance policy language to plan for the next pandemic and also take advantage of a hardening market.
Are insurers trying to be more customer-conscious, and are they making them more aware of what they have in their policies? Are consumers becoming more proactive?
The answer is yes to all of that, but I think that the key right now is that we’re in a hardening market. A hardening market means that premium, the amount you pay for insurance, goes up, and what you’re covered for goes down. In short, you get less coverage for more money.
And that’s because the insurance companies have less risk tolerance right now. And so, what we are seeing is that the policy language is changing, meaning the overall value of the policy is changing. With a hardening market and the results of it, the insured company or person isn’t getting what they previously were, getting.
If you had a crystal ball or a magic eight ball, what does the future look like for the consumer? For the insurer?
I’m closely watching the legal and regulatory actions around business interruption insurance, not just in the United States but all over the world. And we are going to start seeing the ripple effects of that soon.
So in the UK, you have the FCA, which is the authority that oversees all insurance in the London market, or in the British marketplace. They’re taking contracts to court to get a decision right away as to whether or not these cover the insured businesses that were shut down.
Whatever the final judicial decision is going to be, it will have major ripple effects across the world, even though we all know there are different legal court systems in every country.
In the United States, hundreds of lawsuits are being filed every week. And we see attempts to create class action lawsuits around those business interruption claims. That probably is not going to happen, but I’m curious to see what happens with those lawsuits.
Post-COVID contract law is not going to look like pre-COVID contract law
I am curious to see where we will see the biggest changes. I guess my macro-level prediction is that we will see new legal interpretations and problematic regulations passed that insurance companies are not going to like around business interruption.
There will be a jurisdiction, either it’s a country or a state or something, that rules on the side of the insured, and then it’s going to create a big legal battle. People are going to be surprised by what happens.
There’s 50 States. There are hundreds of countries. Somebody is going to basically shift how they interpret these business interruption policies. It’s just human nature.
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