Paradigm Shifts: Innovation from Adversity

Out of adversity comes opportunity.   Benjamin Franklin

The property/casualty insurance industry will endure Covid-19 pandemic challenges in the near term.  After the pandemic has finally fizzled, the P/C insurance industry will continue to feel its effects for years.  And as noted in our prior post on paradigm shifts, the pandemic will leave some permanent changes.  These paradigm shifts will drive innovation in insurance and create opportunities for Insurtech organizations.  Insurtechs with a compelling value proposition may be able to gain traction in this difficult and changing environment.

The P/C insurance industry will likely see declining demand, business interruption coverage disputes, and deteriorating results, particularly in the SMB market segment.  But the degree of the impact is not clear, the results are unlikely to be evenly distributed, and increased rates as a result of the hard market may provide some offset.

Renewal exposures are already declining on both large and small accounts as a result of the pandemic, in most cases resulting in lower renewal premiums (here).  Brokers will be impacted by lower commissions on smaller accounts, no commissions on closed businesses, return commissions on cancellations and lower audit premiums, and delayed commissions on accounts with extended payment terms.

The SMB market segment is likely to be the hardest hit, and many insureds may not survive.  Account attrition as a result of businesses going out of business is not a significant factor yet because many businesses are hanging on with some cash on hand, premium payment extensions and PPP loans (prior post).  Account attrition will likely increase as the pandemic shutdown drags out in some states and could be a significant factor over the long term.

Most property policy forms do not contemplate coverage for business interruption losses from the pandemic.  The American Property Casualty Insurance Association’s (APCIA) preliminary estimate is that business continuity losses just for small businesses with 100 or fewer employees could fall between $220-383 billion per month (here & here).  A few policyholders have already filed lawsuits looking for business interruption coverage.

Litigation over business interruption coverage in property insurance policies will turn on the specific policy forms.  Not all policies clearly exclude coverage, and there are indications that a few specialty property policies have no exclusionary wording applicable to shutdowns from a pandemic.  The absence of specific exclusionary language regarding communicable disease coverage in some forms will add to the uncertainty regarding coverage (here) and drive coverage litigation.

A few state legislators have proposed various bills to force insurers to cover business interruption claims.  Some industry executives claim that attempts to legislatively force coverage of business interruption losses in policies where coverage is excluded (here, here) will be expensive, possibly crippling the industry.  At best, the public discussion, legislative process and ongoing litigation could have profound negative effect on the insurance market.

Coverage for pandemic losses may crop up in different policies and other business lines (here).  For example, the scope of coverage may be expanding in workers compensation to incorporate Covid-19 exposures (here), and D&O coverage could be a source of claims, and lawsuits have already been filed (here & here).  Other lines of coverage, such as E&O coverage for some classes, could also see an increase in claims.

P/C loss results may deteriorate (here) from both coverage dispute litigation and from covered claims, and may exacerbate an already difficult insurance market.

While it is not clear how the coverage disputes or legislative initiatives will resolve, it is likely that coverage disputes could be with us for quite a long time given the amounts at risk.  AM Best expects that insurers could see increased social inflation as policy holders press their demands for coverage (here).  And these disputes will take place in an environment where exposure bases and premiums will likely be in decline.

This is both a time of challenge and opportunity for Insurtechs.  Raising capital will be a challenge in this environment (prior post), but the insurance industry will be looking for ways to improve both the top and bottom line.  Now may be a good time for startups and early stage companies selling innovative concepts into insurance to get traction and accelerate growth, but opening doors may be difficult without personal contacts, and sales cycles are likely to lengthen as insurance organizations focus on business retention and loss mitigation.

Organizations that have a strong value proposition, that provides a significant immediate return to the client, and provide a product or service that is easily implemented may be able to get traction quickly.  And niche technology or tech-enabled services focused those segments not been severely impacted may also get fast traction.  The accelerating shift to digital interactions will be an opportunity for those businesses with well positioned distribution models and technology resources.

The insurance industry will face multiple challenges from the Covid-19 pandemic due to declining demand, coverage disputes over business interruption and deteriorating results.  Some of the changes will be paradigm shifts, and these paradigm shifts will drive innovation.  Now is a good time for Insurtechs with a strong value proposition to gain traction in property/casualty insurance.

Innovate Insurance – Innovation & Entrepreneurship in Insurance


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