In 2007 Nassim Taleb published his landmark book, "The Black Swan." He defined a black swan as a rare, unpredictable event that has severe consequences and will later be claimed to be obvious in hindsight.

COVID-19 certainly fulfills the first two elements of Taleb's definition and, in time, will likely fulfill the third. The direct impacts from the disease, as well as the impacts from the mitigation response to the disease, will have wide-ranging impacts on society. The insurance industry, which protects the assets of individuals and businesses and is the main risk transfer vehicle to enable the efficient flow of goods and services, will be challenged on multiple fronts.

Most businesses were forced to shut down by governmental order; whole sectors of the economy such as travel, leisure, entertainment, and sports have been suspended; and people have been asked to stay home. Virtually every line of business will be stressed; not only due to the pandemic, but due to the mitigation efforts aimed to slow the spread of the disease. In the short run, Commercial Property and Workers' Compensation will be on the front line while longer-term general liability will move into the crosshairs of lawyers. Perhaps the only line facing less exposure is automobile, where the challenge is how to fairly adjust premiums for the dramatic drop in vehicle usage.

In this article we will focus on the two immediate areas of concern: Commercial Property and Workers' Compensation.

Commercial Property  — Two important principles in modern property insurance policies are being challenged by many state legislatures due to public pressure: "direct physical loss or damage to property" and exclusions for "loss due to virus or bacteria." Not to minimize the potential for direct losses due to contamination or neglect during the shutdown, the business interruption claims potential alone would be enough to bankrupt the entire P&C industry. Business interruption claims, just for businesses with fewer than 100 employees, are estimated between $250 to $400 billion a month.

Workers' Compensation — Many states do not authorize Workers' Compensation coverage for "ordinary diseases of life" since the public is equally exposed, and exposure to the disease is not a result of the nature of one's job. However, many states are urging employers and carriers to be very liberal in granting coverage for COVID-19 claims using the principle of "rebuttable presumption." This principle is already used in most states with respect to firefighters who contract respiratory illnesses.

The widespread financial impact and the current highly-charged political environment will make adjudicating these claims based on policy language and historical precedents difficult. Resolution will most likely be protracted with a fair share of "landmines." We may have avoided a surge on our healthcare system, but the P&C industry may not be able to avoid a surge in claims activity across multiple fronts.

We will not attempt to do justice to all the issues facing insurers today, but we do hope to offer our insights based on our discussions with numerous industry leaders about what the best carriers are doing to balance the interests of policyholders, employees, agents, and customers while maintaining financial strength and solvency.

Industry Themes from the Front Line
Consistent themes cross states, lines of business, and market segments. Workers' Compensation carriers, specialty writers, farm bureaus, medical professional writers, national and regional companies, and small and large carriers are all being challenged. Natural catastrophes are usually confined to a specific coverage line and geographic region as in tornado or hurricane —  not so at this moment in time.

Stress on Management Bandwidth — Crises tend to exacerbate underlying weaknesses. Carriers that have developed bench strength and strong succession plans have been better able to put resources on these new demands. These companies have been better able to triage demands and put some people on keeping the machinery running while putting others on addressing new and emerging issues.

Opportunity for Loss Control — Many carriers have cut back in this area, while others have maintained a strong presence in safety. As states and businesses reopen, Loss Control plays a vital role in helping businesses design safe protocols that will minimize risk to both their employees and customers. There is a tremendous opportunity for widespread distribution of safety measures utilizing electronic technology such as podcasts or video streaming. Another area where Loss Control plays an important role is in incident documentation. While this is second nature among healthcare professionals, other businesses will need risk management experts to help them with not only designing new processes but in keeping documentation of the risk mitigation and prevention actions they took. Liability lawsuits will surely follow once things settle down, and the better a business can point to records of their actions and responses to incidents, the more defensible the claim will be.

Claims — Triage and Specialization
Many claims departments were already under stress and seeing a noticeable increase in new claim activity — that, in addition to the open caseload they had prior to today. Many of these cases will not be black and white and will require deeper investigation and possibly legal advice. Political and regulatory constraints will put a strain on speedy resolutions. One of the biggest challenges for claims departments will be managing this surge while maintaining control of their current service levels and caseload.

Consider creating a multi-line COVID-19 claims catastrophe team to handle all COVID-19 claims. This will yield consistency in claim handling including claims investigation requirements, coverage analysis, and coverage position letters and denials. Although the claim volume may be increasing significantly, it is important that these claims are not handled in a "template" format both from a coverage and investigation perspective to avoid potential bad faith litigation. Each claim should be evaluated on its own merits, based on the claim investigation and a review of all the applicable coverage forms.

Consider including coverage counsel as a member of the COVID-19 claims catastrophe team. They can assist with coverage analysis and drafting coverage position letters with the appropriate language, as well as provide guidance in difficult areas.

Reassess open claims. Implement a procedural plan to address the impact of COVID-19 on current open claims, such as Workers' Compensation. For example, we will likely see an adverse impact on Workers' Compensation indemnity and medical costs due to the lack of provider care capacity, delays in healthcare treatment, medical appointment abandonment, lack of employer modified duty work, and courts and Workers' Compensation board offices being closed or overloaded.

Prepare for new management reporting needs. Isolate the COVID-19 claims in the claims system with specific indicators which can track claim volume, productivity, financial transactions, litigation, and coverage decisions by line of business. You will need this information in the future.

Most companies have developed proprietary models, many have credit information at the foundation of their models, and many others are influenced by historical loss performance. What happens if both components undergo a shift?

Putting "eyes" on new business. At first blush, underwriting should have the benefit of decreased demand. Businesses will most likely not try to change carriers while they are trying to get their carrier to cover losses associated with COVID-19. Most companies have implemented some degree of straight-through processing and predictive pricing models that enabled higher productivity and lowered the need for underwriters to touch a substantial portion of their book. In this environment, many are returning to putting "human eyes" on new business.

Be fair to existing policyholders and reassess risk. Most carriers truly care about their customers and are trying to balance compassion and risk assessment. While the issue of how models will respond in this environment is not the #1 issue on the minds of many executives, most acknowledged it is something they need to address. Many models have credit information as a major pricing driver. There may be a lag as the financial impacts take time to work through the credit bureaus. Carriers will have to determine whether the risk profile of a policyholder has changed and whether their models are sensitive to that change. There will also be pressure to return premiums due to less exposure than what was anticipated when the policy was sold. Automobile is the best example of this, where people are driving far fewer miles than what was anticipated in their premium charge.

Some carriers suggest they were looking at reducing the weight that credit has on the suggested pricing and for renewals they were looking at having the model continue to use last year's credit information. Other carriers are looking at the "pay-as-you-go" product for Workers' Compensation to help customers match their costs with their payroll as they slowly get back to full operation.

Customer Experience
There has been significant focus on customer experience the last few years. What does that look like now? How well is our content, website, and self-service offerings aligned with the changes in customer needs? How do we handle increased phone calls and email inquiries? How do we handle policyholders who are stressed and facing serious financial difficulties?

Final Thoughts
While the economy improves and businesses open up, challenges will remain in the forefront for insurers for the foreseeable future. A few considerations as we move forward:

  • Speed: Things are happening quickly. How will we cope with the speed of events?
  • Balance: We have all been impacted by the new and emerging challenges. How can we keep our normal business operating at the standards we have come to expect while dealing with a whole new layer of business complexity?
  • Changing Opportunities: Many traditional business segments may become less attractive while new opportunities are now being presented. How well are we positioned to accept the reality of the downside changes and begin to pursue new market needs and growth opportunities?

Yes, these are extraordinary times. We look forward to working through these and other challenges to ensure our industry is even stronger on the other side.