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2021 Insurance Market Insights: Part 2

In our previous article, we provided an overview of the hard insurance market cycle and what to expect in 2021. Here we will dive deeper into how COVID-19 is influencing the hard market in certain coverage lines.

The COVID Effect

The insurance market has been tightening since 2018 as the result of years of underpricing, the frequency and severity of catastrophic property losses, and massive liability judgments and settlements impacting several lines including General Liability, Commercial Auto, Product Liability, Commercial Umbrella and Directors & Officers Liability.  Insurers have been looking to reverse underwriting unprofitability, especially in certain coverage lines and sectors. An economic landscape with historic low interest rates has stifled the industry’s ROI ability to make up for insured catastrophic losses. The coronavirus pandemic has only served to exacerbate the situation.

There is tremendous uncertainty over the extent of the fallout of COVID-19. Lloyd’s of London estimates that insured losses globally from pandemic-related claims could exceed $107 billion. Most of these losses center around the issue of Business Interruption (BI) claims. As we mentioned in our previous article, many claim disputes are going through the courts with insureds and insurers facing off on whether a BI policy should cover loss of income as a result of the pandemic and government-mandated closures. BI policies were never designed with this in mind and the insurance industry would be gutted if it were forced to pay all the BI claims being filed (to date more than 1,300). In the wake of the pandemic, several proposals were put forward to establish a federal-type backstop program where insurers would pay up to a certain amount and thereafter the government will step in. But these proposals have gone nowhere, including in the latest stimulus/relief package passed by Congress.

Potential Emerging Risks in Workers’ Comp, D&O, EPLI

COVID-19 is also impacting Workers’ Compensation insurance. For the first time in five years, there has been an uptick (albeit slight) in Workers’ Comp rates. Insurers are concerned about the long-term effects of the virus in employees who have been infected, new risks emerging from remote work, and changing employment levels due to furloughs and layoffs, among other issues. The presumptive legislation enacted in 17 states and the resulting path to potential claims with regard to COVID-19 cases could contribute to ongoing rate increases moving forward.

We touched upon the additional underwriting scrutiny the pandemic has ushered in for D&O and EPLI in our Part I article. In addition to D&O underwriting concerns over liquidity, restructuring and bankruptcy issues for public companies, some insurers moving forward are introducing insolvency exclusions and for certain insureds, buyers are required to sign a warranty letter. This comes on the heels of pandemic-related D&O lawsuits with regard to securities class actions and shareholder derivative actions that have already been filed. Insurers are expecting more of this type of litigation, which could impact pricing and policy terms and conditions.

In terms of private companies, insurers are anticipating medium to high-severity D&O claims as more businesses file for bankruptcy amid the economic downturn caused by COVID-19.

As many employees continue to work remotely, a spike in wage-and-hour claims is a concern. Employers must ensure employees are paid correctly, which is increasingly more difficult with individuals working from home.

Cyber Market Responding to WFH Emerging Risks

In addition to these coverage lines, the work-from-home (WFH) era amid COVID-19 has resulted in a spike in phishing and hacking attacks, impacting the Cyber market. Cyber Liability claims losses related to the coronavirus pandemic, according to a report issued by Willis Re, are expected to continue. Organizations could be more vulnerable now due to employees working remotely on potentially less secure networks with less secure hardware, says the report.

Willis Re also reports that primary and excess Cyber renewals are now averaging premium increases well into the double digits, “with heavily exposed industries likely to see increases on the higher side of our predicted 10% to 30% range.” This includes healthcare, higher education, public entities, manufacturing, financial institutions, construction, and large media and technology companies. Cyber capacity is also expected to tighten as losses increase.

Advanced renewal preparation is critical in today’s market. Clients need to be prepared to answer additional underwriting questions including about their business continuity plans. At Distinguished Programs, we continue to offer insureds comprehensive, broad coverage in the markets we serve, supported by our strong, longstanding carrier relationships.