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COVID-19 tail unclear, but we’ve much further to travel in casualty: Willis Re

16th October 2020 - Author: Luke Gallin

While insurers and reinsurers looked to book much of their pandemic losses in the second-quarter, the potential for casualty lines development could persist for years and be very significant, according to executives at reinsurance broker Willis Re.

coronavirus-covid-19-pandemicIt’s likely to be years before we understand the full impact of the ongoing COVID-19 pandemic on the re/insurance industry. At the top end of the industry-wide loss range, as high as $140 billion has been touted, but in reality, it’s likely far too early to accurately estimate just how costly of an event the pandemic proves to be.

As evidenced by Q2 results, re/insurers have been eager to book as much of their losses as early as possible, but it does seem that there’s potential for casualty lines development.

In light of this, Reinsurance News spoke with executives at Willis Re, the reinsurance broking arm of Willis Towers Watson (WTW), about how significant the COVID-19 tail might be, and how long it might take for the full picture to emerge.

“We’ve much further to travel in casualty, especially in classes such as workers comp, professional liability, D&O, and medical liability. We have not yet seen much in the way of liability claims being advised, so none are yet in the courts. No doubt they will come, but in the interim there will be a drag on reserving for reinsurers for the next couple of years.

“Ultimately this could be significant, but that depends on judicial interpretations, policy wordings, and the structure of reinsurances. Uncertainty prevails at this juncture,” said James Vickers, Chair, Willis Re International.

Andrew Newman, President and Global Head of Casualty at Willis Re, agreed that casualty lines development could be very significant. At the same time, he continued, not everyone tried to book the maximum in Q2, so development could continue for years.

“On property coverages, the outlook has been encouraging, but important rulings are pending and the outcomes could affect the level of indemnities, with appellate possibilities adding to the theoretical tail on the primary/underlying policies, which then need to flow through the reinsurance structures,” said Newman.

Adding, “For casualty insurers it is even less certain how judicial decisions that will determine responsibility, accountability and liability will be resolved, given that many courts remain closed. Questions such as who owes whom an actionable duty of care, and the determination of the role of government guidance and other instructions in defences, will take some time to answer. Add to that the very possible second and subsequent waves of infection, which by definition no longer have the benefit of an unforeseen and unforeseeable defence, and certainty of outcome will take even longer.

“Until parties’ responsibilities have been clarified, we can be sure that attorneys will keep the system busy. There is a reason this is called long-tail business.”

According to Paddy Jago, Global Chair, Willis Re, the COVID-19 issue has been made “more scary” because many people never really analysed or prepared for an event “that didn’t obey the parameters of time and space.” He went on to explain that the lines of business most likely to be hardest hit include healthcare, WCA, D&O, and E&O.

“However, when all is said and done I don’t think that COVID-19 will be as large a loss as some initially predicted. At the top end it has been forecast at as much as $140 billion, but that number is not very helpful. I believe the total claim on our industry will be less than half of that, and probably south of $40 billion,” said Jago.

Ultimately, it appears that a large number of companies will experience financial losses for a long time as a result of the COVID-19 outbreak, and litigation will undoubtedly exacerbate the situation.

“Will people sue an employer in a meat-packing factory, where they had been obliged to work despite the lockdown and caught COVID? The answer is probably yes, some will, but we can have no idea how many, when, and for how much. Clearly the uncertainty will last for a long time,” said Tony Melia, Chief Executive Officer (CEO) of Willis Re International.

Echoing this uncertainty, Newman added: “My instinct is that we will have a much better picture by the middle of next year, but as to full impact we are talking years. That’s just on the liability side of the industry balance sheet, and assumes we don’t see subsequent waves of infection and litigation.”

To conclude, Jago agreed that it would be a long time before the ultimate hit to the industry is fully understood, and highlighted the very public debate between primary clients and insurers in the UK around business interruption (BI) insurance.

“We are waiting for decisions on BI claims, which will be interesting to watch, and will go on for some time yet. Meanwhile insurers will cede losses to reinsurers, which will cause further debate. That conversation hasn’t really begun yet, but it will bring many questions about reinsurance coverage and interpretation of wordings, including occurrence clauses. That too will go on for a long time.”

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