Time for a rethink? The insurance industry faces up to covid-19
The covid-19 outbreak puts insurance companies in the delicate position of balancing a huge claims load with their own capital and solvency stability. So far, there is also considerable uncertainty about whether insurance policies cover losses caused by the pandemic, with governments across the region considering issuing regulations aimed at bringing more clarity to the sector.
Insurance companies are facing a myriad of issues following the covid-19 outbreak. Among the most legally complex is the uncertainty about whether damages caused by covid-19 (and the emergency laws dictating lockdowns that it has triggered) will be covered by insurance policies. That complexity extends across Latin America.
In Chile, most local policies expressly exclude losses resulting from pandemics. “Insurances commonly only cover damages caused by a company stopping its operations if the stoppage occurred because of physical damage to the insured property,” says Prieto’s partner Patricio Prieto. The same is true in Brazil, says Carlos Eduardo Azevedo, a senior associate at Pinheiro Neto Advogados.
The issue is echoed in Argentina. Martín Argañaraz of Allende & Brea says the claims that are most likely to be triggered by companies at the moment are those relating to their operations and suffered losses due to business interruption. “What normally triggers these is material damage, but in this case the disruption is due to a government directive originating from a virus and not material damage,” he explains.
Whether insurance companies will cover losses caused by covid-19 could soon change. In Chile, the Financial Market Commission (CFM) – which regulates the insurance industry – has called on insurance companies to make certain exceptions and extend coverage to some asset damages caused by the covid-19 outbreak. Congress is also debating a bill that would include epidemics in insurance policies during certain national emergency situations.
Pinheiro Neto’s Azevedo reports that in Brazil, insurance companies have begun making some exceptions. “For the benefit of their commercial relationships and reputation, certain insurance companies have already started waiving such exclusions,” he says.
Brazil’s two main business areas, São Paulo and Rio de Janeiro, have been in lockdown since 24 March. The lockdown is causing disruptions to companies’ supply chains, which will impact whether they can maintain their operations. Cassio Gama Amaral, partner at Brazil’s Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, says the extent of companies’ insurance coverage will depend on how their individual policies are formulated and the underwriting process.
The uncertainty surrounding how insurance policies and contracts should be understood during these extraordinary circumstances puts insurance lawyers in a key role to help their clients. “The most urgent advice relates to the interpretation of policy wording to determine if policies cover claims due to the covid-19 outbreak and the government’s emergency laws,” says Guillerme Puelles of Peru’s Rodrigo, Elías & Medrano Abogados.
Lawyers have also raised concerns about whether force majeure clauses can be triggered under these circumstances. While frequently used in contracts, there is limited legal guidance about force majeure’s applicability in pandemics. Whether it is applicable or not will have a huge effect on the insurance industry as it will determine if insurers should pay out enormous amounts in premiums or not. Argentina’s Allende & Brea partner Laura Santanatoglia says force majeure clauses remain uncertain, but it will be necessary to evaluate their possible trigger in relation to claims and possible coverage exclusion, as well as to premium pay-outs, considering that the quarantine measures were implemented as compulsory.
A factor behind insurance companies’ hesitation to accept claims outside what policies cover is that it may trigger issues relating to their agreements with reinsurance companies. “In this case, the threat that could affect the insurance market is that reinsurance contracts will become more expensive since the level of claims will increase too much,” says Patricio Prieto.
One critical aspect that insurers must communicate to the regulator is their financial viability to make premium pay-outs and comply with local regulation. Matías Vergara of Chile’s Carey says insurance companies must report their covid-19 related loss ratio exposure to the CFM. “If a high loss ratio affects the insurer’s technical reserves and risk equity, it must itself report this situation to the CFM and the general public, providing detailed explanations of the reasons of such risk equity deficit and of the measures taken,” he says. “The CFM may also ask the insurer to make a capital increase or submit an adjustment plan to comply with the risk equity or technical reserves required by regulations,” Vergara explains.
With the world economy deeply affected by the covid-19 pandemic, capital investments made by insurers to finance their premium payments, are likely not performing as strongly as expected.
London-based partner Yves Hayaux-du-Tilly of Mexico’s Nader, Hayaux & Goebel recommends insurance companies conduct stress tests to check the sensitivity of their balance sheet to coronavirus. “This situation is clearly one of those scenarios where you have a combination of factors stressing the solvency of insurance companies on various fronts; [covid-19] affects its investments considering the valuation of their reserves and capital, the difficulties faced in the continuation of the business as well as potential increase in claims,” he says. While Hayaux-du-Tilly says Mexican insurers have robust protocols for business continuation in place and should be prepared to face the outbreak, he thinks this scenario will raise several matters that may not have been considered in those protocols and that will require immediate solutions.
Some think that insurers may have to rethink their investments and asset management strategies, particularly with respect to assets supporting their regulatory capital and technical reserves. “Insurance companies will no longer be able to count on the steady income from investments that most had enjoyed in the past,” says Mexico’s Creel, García-Cuéllar, Aiza y Enriquez SC partner Leonel Pereznieto. “It will be key for insurance lawyers to help interactions with regulators when dealing with solvency issues and capital shortfalls that may result from the covid-19 crisis,” he says.
Insurers’ in-house teams are relying on their go-to external lawyers for these interactions. “In-house counsel have to make business sense of a myriad of new events and frequently unripe regulations, with little guidance from an overstretched regulator, while also providing effective advice to an often-anxious management team,” says Carey’s Vergara.
At the same time, insurers have to contend with an overload of claims. “They must manage an unusual large number of claims filed in a short time frame and do so as quickly and efficiently as possible,” says Rodrigo Elías’ Puelles. This is particularly important as some insured companies’ survival will depend on pay-outs from these claims. “Some insured will face problems derived from the lack of timely payment of insurance premiums, which may create additional coverage problems and issues later on,” Puelles adds.
However, dealing with an unusually large workload comes at a time when insurance companies, just as companies from any sector, must also keep their own house in order, handling health and safety matters for their employees, setting up remote working and guaranteeing operations continue to run smoothly under extraordinary circumstances.
María Fraguas, partner at Argentina’s Nicholson y Cano Abogados, thinks the covid-19 outbreak will substantially adjust how insurance companies work, possibly for the better. “This has all of a sudden accelerated digitalisation and overnight has pushed all clients to change how they relate to their insurance companies, particularly, in regards to the sale, underwriting and handling of claims,” she says. Insurers must set clear and functional procedures to ensure company operations are in line with evolving technical, legal and regulatory standards. “This has no return,” Fraguas says.