P&C actuary here. Can't speak for life or health insurance.
The first part of this statement is definitely not true ("Insurance companies are coming out of the pandemic relatively unscathed"), but the second part ("pandemic isn't a typically covered event for business interruption") is.
When it comes to underwriting margins (i.e. premium less losses less expenses) then the impact of the pandemic is very dependent on the line of business:
* Auto is actually benefiting greatly, for the obvious reason that there is an unprecedented drop in the number of people on the roads. On the other hand personal auto, as a legally mandated cover, is highly regulated. I imagine a lot of these profits will be given back to consumers, as we see here. Any combination of the company being incorporated as a mutual, a publicly traded company not wanting to lose face in comparison to a mutual, or regulators forcing everyone's hands.
* Business Interruption is offered alongside property insurance. The general idea is that you can recoup lost income while you rebuild after a tornado knocked down your store. It was never intended to sustain the shutdown of the entire world economy. Insurers recognized this risk after the SARS epidemic, and in response the Insurance Services Office (ISO) which provides the industry with standard policy forms for typical exposures explicitly added exclusions for virus and bacteria into the form. It is unclear if it would be covered regardless, as the usual requirement for BI payouts is "physical damage from a covered peril." Frankly, if it wasn't excluded, there would be widespread fears of insolvency throughout the sector right now.
But there are plenty of other exposed lines:
* Contingencies policies, which usually means some sort of event cancellation, is going to get rocked. Some have pandemic exclusions but usually the larger ones don't. Munich Re and Swiss Re are on the Tokyo Olympics tower for a combined $800 million, and the total value insured for that tower is definitely in the billions. There are plenty of other ones that are not making headlines that will make this a huge headache.
* Medical malpractice insurance: more patients and more death means more lawsuits. Whether or not the lawsuit is justified does not remove an insurer's duty to defend.
* Directors and Officers policies will also take a hit. Shareholders file lawsuits whenever share prices go down (duty to defend again), and companies that royally screwed up (e.g. cruise ships) are likely to actually pay out.
* Workers' Compensation premium, which is calculated retrospectively based on average payroll over the period of the policy, is going to drop significantly. That is an impact to the "top line" (i.e. premium) but still a large hit to investment float. Also, after 2008 we saw an increase in claims as people were using WC to recoup income rather than reenter the job market. There will also be claims about getting COVID on the job. Hard to say how many of those will be successful (hard to prove), but I think it is safe to say that it will pay out for a lot of medical workers.
Probably some others but you get the point. This is far reaching. And I haven't really touched investment income. For a lot of lines of business there is a focus on "top line" growth rather than "bottom line" as it is assumed that the premium float will provide investment income. P&C insurers have liabilities that typically pay out over a relatively short period of time compared to life insurers (we call this "short tail" versus "long tail"). That means that the majority of investment is in bonds, which haven't had as bad a hit as equities, but still have hurt except in the very safest investment classes. There is a real fear of corporate bond defaults so a lot of holdings have lost value.
Hey jbeam, I’m exploring a working relationship with The Institutes, and am currently trying to understand the industry from as many angles as possible. Would it be ok if I reached out to you and ask you a few questions? Something along the lines of your personal workflow.
The first part of this statement is definitely not true ("Insurance companies are coming out of the pandemic relatively unscathed"), but the second part ("pandemic isn't a typically covered event for business interruption") is.
When it comes to underwriting margins (i.e. premium less losses less expenses) then the impact of the pandemic is very dependent on the line of business:
* Auto is actually benefiting greatly, for the obvious reason that there is an unprecedented drop in the number of people on the roads. On the other hand personal auto, as a legally mandated cover, is highly regulated. I imagine a lot of these profits will be given back to consumers, as we see here. Any combination of the company being incorporated as a mutual, a publicly traded company not wanting to lose face in comparison to a mutual, or regulators forcing everyone's hands.
* Business Interruption is offered alongside property insurance. The general idea is that you can recoup lost income while you rebuild after a tornado knocked down your store. It was never intended to sustain the shutdown of the entire world economy. Insurers recognized this risk after the SARS epidemic, and in response the Insurance Services Office (ISO) which provides the industry with standard policy forms for typical exposures explicitly added exclusions for virus and bacteria into the form. It is unclear if it would be covered regardless, as the usual requirement for BI payouts is "physical damage from a covered peril." Frankly, if it wasn't excluded, there would be widespread fears of insolvency throughout the sector right now.
But there are plenty of other exposed lines:
* Contingencies policies, which usually means some sort of event cancellation, is going to get rocked. Some have pandemic exclusions but usually the larger ones don't. Munich Re and Swiss Re are on the Tokyo Olympics tower for a combined $800 million, and the total value insured for that tower is definitely in the billions. There are plenty of other ones that are not making headlines that will make this a huge headache.
* Medical malpractice insurance: more patients and more death means more lawsuits. Whether or not the lawsuit is justified does not remove an insurer's duty to defend.
* Directors and Officers policies will also take a hit. Shareholders file lawsuits whenever share prices go down (duty to defend again), and companies that royally screwed up (e.g. cruise ships) are likely to actually pay out.
* Workers' Compensation premium, which is calculated retrospectively based on average payroll over the period of the policy, is going to drop significantly. That is an impact to the "top line" (i.e. premium) but still a large hit to investment float. Also, after 2008 we saw an increase in claims as people were using WC to recoup income rather than reenter the job market. There will also be claims about getting COVID on the job. Hard to say how many of those will be successful (hard to prove), but I think it is safe to say that it will pay out for a lot of medical workers.
* Mortgage Insurance: massive unemployment = defaults.
Probably some others but you get the point. This is far reaching. And I haven't really touched investment income. For a lot of lines of business there is a focus on "top line" growth rather than "bottom line" as it is assumed that the premium float will provide investment income. P&C insurers have liabilities that typically pay out over a relatively short period of time compared to life insurers (we call this "short tail" versus "long tail"). That means that the majority of investment is in bonds, which haven't had as bad a hit as equities, but still have hurt except in the very safest investment classes. There is a real fear of corporate bond defaults so a lot of holdings have lost value.