Six Ways COVID-19 is Changing the Insurance Industry
By now we’re all well aware of the enormous impact the pandemic is having on the U.S. society and
economy. So it’s no surprise that the SME insurance market has been affected as well – let’s dive right in
on the details, shall we?
Will Jacob, Vice President of Product & Underwriting 
1. Digital Transformation
Even before the pandemic, the amount of money flowing into the InsurTech space was significant, and that did not let up in 2020. During the first half of the year, the number was a staggering $2.2 billion, according to data collected by Venture Scanner and analyzed by the Deloitte Center for Financial Services.
While many insurance companies were either investing in their own InsurTech platforms or delegating such development to third parties, the pandemic has prompted many insurers to expand their digital efforts and seek InsurTechs that can help accelerate distribution, underwriting and claims management, as well as bring down overall expenses.
In many ways the pandemic has been a fillip for digital procurement of insurance, and we expect this trend to continue with the distribution chain (retail and wholesale brokers) spending more time working remotely and looking for efficient ways to transact business, and carriers looking for more effective ways to deploy their capital.
2. Customer Loyalty
Many small businesses are feeling the strain and pressure of reduced revenues and budget constraints. According to a report by PWC[1] , as lockdowns took effect across the United States earlier this year, 45% of respondents reported financial stress. Small businesses are having to make cuts to employee hours, pay and benefits, causing stress to the individuals and the business itself.
As a result, insureds are looking at the cost of insurance more closely – price is paramount. This means retail brokers might have to work harder to satisfy their clients and/or retain them, and carriers’ retention ratios might suffer as insureds look for cheaper options, exhausting the market to save money.
Having said that, we have seen both retailers and carriers shifting their focus to prioritizing daily transactions, especially renewal policies, as they look to cement their existing portfolio.
3. Coverage Changes
Policies that include verbiage expressly covering contagious diseases and similar risks may be revised given that it has been a significant expense already this year. Those that are silent on pandemic/COVID-19-like issues may be modified to more directly address such exposures. Insurance companies may either completely carve out exposures like COVID-19 or make coverage an add-on.
As Terrorism Risk Insurance was developed after 9/11, designed so that a share of the costs would be covered by the government when losses reached a specified threshold, a similar Pandemic Risk Insurance may develop related to COVID-19 and/or virus risks.
4. Regulatory Changes
Carriers, wholesalers, and retailers are constantly trying to navigate ever-changing regulations that vary by state. During the spring of 2020, most state insurance departments issued guidance on non-renewals and cancellations, including moratoria in some cases, in response to the pandemic. If the country goes into lockdown again, there could be further instructions and guidance from each state.
It has been our experience that most carriers are saying they will comply with state regulations as best they can interpret them. As such, many carriers have provided flexibility with payments, taking into consideration changing payroll and sales estimates, and with how they manage their portfolio in general. They understand that insureds might not be able to accommodate an inspection (e.g., under a Property policy) or comply with safety recommendations if they can’t hire a contractor to address deficiencies (e.g., Workers Comp).
As a corollary to this, insurance companies and MGAs have been closely monitoring activity in the court systems and the movement at the state level vis-à-vis business interruption (BI) loss caused by the pandemic. The wider effect of these court decisions is still undetermined, but it could result in a federal backstop akin to Terrorism Risk Insurance Act and/or some comprehensive changes to the way this is handled in the face of another pandemic.
5. Changing Risk
With respect to General Liability, many business have had or will have a changing risk profile. For example, Hospitality, Real Estate, and some retail classes have seen their exposures to frequency losses change and may see them change again as COVID-19 cases increase and winter looms. Lessors-Risk Only (LRO), Habitational and Hotel/Motel risks will be challenged by depressed occupancy rates.
Less customers and less foot traffic mean that premises claims for 2020 and for some time into 2021 in these sectors likely will be down. Conversely, some businesses that experienced increased demand, such as grocery stores and convenience stores, could potentially see an increase in the frequency of slip and falls and other premises-related claims.
Property risks will also present a unique set of underwriting challenges for both the physical property, as well as the concerns surrounding BI coverage. Given the abovementioned factors, certain properties may be far less occupied than they were prior to the pandemic. As a result, carriers might start re-classifying risks as “vacant”. Indeed, a partially occupied building, oftentimes, presents heightened exposure to the types of losses commonly seen for vacant buildings.
With respect to BI exposure, it is doubtful any carriers are going to alter much to the standard policy wording that requires direct physical loss or damage for BI coverage to apply, before understanding the consequences of new regulations (if any), legal battles and/or legislative decisions that materialize over the course of the next few months or years. In the meantime, we might continue to see carriers strengthen the wording of their policies to eliminate any arguable ambiguities, for example as Lloyd’s of London did earlier this year.
6. The Hardening Market
Although the current focus of retailers and carriers has changed, the underlying market dynamics we saw in 2019 have not. Over the last 12 to 18 months, many carriers have taken initiatives to improve their operating results, including making a concerted effort to tighten underwriting controls to reduce loss ratios, as well as mitigate costs to keep combined ratios at a reasonable level.
In 2019, insurance companies were already tightening underwriting capacity in certain industries such as the Hospitality sector and Habitational classes of business; in our experience these trends are continuing and arguably are more pronounced today. Indeed, it is increasingly difficult for retail brokers to find capacity for hotels, motels and restaurants – carriers are continuing to pull out of this space and/or reduce capacity, not only because of deteriorating underwriting results, but also because of a perceived increase in moral hazards of insureds, due to the pandemic.
Therefore, ironically, COVID-19 has acted as a tonic for the hardening market, compounded by the active hurricane season of 2020 and Q3 carrier results. There is little doubt that (Re)insurance companies are assessing the current conditions and extrapolating for Q1 and Q2 next year. Most likely, they are coming to conclusions that ratify the positions they had already taken 12 months ago insofar as reduced underwriting appetite or exiting classes.
One of the effects of carriers keeping a close eye on risk selection and increased pricing, is an increasing role for the wholesale broker.
The solutions and access to capacity that a wholesaler provides will continue to be essential for any retail broker and their client.
Retailers will still need to market the risk widely to obtain the most competitive terms, as their avenues for capacity are more restricted now than they were 12-18 months ago. Wholesalers not only provide critical advice at a transactional level but also empower the retail broker to access capacity efficiently and effectively.
