The impact of COVID-19 on the insurance industry

Resort News talks to Christopher Traill, Executive Account Manager, EBM Insurance & Risk about the hardening insurance market.

He told us: The insurance market is cyclical and at the moment it is firmly in the ‘hard’ stage. This means it is increasingly difficult to secure cover at renewal time or when taking out new policies. Several factors have contributed to the hardening of the insurance market in recent years including recent natural catastrophe claims, recessionary economic conditions, increased litigation, poor investment returns and most recently, COVID-19.

Despite the challenges, there are ways to help get the cover your business needs.

What does the hardening insurance market mean for businesses?

In terms of the impact on policyholders, a hard market translates into increased premiums, less competition among insurers, narrowing of coverage, toughening risk criteria, insurers exiting certain lines/classes, extensions being dropped, fewer policies being written, conditions and warranties being more onerous, and renewals taking longer. 

While some insurance lines have been hit particularly hard by the current conditions (Directors & Officers, professional indemnity, construction, cargo, property, umbrella liability, financial lines), securing new policies and renewals across all classes has become difficult. According to Lloyd’s broker Howden, pricing for commercial insurance globally rose 16% on average in 2020. Market sentiment has been transformed by fear of ‘(un)known unknowns’ in a highly uncertain and volatile environment. As a result, higher-risk businesses are finding it increasingly challenging to obtain suitable policy wordings and adequate capacity.

What can business owners do to have the best chance of securing the cover needed?

There are several things you can do to secure the cover you need for your business.

Start early

• Have a clear strategy for what you want to achieve

• 3–4-month lead time for renewals is advisable

• Any request for new cover should be made as soon as possible
• Have a contingency plan in place well ahead of renewals falling due to avoid risk of being uninsured
• The sooner you engage your broker, the more they will be able to do in terms of:
  • program design
  • policy coverage
  • structure
  • choice of insurance markets
  • review risk appetite.

Choose the right insurer

• Work with your broker where an insurer or underwriter understands your business’ risk profile and can help you achieve optimal terms
• Your broker can guide you on which insurers are the best partners for your business:
  • Provide guidance around any restrictions of cover and insights into how particular insurers manage and settle claims.

Price should never be the only factor - insurers’ reputation, ethics and claims response and management are critical.

Be prepared

• Insurance is all about risk
• Evaluate and demonstrate processes and systems within your business are not too great a risk for the insurer to take on
• Be prepared to answer in-depth questions about the business (and yourself)
• Provide documentation to back up your position, such as recent and accurate valuations/appraisals
• Insurers will look at your risk management and how you execute this – work with your broker to effectively present underwriting information.

Be flexible

There may be options to discuss with your broker:

• increase excesses (risk appetite)
• restructure a limit (primary and excess layers)
• consider alternative markets or structure.

The more flexible you are, the more likely your broker will be successful in obtaining cover on the best terms possible.

Work with your broker

The extent that a new policy or renewal will be affected by the hard market will depend on:

• your business’ risk profile (current)
• claims record – historical (5 years minimum)
• strategies for risk management (future)
• the capabilities of your insurance broker (market influence).

Working collaboratively with your broker, being proactive and involved in the process, will help ensure your business is well placed to secure the cover you need.

How has the insurance market been affected by COVID-19?

It has had a significant impact on key product lines, among them Business Interruption (BI) cover, where most BI policies written in Australia contain exclusions relating to losses caused by quarantinable or infectious diseases. There is now some uncertainty about outdated wording in pandemic exclusions – what might this mean for some businesses?

The majority of BI policies written in Australia contain exclusions relating to losses caused by quarantinable or infectious diseases, meaning most BI policyholders have not been able to claim for financial losses incurred during the pandemic. However, there is uncertainty about some outdated wording in pandemic exclusions.

In August 2020, a test case was brought before NSW Supreme Court by the ICA and Financial Complaints Authority (AFCA) to resolve the uncertainty. While the test case ruling found in favour of the insureds, not every BI claim will be accepted. Each claim will have to fall within the constraints and confines of the policy wording, and the trigger for the claim will have to be within those parameters.

A second test case began in Australia in February 2021 to cover the issues not covered previously. The latest test case will focus on determining the meaning of policy words related to the definition of a disease, the proximity of an outbreak to a business, and prevention of access to premises due to a government mandate.

The full impact of COVID-19 is still being worked through and may take some time. Until such time as the position on the policy ruling is clarified, we encourage our clients to keep any documents (that relate to the closure of your business and income and/or losses suffered during that period) safe and ready to be submitted to insurers. This may be the data you have on your business reporting system (like MYBOS or similar) or alternatively, data from your accountant that would enable you to prove an accurate figure of loss. The test case rulings may take time to reach a resolution stage and preserving evidence is important.

If you have any questions, please contact EBM Executive Account Manager, Christopher Traill.

About EBM Insurance & Risk

EBM Insurance & Risk offers Management Rights business owners a specialist division dealing in insurance for the industry. Based in Queensland, we understand the requirements and demands of the industry; our aim is to ensure you have the right cover in place at the right price.