By John Miklus, President, American Institute of Marine Underwriters (AIMU)
While it’s not a panacea, a vaccine for COVID-19 is expected to go a long way toward reducing the number of cases and slowing transmission of the virus. Development and testing is moving at a frenetic pace, meaning that in the not too distant future a fully-approved vaccine will need to be shipped in unprecedented volumes.
Experts predict it will take anywhere from 8,000 to 15,000 fully loaded flights to transport 20 billion doses around the world. While air is often the preferred method for shipping pharmaceuticals because of time sensitivity, it’s likely that large ocean transport companies will take on some of the load.
Once a COVID-19 vaccine is approved and manufactured, cargo insurance will be imperative to ensure speedy and safe distribution. Insurance coverage for pharma products, which encompass vaccines, is widely available and written by a number of AIMU’s member companies.
When one considers the infrastructure required to ship billions of doses from manufacturing facilities to hospitals and clinics around the world, this could be one of the biggest logistical challenges in modern history. Pharma shipments such as vaccines present a number of unique underwriting challenges, including:
High valuations: According to one industry analyst, the market for COVID vaccines is estimated at $100 billion, with $40 billion in profits. Shipping companies will handle a lot of valuable inventory and pharmaceutical companies have a lot at stake. A single shipment could be valued into the millions of dollars.
Time and temperature sensitivities: Vaccines currently under development require precise handling. Some need to be stored at temperatures as low as -80C (-112F), which will require special refrigerated containers, along with rigorous temperature monitoring and quality control.
Careful packaging and handling requirements: The vaccine will require special packaging such as cold-resistant vials and boxes to hold multiple vials. Dry ice may be required, along with syringes and protective equipment for healthcare workers administering the vaccine. Besides pharmas, the vendors who supply these products will also have skin in the game.
High theft exposure: Pharma companies plan to use everything from GPS to track their product to fake shipments to confuse criminals. One glassmaker plans to use black-light verification to prevent counterfeiting. Since the start of the pandemic, tests, masks and other gear have gone missing, so it’s not a stretch to think professional thieves and cargo theft gangs will want to get their hands on a precious and valuable vaccine.
The involvement of experienced loss prevention experts is vital to provide advice on proper packaging, proper handling and storage, setting standards and procedures for transportation providers, and recommending security measures to ensure safe delivery. AIMU member companies believe in the old saying that the best loss scenario is preventing one from ever occurring.
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.
By Loretta Worters, Vice President, Media Relations, Triple-I
Advanced Persistent Threat groups and cybercriminals are likely to continue to exploit the COVID-19 pandemic over the coming weeks and months. Weak and stolen passwords, back doors, applications vulnerabilities, malware and insider threats have been among the most common causes of data breaches in the past. But according to a recent Willis Towers Watson reportnew threats include:
Phishing, using the subject of coronavirus or COVID-19 as a lure;
Malware distribution, using coronavirus or COVID-19-themed lures;
Registration of new domain names containing wording related to coronavirus or COVID-19; and
Attacks against newly and often rapidly deployed remote access and teleworking infrastructure.
Security breaches have increased by 67% since 2014, yet businesses fail to take the proper precautions. Ransomware has become big business for “professional” criminals, crippling large and small businesses alike. But small businesses are especially attractive targets because they have information that cybercriminals want, and they typically lack the security infrastructure of larger businesses.
A remote workforce due to COVID-19 has made many organizations address issues of remote access and the need for multifactor authentication and virtual private networks (VPNs). But others – less cyber savvy— have left themselves exposed to cyberattacks.
In addition, vishing (via telephone) and smishing (via text message or WhatsApp) attacks have also increased in frequency, and in a work from home environment where colleagues and clients are increasingly connecting via mobile phones, vulnerability increases, according to a new AON Report. Short message attacks will generally seek to redirect a victim to a compromised website in order to harvest user credentials.
According to a recent survey by the Small Business Administration , 88% of small business owners felt their business was vulnerable to a cyber-attack – and that was before the pandemic. Yet many businesses can’t afford professional IT solutions, have limited time to devote to cybersecurity, or don’t know where to begin.
In observance of National Cybersecurity Awareness Month, Triple-I offers U.S. businesses these seven tips for improving their cybersecurity and averting data breaches:
Understand yourcyber risks. Businesses are vulnerable to cyberattacks through hacking, phishing, malware, and other methods.
Train Staff. Those engaged in cyberattacks find a point of entry into a business’ systems and network. A business’ exposure can be reduced by having and enforcing a computer password policy for its employees.
Keep Software Updated. Businesses should routinely check and upgrade the major software they use.
Create back-up files and store off-site. A business’ files should be backed up either as an external hard drive or on a separate cloud account. Taking these steps are vital to data recovery and the prevention of ransomware. Ransomware is when a cyberattack results in a situation where a business is asked to pay a fee to regain access to its own data.
While ridiculous sounding lawsuits are common in our litigious society, some stand out because they sound so preposterous they could have been the plot of a “Seinfeld” episode.
For example, in 2019 an infamous Long Island attorney nicknamed the “Vanilla Vigilante,” sued Whole Foods for $5 million, claiming the store’s vanilla soy milk is flavored with ingredients in addition to vanilla. The American Tort Reform Association (ATRA) highlights this case and others as part of Lawsuit Abuse Awareness Week (October 5-9).
Food disappointments appear to be a common theme among these suits:
A December 2019 complaint filed in federal court alleged a Panera blueberry bagel purchased in Manhattan didn’t contain blueberries but “dyed lumps.” The complaint argues that the bagel’s advertising breached the New York Deceptive and Unfair Trade Practices law, among others.
A May 2020 lawsuit contends that Haagen-Dasz milk chocolate coated ice cream bars should be labeled as milk chocolate and vegetable oil coated chocolate bars. The company says vegetable oil is used as an ingredient to help overcome the difficulties of applying a coating of chocolate to ice cream; the oil is not otherwise included in milk chocolate.
A June 2020 lawsuit against a snack food manufacturer alleges the “potato skin snacks” do not contain potato skins but potato starch and potato flakes.
Such cases are fun to laugh about, but increasing willingness of plaintiffs to bring suits of all kinds – and of juries to pay out large settlements, known as “nuclear verdicts” – feeds the phenomenon of social inflation, which drives up claims costs for insurers and premiums for policyholders.
ATRA warns that a wave of such lawsuits is expected against businesses as they reopen during the ongoing COVID-19 pandemic.
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.
During the last week in September, Universal Health Services Inc., one of the largest hospital chains in the United States, began taking some ambulances out of service because of disruptions caused by a ransomware attack. Universal said no patients were harmed, but systems that support medical records, laboratories and pharmacies were taken offline at approximately 250 facilities.
This incident is part of a disturbing trend of healthcare institutions being targeted by ransomware attacks as the software used by hackers becomes more sophisticated and their attacks broader.
While cyber insurance claims impacted businesses of all types and sizes certain industries, including consumer businesses (retail, hospitality and food), healthcare and financial services were more frequent targets of cyberattacks in the first half of 2020, according to a recent report by Coalition, a provider of cyber insurance.
Overall, ransomware (41 percent), funds transfer loss (27 percent), and business email compromise incidents (19 percent) were the most frequent types of loss—accounting for 87 percent of reported incidents and 84 percent of claims paid in the first half of 2020.
“We’ve seen a sharp increase in ransom demands over the past quarter as threat actors have exploited COVID-19 and changes in company operating procedures. Although the frequency of ransomware claims has decreased by 18 percent from 2019 into the first half of 2020, we’ve observed a dramatic increase in the severity of these attacks,” said the Coalition report.
Since email is the single most targeted point of entry for a hacker, taking a few basic email security measures and implementing an anti-phishing solution would go a long way toward securing your business from criminals.
Coalition reports that, for each claim processed, cyber insurance played a critical role in helping the insured recover operationally. For example, a nonprofit organization providing child and family services grants to other nonprofits was duped into transferring $1.3 million to criminals. Coalition worked with law enforcement and the financial institutions involved to recover the stolen funds.
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’.”
September is National Preparedness Month, and this years’ theme of “Disasters Don’t Wait. Make Your Plan Today” could not be more timely as many areas of the country experience record-breaking wildfires and storms.
The webinar showcased two small businesses’ stories of preparation and recovery from disaster. The webinar also covered small business loans that are available after a disaster, tools are available to help businesses prepare, and what you need to know about insurance coverage.
Alex Contreras, Director of the Office of Preparedness, Communication and Coordination in the SBA’s Office of Disaster Assistance (ODA), was the first speaker. The SBA offers low-interest disaster loans to businesses of all sizes, as well as to homeowners and renters. These loans are the primary source of federal assistance to help private property owners pay for disaster losses not covered by insurance. Borrowers are required to obtain and maintain appropriate insurance as a condition of most loans.
The SBA can also fund disaster mitigation efforts, such as installing fire-rated roofs, elevating structures to protect from flooding or relocating out of flood zones.
Janice Jucker, co-owner at Three Brothers Bakery in Houston, TX is the 2018 Phoenix Award Winner for Outstanding Small Business Disaster Recovery. After Hurricane Harvey, the bakery had five feet of water. Thanks to a business recovery plan, the business was fully operational after six weeks.
According to Jucker, part of an effective recovery plan is building a recovery team that includes a restoration company (find one now, don’t wait) an accountant, a contractor, an SBA loan officer and an insurance agent. Another important recovery team member is your local lawmaker – know who they are and make sure they know you, regardless of whether you agree with their politics. They can play a key part in making sure you get what you need to recover from a disaster.
Gail Moraton, business resiliency manager at IBHS, talked about the free business continuity planning tool called OFB-EZ (Open for Business E-Z) available from the IBHS. The first step to planning is to know your risk – both the likelihood of each type of disaster for your location and the amount of damage it could cause your business. Another step is having an up-to-date list of all your employees, vendors and other important contacts. A training exercise is also included with the planning tool.
Alison Bishop, internal operations manager at Spry Health Inc., talked about her company’s use of OFB-EZ. “It takes an overwhelming concept and makes it accessible and achievable,” she said.
Loretta Worters – vice president, media relations at Triple-I, went over different business insurance coverages that are available and pointed out that having the right coverage is a crucial part of disaster recovery, as well as an essential element of an overall business plan.
Like the other speakers, Ms. Worters said having a thorough inventory of all your business assets is of paramount importance. She listed different types of business policies that are available, including: property, business income interruption, extra expense, flood and civil authority. Separate coverage is also available for items that are frequently damaged in a storm, such as fences and awnings.
Click here to listen to a recording of the webinar, which offers many more useful tips for seeing your business through a disaster.
Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.
Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill.
Not as much as you think
But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.
Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.
Call it $400 billion, for simplicity’s sake.
Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.
By extension, $400 billion is where alarms begin going off for the entire industry.
It gets worse – or better, depending on your perspective.
In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve.
Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels.
So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.
To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.
Which brings us to today.
Losses ordinary and extraordinary
In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.
Nevertheless, the industry remains financially strong, in large part because the bulk of insurers’ investments are in investment-grade corporate and governmental bonds. And it’s a good thing, too, because the conditions underlying that surplus decline preceded an extremely active hurricane season, atypical wildfire activity, and damages related to civil unrest approaching levels not seen since 1992 – involving losses that are not yet reflected in the surplus.
Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.
And the Atlantic hurricane season has not yet peaked.
The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.
In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.
And the 2020 wildfire season still has a way to go.
All this is on top of routine claims for property and casualty losses.
Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.
No end in sight
Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease.
If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.
This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.
Fortunately, Americans seem to be beginning to get this. A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.
The Financial Conduct Authority (FCA), which regulates insurers in the United Kingdom, has indicated that it doesn’t believe COVID-19-related losses trigger most business insurance policies because such policies typically require a direct connection between financial loss and physical damage to the insured property.
Think fire, flood, wind, or earthquake damage.
The FCA is now litigating a test case involving policies of eight insurers that don’t require property damage to trigger coverage (Hear a three-minute explainer from the Centers for Better Insurance).
Is this case relevant to U.S. property/casualty insurers? It depends on whom you ask.
The FCA is looking at 17 policy wordings from the eight insurers and asking whether COVID-19 triggers a payout. Based on other policies the regulator has studied, the Financial Times reports, the court’s ruling are “expected to apply to nearly 50 insurers, who sold coverage to 370,000 customers.”
Senior executives from specialist insurance and reinsurance underwriter Hiscox Group warned that the FCA’s eventual findings could drive additional COVID-19 losses to its reinsurance book, Artemis reports.
Tom Baker – an expert in insurance law and policy at the University of Pennsylvania – called the U.K. case a “one-way ratchet” for U.S. insurers.
“If the carriers lose or end up having a lot of coverage, that’s going to be bad for them here” in the United States, Baker said. “I think if the carriers win, the insurance policies [in the U.K.] are really different. They tend to be named-peril, rather than all-risks policies. I think it will be easy to distinguish them.”
Jason Schupp, founder and managing member of Centers for Better Insurance, disagrees that an adverse ruling for U.K. insurers will have much of an effect on their U.S. counterparts.
“In Europe, [FCA] authorization to provide miscellaneous financial loss insurance allows an insurance company to write business interruption insurance that does not require evidence of property damage” to pay a claim, Schupp says. Even though the United Kingdom is no longer part of the European Union, Schupp says, “U.K. law itself recognizes the miscellaneous financial loss class of insurance.”
What does this mean for pandemic business interruption coverage in the United States? Not much, according to Schupp.
“The outcome of the U.K. litigation is unlikely to be relevant to the dozens – or perhaps hundreds – of business interruption lawsuits making their way through U.S. courts, where the property damage question is front and center,” Schupp says.
He goes on to say that proposals coming out of Europe or the U.K. for pandemic insurance going forward – such as a Lloyd’s framework – contemplate non-property-damage business interruption insurance solutions…. These proposals do not appear compatible with the current U.S. insurance regulatory system.”
A ruling by the FCA is expected in mid-September. Last week, the regulatory body said that, while the case doesn’t address how any resulting claims payments would be calculated, “We may intervene and take further actions where firms do not appear to be meeting our expectations and treating their customers fairly.”
