In 2020, two major events have rocked society and the economy in the United States: The COVID-19 pandemic and the episodes of civil unrest that began in June. The pandemic, which started in China and made its way to the U.S. during the winter via China and Europe, pushed the country’s economy into recession in February. The unrest, inspired by the death of George Floyd on May 25 in Minneapolis while in police custody, has resulted in riots in many cities across the USA.
Both of these events are having major effects on the property-casualty insurance industry in general, loss ratios in particular, and the fortunes of insurance agencies.
Standard & Poor’s estimated in early June that U.S. underwriting losses resulting from COVID-19 would be in the range of $15 to $30 billion, though some experts expect them to be higher than that. That estimate assumed no extension of shelter in place orders and that insurers will not be forced to pay business interruption losses, both of which would exacerbate losses.
Workers’ Compensation loss ratios will be pressured from both sides of the equation. Workers with active claims will have more difficulty getting treatment as resources are redirected to address the growing number of COVID-19 patients. This may delay their returns to work, adding to disability benefit payments. Also, health care workers and other front line employees may be able to prove that they contracted the virus on the job, making their medical expenses and disabilities compensable.
Simultaneously, payrolls may decrease for non-essential businesses that were forced to cut hours, furlough or lay employees off. This will reduce premiums that could have offset losses for essential employers. Premiums will likely decline even for employers who qualified for the federal government’s Paycheck Protection Program loans. The National Council on Compensation Insurance (NCCI) has created a separate lower-rated classification for employees who are idled by the pandemic but still getting paid.
Other lines of coverage are also likely to see lower premiums. Many personal auto insurers introduced premium discounts to reflect reduced driving by customers no longer commuting to workplaces. However, Jef Morgan of agency network Smart Choice says, “The reduced driving activity should offset these reductions,” keeping loss ratios in check.
For many classes, Commercial General Liability insurance premiums depend on the organization’s payroll or sales, both of which have taken big hits. Small businesses insured under Businessowner Policies may reduce limits, drop additional coverages, or simply cancel their policies because they have gone out of business.
Finally, Congress and a number of states are considering legislation that would require insurers to cover COVID-19 related business interruption losses despite exclusions in their policies. Many states have enacted or are contemplating bills that would require insurers to presume that workers who catch the illness contracted it at work, increasing Workers’ Compensation payments.
Virtually all commercial property insurance policies cover losses caused by riot and civil commotion. Insured property owners who suffered damage during the riots after George Floyd’s death should have coverage. How much this will increase property loss ratios is unknown. Morgan predicts the increase will be significant but that a hardening market may partially offset the higher losses. Some believe that the record set by the riots in Los Angeles in 1992 will be broken. Those uprisings following the acquittal of four police officers on charges of beating black motorist Rodney King caused $1.4 billion in losses adjusted to 2020 prices.
Ballooning loss ratios are likely to affect insurance agencies in multiple ways. Carriers may squeeze profit sharing bonuses as they absorb lower premiums and higher losses. Their appetites for certain classes of business and lines of coverage may shrink as well. Proposals to require retroactive coverage of COVID-19 business interruption losses may make them reluctant to write this coverage in the future. While redlining laws will hamper carriers’ ability to cut back on where they write property insurance, both premiums and deductibles may rise across the board.
The events of the first half of 2020 will significantly impact the insurance industry for some time. Insurance agencies should expect limited markets for some classes and pressure on their profits.
