A North Carolina court has ruled that Cincinnati Insurance Co. must pay 16 restaurants’ claims for business income (interruption) losses due to government-ordered COVID-19 shutdowns – a decision that runs counter to those of most judges who’ve ruled on similar cases.
As hundreds of COVID-19-related lawsuits regarding business interruption coverage make their way through U.S. courts, judge after judge has found in favor of insurer defendants. The central point has been that coverage depends – as specified in the insurance policies – on the policyholder suffering a “direct physical loss.”
“Business income (interruption) policies generally reimburse a business owner for lost profits and continuing fixed expenses when its facilities are closed due to direct physical damage from a covered loss, such as a fire, a riot, or a windstorm,” said Triple-I CEO Sean Kevelighan. “Insurers have been prevailing nationwide in nearly all of the litigated COVID-19 BI lawsuits because, as North Carolina’s Insurance Commissioner has noted, ‘Standard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses.’ ”
“Policy language controls whether COVID-19 interruptions are covered,” said Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I Non-Resident Scholar. “The threshold issue will be whether the insureds can prove their business losses are caused by ‘physical damage to property’.”
Cincinnati Insurance has said it plans to appeal the ruling.
Policyholder dividends have more than tripled so far this year, due largely to approximately $14 billion auto insurers have returned to policyholders in response to reduced driving and fewer accident claims related to the COVID-19 pandemic.
According to National Association of Insurance Commissioners (NAIC) data from Standard & Poor’s Global Market Intelligence, insurers issued $4.8 billion through the second quarter of 2020, almost $3.4 billion more than the same period a year ago. The bulk of that, $3.3 billion, is a result of pandemic-related driving patterns.
Insurers in the first half also booked $4.7 billion in credits through lower rates, and another $1.6 billion was booked as an underwriting expense, according to a Triple-I analysis of industry results.
In the second half of the year, Triple-I projects, insurers will return to customers another $338 million in dividends. Rate decreases of $4.1 billion will make up the remainder of the $14 billion in givebacks.
State Farm, the country’s largest auto insurer by premiums written, in April announced a $2 billion dividend to its auto insurance customers, averaging a 25 percent credit on these customers’ premiums through May 31. Combined with the premium credit and an 11 percent reduction in premium rates, the company said, these initiatives will save customers $4.2 billion through the end of 2020.
USAA, through a series of three dividend announcements, has returned $1.07 billion to auto policyholders and said it also is adjusting its rates.
On top of these, the industry has provided approximately $280 millionin charitable giving specifically related to the pandemic.
Recent advisories from two U.S. Treasury agencies – the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) – indicating that companies paying ransom or facilitating such payments to cyber extortionists could be subject to federal penalties are a reminder of the importance of good cyber hygiene.
The notices also underscore businesses’ need to consult with knowledgeable, reputable professionals long before a ransomware attack occurs and before making any payments.
Ransomware on the rise
In a ransomware attack, hackers use software to block access to the victim’s own data and demand payment (usually in Bitcoin or another cryptocurrency) to regain access. It has been a growing problem in recent years, and such attacks have intensified since the COVID-19 pandemic has led to many people working from home for the first time.
The FBI warns against paying ransoms, but studies have shown that business leaders today pay a lot in the hope of getting their data back. An IBM survey of 600 U.S. business leaders found that 70% had paid a ransom to regain access to their business files. Of the companies responding, nearly half have paid more than $10,000, and 20% of them paid more than $40,000.
Sanctioned entities
The OFAC advisory specifically targets transactions benefiting individuals or entities on OFAC’s Specially Designated Nationals and Blocked Persons List, other blocked persons, and those covered by comprehensive country or region embargoes (e.g., Cuba, the Crimea region of Ukraine, Iran, North Korea, and Syria).
“Companies should rely on experts to assist with their due diligence and work with the FBI,” writes law firm BakerHostetler in a recent blog post. “Experience in incident response is key, and your counsel should be an informed, confident partner as you navigate this rapidly evolving area.”
“Before a payment is made,” the law firm writes, “a company generally retains a third party to conduct due diligence to ensure that the payment isn’t being made to a sanctioned organization or a group reasonably suspected of being tied to a sanctioned organization. Additionally, checks are in place to ensure that anti-money laundering laws are not being violated.”
Many insurers are working with their clients to put such practices in place and taking a variety of other steps to address the threat of ransomware attacks. Cyber-insurance premiums started rising 5% to 25% late last year, according to Robert Parisi, U.S. cyber product leader at insurance broker Marsh & McLennan. Parisi called the increases “dramatic” but said insurers have not scaled back coverage.
Marsh has issued a client advisory — What OFAC’s Ransomware Advisory Means for US Companies — explaining what U.S. businesses need to know about the OFAC advisory and the importance of completing an OFAC review before payment of ransom demands. Marsh’s advisory also makes recommendations for re-assessing ransom incident response plans, mitigating ransomware risk, and preparation for and recovery from ransomware and cyber extortion attacks.
Dan and Ben, ready for a safety-conscious Halloween last year.
My five-year-old nephew, Ben, is a great source of pride to his electrician father, Dan. Last Halloween, Ben refused to trick-or-treat at a particular house because he noticed that the decorations there were a fire hazard.
Halloween is supposed to be fun, but it has always involved risks and potential liabilities. The video below outlines some of the “traditional” hazards and ways to mitigate them, from eliminating trip-and-fall dangers to preventing fire and pet-related perils.
And while much of the focus of Halloween-risk mitigation is on the home, Donald R. Grady, a Boston personal injury attorney, says the biggest dangers actually involve cars.
“You see an uptick in automobile accidents,” Grady says. “Especially with teenagers, who don’t have adults with them and who rush from house to house.”
The curse of 2020
2020 has aged us all….
Perhaps predictably by now, 2020 has brought the spooky holiday threats of its own. COVID-19 has introduced new Halloween concerns.
The Centers for Disease Control and Prevention (CDC) has published a list of low-, moderate-, and high-risk Halloween activities for a time of pandemic.
Lower-risk activities include:
Carving or decorating pumpkins with members of your household and displaying them
Carving or decorating pumpkins outside, at a safe distance, with neighbors or friends
Decorating your house, apartment, or living space
Having a virtual Halloween costume contest
Having a Halloween movie night with people you live with.
Moderate-risk activities include:
Participating in one-way trick-or-treating, where individually wrapped goodie bags are lined up for families to grab and go while continuing to social distance
Having a small group, outdoor, open-air costume parade with people distanced more than 6 feet apart
Attending a costume party held outdoors, where protective masks are used and people can remain more than 6 feet apart.
The CDC provides caveats and additional guidance for these and other moderate-risk activities, so if you’re even thinking about them, definitely read the relevant guidance. It advises against the following:
Traditional trick-or-treating where treats are handed to children who go door to door
“Trunk-or-treat,” where treats are handed out from trunks of cars lined up in large parking lots
Attending crowded costume parties held indoors
Going to an indoor haunted house where people may be crowded together and screaming
Going on hayrides or tractor rides with people who are not in your household
Using alcohol or drugs, which can cloud judgement and increase risky behaviors
Traveling to a rural fall festival that is not in your community if you live in an area with community spread of COVID-19.
Dr. Steven N. Weisbart, CLU, Triple-I Senior Vice President and Chief Economist
COVID-19 pandemic has not only disrupted our economy – it has complicated the data we routinely use to understand economic developments. This is a bit like finding out the thermometer you use to tell if you have a fever is unreliable.
Here are two examples of why it’s hard to know what’s happening.
What is the correct unemployment rate?
The April 2020 Bureau of Labor Statistics (BLS) employment report said the U-3 rate – just one of six unemployment measures BLS reports – was 14.75 percent. This number is derived by dividing the number of people counted as unemployed (23.078 million) by the civilian labor force (156.481 million), which is everyone who is either working or unemployed and looking for work.
But when the virus was recognized as a major public health threat in mid-March and April and many businesses and organizations were shut down, throwing many millions out of work, some who were affected decided to retire. This means they were no longer counted as part of the civilian labor force. This is most vividly seen by comparing the civilian labor force in February (164.6 million) with its count in April (156.5 million)—a drop of 8.1 million.
The large number of retirees affected the unemployment rate: if they had not retired, most would likely have been counted as unemployed. To keep the math in our example simple, let’s say 7 million of the retirees had remained in the labor force and been counted as unemployed (maybe the other 1 million would have retired then anyway—virus or no virus). The unemployment count would have been 30 million (23 million counted plus 7 million un-retirees) and the civilian labor force would have been 163.5 million (156.5 counted plus 7 million un-retirees).
The unemployment rate would have been announced as 30 million divided by 163.5 million, or 18.35 percent, instead of 14.75 percent.
So, which one is correct?
Are seasonal adjustments still correct?
Macroeconomists have long recognized that many economic data have seasonal patterns. For example, retail sales often spike in the last quarter of the year because of the holidays. Sales for some items, such as those bought for “back to school,” spike at other times. So, to see what’s really happening, economic data are often adjusted to account for the seasonal effects and reported after these adjustments are made.
To see the effect of seasonal adjustments, look at the following two graphs. The first is employment in the construction industry that is not seasonally adjusted. The second is the same industry and time; the only difference is that its data are seasonally adjusted.
Construction employment obviously dips in the cold months, and the drop shown in the first graph doesn’t represent any significant economic change, so the seasonal adjustment in the lower graph lets us see only changes beyond the seasonal adjustment, such as what happened in 2020.
The problem, from an economic analysis viewpoint, is that the amount of seasonal adjusting to apply is a judgment call, and it is often based on a historical period in which conditions were much as they are now. But what’s happening now has no satisfactory historical precedent.
So should we keep using the seasonal adjustment factors from before, or do they not apply to the current economic situation?
These are just two examples of datasets or analytical approaches whose relevance can be called into question in light of COVID-19 – further complicating the already complex and nuanced endeavor of attempting to understand and anticipate economic developments.
Commercial insurance loss estimates related to the COVID-19 pandemic vary widely, with Lloyd’s estimating global claims as high as $107 billion in 2020 and analysts from investment bank Berenberg projecting total claims between $50 billion and $70 billion.
But a new Allianz paper says the unprecedented size of pandemic-related claims is only part of the story. The paper discusses the changes in loss patterns and causes spurred by the pandemic that “may be the prologue to more far-reaching and disruptive changes in years to come.”
Shifting exposures
The pandemic has reduced risk in some areas while heightening it in others. The paper points to “material reductions [in claims] in some lines of property and liability insurance, most notably in the aviation sector.”
Reliance on technology and the shift to homeworking for staff and remote monitoring of industrial facilities make companies more vulnerable to cyber-attacks. Reduced air travel and increased emphasis on hygiene standards could benefit the risk profile of many industries, while changes in production line processes to facilitate social distancing could increase error rates.
According to Allianz, the cost of business interruption not related to COVID-19 fell in many cases as many manufacturers, their customers, and their suppliers either shut down or scaled back operations. On the other hand, COVID-19 containment measures have led to longer disruptions and more costly claims in some cases.
“For example, a fire at a chemical plant in South Korea forced the closure of the facility,” Allianz reports. “Restricted access due to the coronavirus lockdown prolonged the reinstatement period, increasing the overall cost of the standstill.”
The hibernation of some industries, such as aviation, doesn’t mean all loss exposures have equally disappeared, Allianz says. They’ve just changed, creating new risk accumulations: “For example, large parts of the worldwide fleet are grounded in airports, many of which might be exposed to hurricanes, tornados, or hailstorms. The risk of shunting or ground incidents, when large aircraft fleets are parked temporarily, also increases and can result in costly claims.”
Business resumption brings its own risks. Opening factories and restarting production lines are high-stress situations that can involve machinery breakdowns and fires.
Eye on supply chains
Allianz points to “the current rethinking and de-risking of global supply chains to achieve more operational resilience” as a trend to watch.
“Many companies are reviewing their supply chain strategies and evaluating options such as parallel supply chains with more redundancies or some reshoring from low-cost countries back to more developed markets,” Allianz says. “This will have an important impact for insurers, both in terms of generating demand for new protection solutions, as well as new claims scenarios.”
Potential also exists for claims to materialize from long-tail lines, such as directors and officers (D&O) or professional liability, as well as workers’ compensation, if any negligence or failures to adequately protect against the coronavirus outbreak have been perceived.
As wildfires continue to burn in California, Oregon, Colorado, and elsewhere – and people pray for precipitation to help firefighters in their efforts – another threat looms: mudslides.
Wet weather is in Oregon’s forecast, and the Marion County Sheriff’s Office warned that mudslides and falling trees will be a big concern with so much burned land in the county. Areas that could be seriously affected include Mill City and Gates, where much of the towns have been destroyed by wildfires.
The sheriff’s office said people need to pay attention to what happens around them and listen to alerts from local authorities.
“We’re really concerned about as those high winds pick up, some of those coming down and creating more hazards along the roadway, more than we would see in a typical windstorm,” Sgt. Jeremy Landers with the Marion County Sheriff’s Office said.
He added that it’s important that people have a plan in place in case the weather becomes dangerous.
Santa Cruz County, Calif., also is preparing for mudslides in the aftermath of the CZU Lighting Complex fire in August. Carolyn Burke, senior civil engineer, said during a special meeting of the Santa Cruz County Board of Supervisors, “The only effective means of protection” is early warning and evacuation.
The fire in the Santa Cruz Mountains burned 86,509 acres – and while Cal Fire on September 22 said it was 100% contained, risk remains of fires igniting and the subsequent danger of mudslides when rain comes. Rainy season there has a history of starting from September to November.
In Colorado, cooler temperatures, rain, and snow have helped suppress the fires that have been raging across that state. Alaska Incident Management Team Incident Commander Norm McDonald wrote, regarding his team’s work on the Grizzly Creek Fire, “While our assignment ends with the Grizzly Creek Fire at 91% containment, we realize there is still much work to be done and the ramifications of this fire will be long-lived with the potential for mudslides and flooding.”
Mudslides occur when a mass of earth or rock moves downhill, propelled by gravity. They typically don’t contain enough liquid to seep into your home, and they aren’t eligible for flood insurance coverage. In fact, mudslides are not covered by any policy.
Mudflow is covered by flood insurance, which is available from FEMA’s National Flood Insurance Program (NFIP) and a growing number of private insurers. Like flood, mudflow is excluded from standard homeowners and business insurance policies—you must buy the coverage separately.
Between June and August, the CDC says, COVID-19 was most prevalent in people between the ages of 20 and 29.
The Centers for Disease Control and Prevention this week provided new data on the spread of COVID-19 that diverges sharply from past reports and is something health and workers compensation insurance providers will want to incorporate into their claims projections.
In its Morbidity and Mortality Weekly Report, the CDC says that between June and August the virus was most prevalent in people between the ages of 20 and 29, accounting for more than 20 percent of all confirmed cases. It went on to say that “across the southern United States in June 2020, increases in percentage of positive [COVID-19] test results among adults aged 20-39 years preceded increases among those aged ≥60 years” by between four and 15 days.
Most of the workforce
“This has profound implications for claims made against health insurance and workers comp,” says Dr. Steven N. Weisbart, CLU, Triple-I’s senior vice president and chief economist. “Early in the pandemic, COVID-19 was most common among adults age 70 or older – people who are mostly retired. Now, the CDC says, more than 50 percent of confirmed cases during the referenced period were among people between 20 and 49. This is the segment of the population that makes up most of the workforce and tends to have health and life insurance.”
They also are the most mobile portion of the population, more likely than the elderly and infirm to spread the infection to co-workers, friends, and family before they know they have it.
Indicating how significant the shift has been, Weisbart points out that in May the most affected age group was still 80 and older, with a case incidence of 4.04 per 1,000 population. In August the most affected age group was 20-29 (case incidence: 4.17 per 1,000).
“By August,” Weisbart says, “the case incidence of the 80-plus group was down to 2.61 per 1,000.”
Expanded workers comp coverage
The ultimate impact of the pandemic on workers compensation is still not clear. It generally doesn’t cover illnesses like a cold or flu because they can’t be tied to the workplace. Before the pandemic, the National Council on Compensation Insurance (NCCI) says, at least 18 states had policies that presumed firefighters’ and other first responders’ chronic lung or respiratory illnesses are work-related and therefore covered.
Since the pandemic, some states have extended coverage to include health care workers and other essential employees. A common approach is to amend state policy so COVID-19 infections in certain workers are presumed to be work related. This puts the burden on the employer and insurer to prove the infection was not work-related, making it easier for workers to file successful claims.
Dr. Steven N. Weisbart, CLU, Triple-I Senior Vice President and Chief Economist
“The FOMC’s action will likely keep longer-term rates exceptionally low for several years more.”
The Federal Open Market Committee (FOMC) of the Federal Reserve Board recently spelled out its objectives and strategies for at least the next several years—describing a financial framework they will maintain longer than the timeframe they typically describe. The length and parameters of this framework will have significant impact on the property/casualty industry.
The FOMC says it will hold short-term interest rates near zero, likely for several years—perhaps to 2023, quite possibly longer. Insurers don’t invest much in short-term instruments – to the extent that they do, it’s to have cash available to pay claims. They primarily invest in intermediate- and longer-term bonds and similar fixed-rate interest-paying instruments that provide steady income, which, together with premiums, covers claims and operating expenses. Insurers raise and lower premiums – partly in response to changes in investment income – to sustain profitable operations.
Because yields on these investments generally track short-term rates, the FOMC’s action will likely keep longer-term rates exceptionally low for several years more.
One signpost the Fed will use to decide when to raise rates is when inflation, as measured by the Personal Consumption Expenditure (PCE) deflator, is sustained at over 2 percent such that the average inflation rate including recent years equals 2 percent. To appreciate what this means, consider Figure 1.It shows that, since 2012, the PCE deflator has been below 2% (vs. same month, prior year) most of the time. The average over this span was 1.40%. But the Fed might not go back that far to calculate its long-run average. For example, since 2017 the PCE deflator averaged 1.69%. If the deflator averages 2.4% from now through 2023, the average from 2017 through 2023 will be 2.01%.
Figure 1
Rates falling since the 1980s
Based on the FOMC’s new framework, intermediate- and longer-term interest rates will, at best, remain at their current historically depressed levels for several years. One consequence of this is that bonds insurers hold to maturity and roll over will be reinvested at lower rates than they currently yield.
Prevailing interest rates have been generally falling since the early 1980s. Figure 2 shows this decline since 2002, as proxied by the yield on constant-maturity 10-year U.S. Treasury notes (the blue line), and its effect on the portfolio yield for the P/C insurance industry over the last two decades (the gold bars).
Figure 2
P/C insurers invest mainly in bonds, but not just U.S. Treasury securities. They also invest in corporate and municipal bonds, both of which generally yield higher rates than U.S. Treasury bonds because they are riskier. Yields on corporate and municipal bonds will likely loosely track Treasury yields.
P/C insurers also receive investment income from dividends on common and preferred stock they hold. These dividends are likely to be affected by corporate profits, which might be depressed for at least as long as the current recession lasts.
A shift to shorter maturities?
How will the insurers respond to these persistent conditions? If recent behavior is any guide, they are likely to shift to shorter-maturity bonds to retain the flexibility to switch back to longer-term, higher-yielding investments when rates eventually rise again. Figure 3 shows this pattern of shortening maturities during the years since 2009 as prevailing rates fell. From 2009 to 2019, the percent of bonds with one-to-five-year maturities rose from 36% to 41%, but those with 10 or more years of maturity fell from 19% to 11%.
Figure 3
What’s notable about this strategy is that – since shorter-term bonds yield less than longer-term bonds – the shift results in an even lower portfolio yield than the industry would have achieved if maturities were unchanged over this time span. It sacrifices near-term opportunities for the flexibility to eventually seize longer-term gains.
If the insurers continue this strategy, the shift to shorter-term bonds, combined with continued low interest rates, could lead to a scenario over the next five years that looks like Figure 4, which includes 2015-2019 yields for historical context.
Figure 4
Of course, future portfolio yields might be different from this scenario. For example, insurers might realize significant capital gains or losses. The portfolio yield in 2012, for example, was nearly two percentage points above the U.S. Treasury 10-year yield that year due to realized capital gains.
On the other hand, if interest rates rise, low-yielding bonds that are available for sale would suffer unrealized capital losses, which would be a direct reduction in policyholder’s surplus.
In a typical year the industry posts capital gains of $5 billion to $10 billion, but any number outside this range would affect the portfolio yield for that year. Capital losses also could result from investments affected by bankruptcies or other business setbacks caused by the recession. Impaired bonds would have to be accounted for on the balance sheet.
The U.K. High Court last week issued a ruling involving business-interruption claims against policies issued by eight insurers. Jason Schupp of the Centers for Better Insurance says the ruling is a “mixed bag” for U.K. insurers and policyholders and has little relevance for their U.S. counterparts.
In the U.K. case, Schupp writes, “the fundamental theme running through the insurers’ defense was that the policies only covered localized outbreaks, not global pandemics.”
“More to the point for U.S. property/casualty insurers,” says Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I non-resident scholar, the U.K. case involved disease coverage – “an affirmative coverage not included in most U.S. commercial property policies.”
U.S. business interruption disputes so far have turned on two key policy features:
U.S. business-interruption coverage almost always requires property damage to trigger a payout.
Nearly all U.S. COVID-19-related court cases have involved policies that specifically exclude viruses.
“The U.K. court did not address either the question of property damage or the applicability of a virus exclusion,” Schupp writes.
As Menapace put it in a recent blog post about U.S. business-interruption cases, “Policy language controls whether COVID-19 interruptions are covered…. The threshold issue [for U.S. insurers] will be whether the insureds can prove their business losses are caused by ‘physical damage to property’.”
