Industry Updates
Relationship Troubles

• Timothy Darragh
• September 2020
• 

State insurance regulators rejecting property/casualty insurers filings over strict wording regarding communicable diseases is fomenting a crisis in the industry, according to a new white paper from the American Property Casualty Insurance Association.

The paper says primary insurers are being exposed to solvency-threatening risk because regulators are ordering changes to their filings that leave them out of alignment with reinsurers' treaties.

“Reinsurance treaties are now including near-absolute communicable disease exclusions, particularly as they relate to liability protection,” wrote the authors, Dr. Robert Hartwig of the University of South Carolina and Robert Gordon, senior vice president, Policy, Research and International at the APCIA. “That means primary insurers must file similar exclusions in order to maintain consistency between the coverage they offer and the reinsurance available to them. Today, many of those filings are not being approved.

The rejection of primary company exclusions combined with the widespread adoption of such exclusions in reinsurance contracts threatens to compromise the relationship between insurers and reinsurers that has been so critical in maintaining stability in insurance markets for decades.”

The authors surveyed APCIA members anonymously in July, used anecdotal accounts from some of the 56 insurance groups that replied and spoke to insurance regulators and brokers in preparing the report, Gordon said. “The states are saying, 'We have to think this through,' but the market has moved on,” he said.

According to the authors, Lloyd's has estimated global losses from COVID-19 to the nonlife insurance industry could total $203 billion, with a “substantial share” of the underwriting losses possibly being be borne by reinsurers. That, they said, could result in “one of the largest losses in reinsurance history.”

It also could come at a time when losses from other natural catastrophes are growing. For the first six months of 2020, they said, insurers around the world sustained $27 billion in catastrophe losses, 35% higher than the average for the same period for the past 30 years.

Additionally, insurers and reinsurers face massive legal risk from thousands of lawsuits, they said.

“Confronted with the enormity of claims and litigation-driven uncertainty, reinsurers recognize they have little choice but to reaffirm the uninsurability of pandemic risk and scale back their communicable disease exposures,” they said.

“The uninsurability of pandemic risk, compounded by the certainty of protracted and costly litigation, has caused investors in insurance and reinsurance markets to retrench. In economic terms, the market has effectively begun to seize.”