COVID-19:
Impacts on insurance
I
n mid-March of 2020, the construction industry along with many other industry sectors felt the economic shock of the Coronavirus pandemic tidal wave. Contractors who were fortunate enough to remain working reported reduced productivity on average of about 30-40%(1); from staffing shortages (on and off site), impending supply chain issues, along with expanded health and safety regulations, all contributing to project delays. Insurance carriers are seeing substantial claims notices flood in, mainly emanating from the issues surrounding COVID-19, specifically on potential business interruption impact and disruption this has caused to income levels. Notably, pandemic coverage has been available to the market (since May 2018) prior to this event; however, there was not a lot of traction with insureds procuring this type of insurance.(2) Ultimately, with such claims, unless the causation of the loss was specifically insured against within that policy wording, disputing such coverage availability from other policies, would be a long and arduous journey, most likely via litigation through the courts. Prior to the pandemic reaching these shores, the insurance market was (and still is) in the midst of a hardening and challenging market cycle. Reduction in underwriting capacity, lessening or reduced market competition/ participation, narrower coverages on offer, high retention limits and, ultimately, increases on rates/premiums are all part and parcel of current insurance landscape, irrespective of the state of policy holder current loss ratios. As of Q1 of 2020, this trending has not shown any signs of easing as evidenced from Aon’s internal benchmarks, which indicate on average 8-10% rate/premium
increases, year over year. How will this pandemic then affect the Construction Sector? • Property/builder’s risk: Overall, largely unchanged as natural catastrophic exposures still exist and will be underwritten for by carriers. Claims for this line will still be prevalent, such as flood, water damage, fire, etc. Anticipate an added focus from Owners and Contractors alike to consider Delayed in Start-Up (DSU)/Business Interruption when placing coverage for future projects. Carriers have moved quickly to insert exclusionary language regarding Pandemic/Outbreaks and including clearer definitions related to Organic Pathogen. • Casualty: Due to the current lockdown/stay-at-home measures, in the short-term, underwriters should be experiencing better than expected loss ratios due to the reduction of human traffic and third-party exposures close to sites. However, the tail exposures will largely remain with the carriers and thus will still be continued to be priced into the rates/premiums. • Surety: Typically, during an economic downturn, this line of business will be at risk to a higher frequency of losses as delinquencies mount. Carriers will
be weary of claims calls mainly due to the lack of cash flow and stretched operating budgets. Underwriting requirements/reviews will tighten with more stringent balance sheet reviews to ensure that contract performance can be fulfilled by contractors. • Directors and officers coverage: As leaders of organizations try to navigate through these unprecedented times, there will be an added burden on corporate boards to determine the best course of action; failing to act or executing a plan that fails, will undoubtedly place added pressures on not only their directors but carriers alike, who may be back-stopping such decisions to a certain extent. • Cyber coverage: Cybercrime is on the uptick and with it the demand for cyber coverage as societies and organizations adapt to a work-from-home environment, which potentially creates system vulnerabilities. Leading up to the COVID-19 situation, the adaptation of this product has been subjective from company to company, as insurance buyers have different views regarding this offering, and will be driven mainly by their own risk tolerance levels. Most certainly, clearer and more concise definitions around pandemic/illness, on an exclusionary basis rather than
Summer 2020 | www.ciqs.org | CONSTRUCTION ECONOMIST | 23
