The Pandemic’s Effect on Insurance, Predictions for the Future

The COVID-19 pandemic has drastically changed the face of commerce, and the insurance industry is no exception. From new coverage types to a digital approach to submissions and underwriting, the industry quickly adapted to new challenges to help businesses maintain operations. Being able to adapt policies to these new circumstances is crucial.

Listen to the podcast to learn more about these changes and what they could mean for the future of business and insurance.

Gordon Bass: So John Moffatt, as Chief Underwriting Officer and Active Underwriter at Syndicate 1200 London, you have a pretty unique perspective on Lloyd’s. So trading has always been done face-to-face there for hundreds of years. So with the coronavirus pandemic, how have brokers, underwriters and insureds adapted to a new way of doing business?

John Moffatt: Prior to this pandemic, we were moving over very slowly on to electronic trading platforms. So we had set targets a few years ago to try and move towards putting more business through it just because it makes more sense economically to place more business through that. And a lot of the big brokers had actually invested quite heavily in the technology. But what this has done is it’s forced a lot of the other brokers onto using this platform, not just from a point of view of binding risks, but actually from cradle to grave so that you put the submissions on there and also binding our lines.

So we’ve been binding electronically, but all of a sudden we shot up from maybe 30, 40% of our risk to over 80% of our risk being bound through this medium.

Gordon Bass: So if the pandemic is accelerating the shift to digital platforms, what’s the longterm effect going to be on the Lloyd’s model that’s just, it’s been built on in-person relationships?

John Moffatt: Yeah. That’s another good question. So I think a lot of syndicates now are looking at their office space and Lloyd’s space because we must be only one of the industries where we have two offices that we pay for on a daily basis. So we’re looking at it as are other syndicates and saying, okay, do we need that space at Lloyd’s? Do we need the box at Lloyd’s? Will it be trading in our office as a trading floor? So we reduce the costs and shift the trading platform away from the room. Will Lloyd’s allow that? Will they allow that from the fees that we pay and will they want that to happen? So I think there’s going to be a shift. And also there’s a shift in mentality by the people that work within the market to say, “I’ve been wasting probably two to three hours of my day commuting when actually I could be working more remotely.”

I think the brokers definitely want the underwriters back in the room because it gives them an edge over negotiation so they can come back time and time again to readdress some of the points in the negotiation of the price.

Gordon Bass: So you think there is always going to be some element of an in-person relationship at Lloyd’s.

John Moffatt: Yeah. So I think there will be, and it might be that we get together for the big renewal meetings and then the rest of it will be done remotely either from home or from the office. But if you look at the [footsie 00:05:35] and the New York Stock Exchange, they’ve been digitalized platforms for over 10 years. So I think the history of Lloyd’s is great, but actually sooner or later we need to make this big shift. Maybe the pandemic has accelerated that significantly.

Gordon Bass: Let’s widen the lens a little bit. So what are examples of current exposures and claims that are stemming from the coronavirus pandemic?

John Moffatt: Yeah. So the main areas where, and I want to talk about direct and indirect. So if we focus on the direct exposure where businesses have bought communicable disease cover, they’re mainly in the contingency area where we’re talking about big sporting events, we’re talking about conference and exhibition facilities. Now, most of those event organizers buy back a communicable disease cover, and that comes at a small AP. So a lot of the direct claims that we’re seeing coming in at the moment are for canceled events. As you know there are no big sporting events happening. They’ve just started to open up some of the football in Europe at the moment in the German [Bundes 00:06:58] League there. But when is the next time we’re going to see 50,000 people watching a soccer game or towards the end of the year, when US football starts opening up, are these events going to have big crowds?

Also, there’s multiple streams of buying here. So sometimes it could be the venue that’s buying to protect its profits, or it could be the media that are buying. So depending on which interests that you have insured in this, you could go claims-free if you’re doing the media rights and it’s being held behind closed doors. But if you’re doing the ticket refund, then potentially a total loss. I think the other difficulty is with the cancellation business is that if we were insuring this from quake or wind, which would normally there would be the perils that we’re concerned about, there’s a time that the event is finished and we’re out of wind season and then you start to reorganize those events and you reschedule them. With this pandemic, is that there is no real clear view of when we can organize an event for, let’s say, I don’t know, November this year or do we put it in February next year?

So there isn’t a clear line of sight of when these events can open up again, which makes it problematic for the event organizers. But they’re also shifting as well. They’re moving some of their events to virtual events, which it might be a complete shift in their business model going forward and it reduces the costs and expenses of venues and hotels for them and also cuts down the cost of people buying flights and hotels to actually commit to those conferences.

Gordon Bass: Well, given that we don’t really know what the future holds, as you were just discussing, how is underwriting going to change moving forward?

John Moffatt: Yeah. So when September the 11th happened, the change of underwriting came about as far as terms and conditions and coverage that were afforded. So all of a sudden you had terror exclusions put in which were given prior to that day. You also had nuclear, chemical, biological exclusions. In the same way, we have started to apply exclusionary language to policies, mainly in the contingency area where we were affording coverage, but also to clarify coverage in certain areas where it could have been deemed to be not transparent. So I think in certain areas people have been more clear and precise about that policy language. But in certain cases on certain lines of business, it’s a risk-based approach because there is no direct exposure to pandemic cover.

Gordon Bass: So when we spoke a few days ago, you mentioned that the industry is affected not just by the pandemic, but really also the wider impact on the world economy. So talk about that. How is the insurance industry being affected by what’s happening to the economy around the world?

John Moffatt: Yeah, and so it’s very wide ranging. So if you look at, we insure, the insurance industry insures hotels throughout the world. The footfall through hotels and the hospitality industry is minimal at the moment. So the premiums that we get from those risks are reduced because of the values of the business interruption that they’re insuring against, so that’s reduced. We’re also in the trade credit environment because of the deal flow slowed down and also because we’re moving into a recession, there’s less appetite for people with the uncertainty around the financial economics. There’s also, if you can imagine there’s a lot of people that aren’t working at full pace at the moment. So people like architects, engineers, they’re not incurring the same fees that they used to.

So that has a knock on effect on some premiums that the insurance industry receives. Also, we insure M&As, so mergers and acquisitions. In another area is there is no M&A happening at the moment, so the income in that area is fallen off dramatically as well. So there’s going to be a knock on effect to premiums throughout 2020 and into ’21. That brings its own problems for us, for financial forecasting going forward.

Gordon Bass: Right. So how does all this affect Argo’s client base?

John Moffatt: That’s a good question. I think a small proportion of our client base have some coverage afforded to them that they’ve purchased, but in the main it’s really us trying to support them through a very uncertain time, whether that be payment holidays or if some of the businesses are actually shut down, that we give them cover but on a restricted basis. So really trying to work with the brokers and their clients to ensure that they transition through this pandemic as smoothly as possible. And unfortunately, in some circumstances there are going to be some casualties as far as businesses going to the wall, but we’re trying to support our client base as much as we can at the moment.

Gordon Bass: If you take a look a year or two into the future, and hopefully we’re past the worst of this by then, what do you think the biggest shift will be to the insurance industry? And when you think about that, how will it change for the better?

John Moffatt: So I think we’ve been used to, as an industry, of climbing on planes and traveling all over the world to see our clients, brokers, insureds, MGAs, cover holders. Internally as well we’ve done a lot of travel and I think that will change. I think the want and also the time that has been spent on traveling in the past, I think people will look at it and say, “Actually, I could jump on a VC and do that hour call.” There will always be a need to sit down and have face-to-face meetings, but I think it will be a massive reduction in the amount that we travel. Also, I think, as we touched on in the first instance, trading electronically will probably get to 95% within the next 18 months I would suggest. Hence, the mitigating the need to do the face-to-face in a Lloyd’s environment.

Gordon Bass: Well, it’ll be really interesting if we can sit down and talk in 18 or 24 months to see first, if we’re going to do it in person or over Zoom, and it’ll be really interesting to see how things have shaken out in the next or two. So John, I really appreciate you taking time to talk. It’s fascinating to hear what’s happening in the insurance industry in general and specifically at Lloyd’s.

John Moffatt: Thank you.

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