Impacts on insurance

COVID-19: Impacts on insurance

In 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

coverage form, would be expected in policy wordings on most lines of coverage to clarify the intent of coverage .

The future of the construction industry will be influenced by how collective society ramps back up to how the “new normal” will look . The retail and hospitality sectors have been ravished and so too have the opportunities for renovation/expansion for contractors servicing those clients . Anticipate an impending shift in the commercial retail/lease sector, as tenants who are currently operating in a work-fromhome environment will realize that their businesses can survive without the expensive overhead attached to working in downtown core office spaces . From an infrastructure perspective, what will the demand be like for new schools with the use of virtual classrooms for students? What too of the need to build more robust transportation infrastructure systems, if the usage numbers are lower? More robust broadband in rural areas and better healthcare facilities for longterm care will be the imminent priorities on which constructors will focus in the coming months . The consensus is that things will likely not be like they were – only time will tell .

Sources

1 . Ontario allows some essential construction projects to start

May 6, 2020, online, www. constructioncanada.net/ontario-allows-

some-essential-construction-projectsto-start/?qnewsletter=20200506&en_ click=1&utm_campaign=202005-06&utm_medium=email&utm_ source=newsletter&utm_content=news 2 . Russ Banham, April 3, 2020, This

Insurance Would Have Helped in

Coronavirus Crisis But Nobody

Bought It, online; www.insurancejournal.com/news/ national/2020/04/03/563224.htm

About the author

Barrie Ngeh is an Assistant Vice President/Account Executive at Aon Construction Services Group . Barrie has over 18 years of experience working in the insurance industry and has been specializing within the Construction sector for over a decade . Barrie has had extensive experience on project insurance placements ranging from P3s to complex manufacturing/residential projects . Presently, he is responsible for leading a portfolio of construction accounts that include multi-national constructors, developers and property owners . He has completed the Canadian Accredited Insurance Broker program, Canadian Risk Management and Enterprise Risk Management designation .