Most non-life insurers have now released their first quarter (Q1) 2020 results.
What have we learned?
The Dowling Partners initial estimate is $40 billion to $80 billion of loss costs for the global property and casualty insurance industry (non-life insurance)1. That estimate assumes that business interruption policy wording discussed in this paper will not be overridden by the courts or through government intervention. The estimates include numerous other caveats and the acknowledgement that the estimates will change as more information emerges.
That $40 billion to $80 billion amounts to roughly 5% to 10% of U.S. non-life statutory capital and surplus (surplus) at year-end (YE) 2019 of $848 billion. As $87 billion of the $848 billion is in unrealized capital gains, assuming those gains have dropped to zero, the percentage is 15% to 20%. Based on the ratio of global non-life premium to U.S. premium of roughly 2.0,2 if we assume global non-life capital and surplus is twice that of the United States, then the global loss cost estimate of $40 billion to $80 billion equates to 7.5% to 10% of global surplus.
These percentages are material but not debilitating for the global industry in its entirety. However, the COVID-19-related loss costs as a percentage of surplus by company will cover a broad range, depending on the business written, policy terms, reinsurance in place, and leverage of premium to surplus, among other factors. While the stronger companies will have ample capital to absorb their loss costs in combination with asset declines related to COVID-19, other companies will take financial hits severe enough to generate ratings declines all the way to bankruptcy.
These bankruptcies could render some reinsurance receivables uncollectable, which will be another surplus hit related to COVID-19 for some companies.
The table in Figure 1 is an extract of total industry Q1 2020 COVID-19 loss provisions for 15 companies. The loss provisions range from a low of $13 million (Hanover and Chubb) to a high of $325 million (Markel). As a percentage of premiums earned, for the 10 companies for which such information was available, the provisions range from 0.2% loss ratio points (Chubb) to 24.4% loss ratio points (Markel).
We acknowledge that the loss provisions are not directly comparable among companies because:
| COVID 19 Loss Provisions Q1 2020 | ||
| Company | (millions US$) | % of Q1 NEP |
|---|---|---|
| Markel | $325 | 24.4% |
| AIG | $272 | |
| Axis | $235 | 20.7% |
| Swiss Re | $223 | |
| AVIVA | $195 | |
| Everest | $150 | 8.7% |
| Third Point Re | $95 | |
| Arch (ex.mortage) | $90 | 10.0% |
| Travelers | $86 | 1.2% |
| QBE | $75 | |
| WR Berkley | $66 | 3.9% |
| Hartford | $50 | 1.1% |
| Argo | $26 | 9.5% |
| Chubb | $13 | 0.2% |
| Hanover | $13 | 1.1% |
In reviewing the earnings releases, we observed that COVID-19 loss provisions recorded by non-life insurers and reinsurers are generally for the following coverages:
While BI revenue loss and associated profit declines are a major source of submitted claims, most insurers deny coverage. The reasons cited for coverage denial are:
These denials have resulted in numerous lawsuits against U.S., Bermuda, and UK non-life insurers. Examples include:
Munich Re CEO Joachim Wenning noted that, while the ultimate cost of the COVID-19 pandemic will be “substantial,” he does not feel that the insurance and reinsurance industry should protect its clients at any cost, especially when that protection was not envisaged in the underwriting and pricing of the product. He continued that he opposes political views that (re)insurers should take on liability for the pandemic-related costs of businesses and private individuals, even if their policies explicitly or implicitly exclude such coverage.6
The major exception with regard to BI coverage applying are property policy forms in the UK that cover BI claims.
The CEO of Markel said that its COVID-19 $325 million loss provision is in large part for BI losses covered under UK property policies, as well as event cancellation losses on business written worldwide. The event cancellations are for events such as the Olympics and Wimbledon, but the provision does not contemplate indirect losses, such as those from professional liability.7
The U.S. federal government has also inserted itself in the BI coverage disagreements.
Eighteen U.S. House members made their case in a March 18 letter addressed to the leaders of the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Independent Insurance Agents and Brokers of America, and the Council of Insurance Agents and Brokers about the need for insurers to provide BI coverage relating to COVID-19 coverage.
The letter argues that American businesses are “understandably concerned about the potential financial impact the continued global spread of COVID-19 may have on their operations” in the wake of more than 118,000 declared cases of the disease in 114 countries globally, with more than 4,000 people having lost their lives at that point. As a result, they argue that including losses related to COVID-19 in business interruption coverage is key.
Insurance industry representatives responded as follows, affirming that coverage does not exist:
“Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19. The U.S. insurance industry remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists."8
Insurers and insurance groups have stated in position papers and on earnings conference calls over the past several weeks that most business interruption policies will not cover coronavirus-related losses because most policies contain virus exclusions and, where they don’t, physical loss or damage has not occurred. Therefore, coverage is not triggered.
A review of earnings releases generally did not reveal COVID-19 loss cost provisions for BI claim payments due to coverage litigation or government mandates.
Like BI, WC policies require interpretation regarding application of coverage for a pandemic.9 In WC, compensability challenges for COVID-19 vary by state, but typically result from:
The National Council on Compensation Insurance (NCCI) developed a model that estimated that WC costs related to COVID-19 could range from $3 billion to $82 billion depending on the assumptions used on infection rates, compensability rates, and fatality rates, among other factors.10
The NCCI model demonstrates the uncertainty in loss cost estimates and that even an $80 billion COVID-19 non-life industry global loss cost estimate could be too low.
There is little discussion regarding claims related to COVID-19 potentially covered by EPLI or D&O policies in most of the earnings releases.
Our view and that of other D&O and EPLI experts is that numerous securities class actions (SCAs) and EPLI claims are forthcoming.
There have been four class actions that are known through the date of this article that will likely trigger D&O coverage.
The decline in public company stock values relating to COVID-19 loss costs and actions will trigger additional SCAs by shareholders.
Further, a well-organized and well-funded plaintiff’s bar in the United States is conducting weekly webinars on employee rights. This will lead to an onslaught of EPLI claims that will invoke EPLI13 coverage.
Mitigating the impact of the COVID-19 loss cost provisions are declines in frequency for personal automobile insurance among other lines. The following comment is from Jeffrey Farber, chief financial officer (CFO) of The Hanover Group:
| THG | "On the claims side, clearly we're seeing reductions in claims across a lot of areas, and they're quite meaningful." "From a loss ratio perspective, we're pretty confident that the claims activity will offset the decline that we're likely to see or seeing in premiums." -Jeffrey Farber, CFO |
Earnings releases consistently comment on the decline in frequency for several insurance coverages related to the shelter-in-place mandates as a material offset to the earnings impact of the COVID-19 loss provisions.
Even before the COVID-19 pandemic, the insurance industry was entering a period of market hardening after an extended period of underpriced coverage, attributable in large part to ample capacity and several years of reserve releases.
D&O premium increases, before COVID-19, were already material due to the following factors:
A hardening of rates and decline in capacity is accelerating.
The availability of retrocessional capacity from the capital markets may dry up over fears of the scale of COVID-19 losses. Per RenaissanceRe CEO Kevin O'Donnell, concerns of social inflation are driving a hard market for reinsurance even before loss costs related to COVID-19.15
Analysts at the U.S.-based investment banking firm JMP Securities LLC said that the COVID-19 pandemic and the recent consecutive catastrophe loss years have driven the global reinsurance market into a phase of "sustainable hardening."
Artemis reported casualty reinsurance rates are also on the rise, but it will only become clear at the January 2021 renewals how broad the hard market will get, the analysts said.16
While Q1 2020 earnings releases have revealed the first wave of insurance claims, there are COVID-19-related loss costs for insurers that will emerge in future quarters. Among the factors that will drive these losses are:
The total insurer loss costs from claims related to COVID-19 will be multiples of what has been recorded in Q1 2020. As i) EPLI, D&O, and other liability claims emerge, ii) the coverage litigation involving BI reaches resolution, iii) the success in the efforts of government and regulators to mandate coverage despite insurance contract language, and iv) resolution of WC coverage questions and v) the risks associated with an economy reopening and employees returning to work, additional insurance loss costs related to COVID-19 will be recorded.
It will likely take years before total non –life insurance industry loss costs relating to COVID-19 are known.
To this day there are outstanding loss reserves relating to the 2008 global financial crisis, 12 years after the event.
2Insurance Information Institute 2018 World Insurance Market.
3Company reports, Inside P&C; for Arch, Axis and Everest, Argo, Q1:19 NEP is used; and earnings releases for Swiss Re, AIG, AVIVA, QBE, ARGO, and Third Point Re.
4Business Insurance/Inside P&C.
8Insurance Journal (March 20, 2020).
9Kallfisch, A.C. & Blais, A. (April 13, 2020). What Does Being Furloughed Mean, and What Is the Impact for Workers' Compensation Exposure? Retrieved May 28, 2020, from https://us.milliman.com/en/insight/What-does-being-furloughed-mean-and-what-is-the-impact-for-workers-compensation-exposure."
10NCCI COVID-19 and Workers' Compensation: Modeling Potential Impacts. Estimates for 38 NCCI member states
11Business Insurance (May 28, 2020).
12D&O Diary (March-April 2020).
13PLUS After the Storm: EPLI Claims in the Wake of COVID-19 (April 23, 2020).
14From (i) NERA: Recent Trends in Security Class Action Litigation: 2019 Full Year Review, (ii) CORNERSTONE RESEARCH: Securities Class Action Filings 2019 Year in Review, (iii) Best’s Market Segment Report February 24, 2020, and (iv) other sources.
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Themes emerging from Q1 2020 earnings releases for non-life insurance companies relating to impact of claims related to COVID-19
COVID-19-related costs as a percentage of surplus by company will cover a broad range, depending on the business written, policy terms, reinsurance in place, and leverage of premium to surplus, among other factors.