The coronavirus pandemic has dominated the news cycle and the public consciousness for several months, and new considerations and challenges are continually impacting the insurance industry and raising new questions as to how the sector will be impacted in the long-term by this crisis. Speaking with Insurance Business, Gavin Coull (pictured), a member of London FOIL’s executive committee and partner at EC3 Legal, detailed the industry-shaking legal battle on the horizon as US lawmakers consider legislation to force insurers to pay for claims arising from the COVID-19 outbreak; and the ramifications this could have for Lloyd’s of London and the global insurance sector.
There are quite a few states already trying to legislate for this retroactive cover, Coull said, which he believes is an attempt to turn the insurance industry into a form of public service. The implications of this would be enormous if even one state mandated this financial impact on direct US insurers and reinsurers, and whether or not the industry would survive is another question entirely. It could also have a tremendous impact on the risk appetite of insurers as fewer would feasibly want to write US property and BI policies.
“Without a doubt, this could go all the way through to the Supreme Court as a constitutional issue as it would be such a wholesale change in established law,” Coull said, “I would not be surprised to see at least one state try to put it into practice as there is so much political pressure to find the solution.
“And while insurance is a potential solution to pandemics, I don’t think this is the right way to do it. It will be challenged without a doubt but it will likely lead to a similar discussion as over here in the UK, as to whether something akin to Pool Re or Flood Re is possible on the pandemic side. In my view, the industry shouldn’t be charged with resolving what is a worldwide pandemic, which calls for a governmental response in place of an insurance or reinsurance response.”
Looking at the potential international impacts of this proposed legislation, Coull highlighted that there would likely be a whole raft of reinsurance coverage disputes stemming from any mid-term changes to a direct policy. It’s all very well to say US local carriers have to pay for these things but the question is whether this will impact on Lloyd’s as, following this logic, if you are authorised to write business in a certain state then you must also abide by its laws and rules.
If this legislation goes through and is not successfully challenged, the financial ramifications will be significant for all insurers and reinsurers who have got any exposure to US PD risks. Though Coull does not think that there is a similar appetite in the UK or most European countries for governmental interference of this kind, he did note that this has the potential to become an international bandwagon upon which other countries could potentially jump for political purposes.
In the long-term, the coronavirus impact will inevitably lead to a tightening up of policy wordings by insurers and reinsurers, particularly if somewhere like the US is trying to mandate coverage, Coull said, but he believes that the pandemic will also leave the insurance industry well-placed to create more creative coverage categories. There’s a lot of discussion around parametric coverage - there may be more of an appetite to provide more bespoke specialist coverage, though he noted that such covers have existed in the past with little demand.
Risk managers will be thinking very carefully about what alternatives are out there, he said, and brokers will need to be closely considering what advice they have been giving when placing business for their clients as well. Like insurers and reinsurers, brokers will need to utilise absolute transparency going forward and make sure to communicate all relevant information to their clients. In the same way that there is a tendency to criticise insurers who are perceived as not paying claims at this time, in the mediated market, brokers have their own responsibilities.
“My take is that the insurance market has reacted very well to the crisis. Certainly, the market view has always been that if there is a covered claim then we will pay it,” Coull said. “Industry bodies have responded appropriately and managed expectations correctly, and I think it would be very unfair for the reputation of the industry to be tarnished because insurers are not paying out for claims they should not have to pay out on. In a rational world, insurers are doing exactly what they are meant to be doing – which is paying valid claims while at the same time responding to changing market conditions.”