Most non-life insurers have now released their first quarter (Q1) 2020 results.

What have we learned?

COVID-19 non-life insurance and reinsurance global cost estimates

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.

Results by company

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:

• Some companies are waiting until Q2 to record part of the COVID-19 provision
• Some provisions are based solely on only reported cases
• Some companies have reviewed policy listings to assess from which policies claims may be forthcoming in addition to known reported cases, a much more comprehensive assessment than solely reported cases

Figure 1: COVID-19 Loss Provisions, Q1 2020

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%

³

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:

• Trip interruption
• Event cancellation
• Property
• Trade credit
• Workers' compensation (WC)
• Business interruption (BI) covered by UK property policies

Business interruption

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:

• Specific pandemic exclusions
• Insurance agreement requires a property loss and a pandemic does not qualify as a property loss

These denials have resulted in numerous lawsuits against U.S., Bermuda, and UK non-life insurers. Examples include:

• Top insurers such as AXA, RSA, QBE, and Zurich face potentially multimillion pound lawsuits from British pubs, hotels, restaurants, and leisure groups, who allege that legitimate business interruption claims have been rejected.⁴
• Prime Time Sports Grill Inc. d/b/a Prime Time Sports Bar v. DTW 1991 Underwriting Ltd. The plaintiff alleged that government-ordered lockdowns triggered coverage under its policy with the syndicate, which does not include a virus exclusion.
  
  The suit is one of dozens of business interruption cases filed against insurers over the past two months. Many of the suits argue that the presence of COVID-19 constitutes physical damage, that they have been ordered to close their businesses by government authorities, and, therefore, that coverage is triggered under the civil authority clauses of their policies.
• Stephane Manigold, owner of four restaurants in Paris, brought a suit against his insurer for payment of business interruption benefits. A Paris commercial court ruled that French insurer Axa S.A. will have to pay two months of revenue declines related to COVID-19. This result potentially opens the door to a wave of litigation over BI insurance coverage stemming from COVID-19 shutdowns.⁵

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

Government intervention

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.

COVID-19 loss cost provisions for BI

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.

Workers' compensation

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 illness not being caused by conditions particular to the job, but rather considered an ordinary disease of life to which the general public is exposed
• The inability to determine whether the disease was contracted at work

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.

Directors and Officers (D&O) and Employment Practices Liability Insurance (EPLI) coverage

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.

• A pandemic-related SCA was filed the week of May 25, 2020, by shareholders against Carnival Corp. The Miami-based cruise ship operator Carnival Corp. is accused of making false and misleading statements and concealing material information concerning passengers on two of its cruise ships who became infected with COVID-19.
• San Diego-based Sorrento Therapeutics Inc. and its officials are accused of making misleading comments about a COVID-19 vaccine.¹¹
• A plaintiff shareholder filed an SCA lawsuit on March 12, 2020, against Norwegian Cruise Line Holdings, Ltd., alleging that the company was employing misleading sales tactics related to the COVID-19 outbreak.
• An Inovio Pharmaceuticals shareholder filed an SCA lawsuit against the company based upon the CEO’s misleading statements relating to the company’s development of a COVID-19 vaccine.¹²

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.

Claim frequency

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.

Market hardening

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:

• Securities class actions (SCAs)
  The average annual number of federal SCA filings, a leading indicator for D&O claims for publicly traded companies, was 420 in 2017 through 2019, representing over a 100% increase from the annual average for the prior seven years 2010 through 2016 (193). Furthermore, for each year in the 2017-2019 period, there were more than 400 federal SCA filings. Between 2005 and 2016, there was no year with as many 300 filings.¹⁴
• Social inflation
  Increased frequency and costs of liability claims due to a higher propensity to litigate, broader interpretation of liability contracts, juries that have been more plaintiff-friendly, and negative public attitudes toward large businesses and corporations.
• The #MeToo movement
  Allegation: The board and company allow pervasive environments that made the alleged misconduct possible.
• Cybersecurity risks and data breaches
  Allegation: The board and company did not assure that adequate protections were in place and the associated reputational damage.
• Environmental, social, and governance (ESG) failings
  The expectations of regulators, investors, and the public about the ability of boards to effectively focus on and address ESG issues.
• Litigation funding
  Larger settlements and more cases brought against companies and directors with the benefit of ample resources by plaintiff firms provided with "litigation funding." This funding is referred to as a "new global investment class" attracting investor capital.
  This has resulted in higher defense costs incurred by the defendant companies, which is also covered by the D&O policy. The annual cost of defense rose from 9% of industry D&O premium in the period 2011 to 2016 to 13% in the 2017-2018 period, a 44% increase.
• Settlements triggering Side A coverage
  In the last two years there were four settlements of over $100 million relating to "derivative actions." Side A coverage is the sole protection for board members in these instances.

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

Beyond Q1 2020

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 exposures presented by employees returning to work and the economy reopening if there is an associated rise in COVID-19 illnesses
• Bankruptcies rendering reinsurance recoverables uncollectible
• Government intervention requiring claim payments despite the policy language
• An influx of liability claims relating to EPLI exposures, D&O liability, medical professional liability (MPL), and additional WC claims
• The outcome of litigation involving demands for payment of BI losses

In Summary

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.

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¹Artemis (April 22, 2020).

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.

⁵Reuters (May 22, 2020).

⁶Inside P&C. (April 2020).

⁷Inside P&C (April 3, 2020).

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.

¹⁵Inside P&C/ Business Insurance (April/May 2020).

¹⁶Business Insurance (May 29, 2020).