2020’s impact on the events & insurance industries and what to expect for the rest of 2021
2020 was a hell of a year. Everything in our lives was turned upside down from our jobs to our shopping habits, our social calendars to our accessories and everything in between. Entire industries were forced to adapt and embrace change; the insurance sector was no exception.
When we think of insurance, we think of stability. It’s the thing that we expect to be there to help us get back on our feet when something goes wrong, so the proceeding pandemic and subsequent losses in 2020 probably came as a shock to even the most conservative insurers in the industry.
We’re talking billions of dollars in losses
Businesses were forced to close, non-essential travel was banned, live events became a distant memory and governments implemented lockdowns and curfews that brought businesses to their knees. Many insurance companies are now facing claims that rival some of the most devastating events in our history.
Back in May, Lloyd’s, the reinsurance market epicentre for the world, revealed that it will pay out in the range of $3bn to $4.3bn to its global customers as a result of the far-reaching impacts of COVID-19’...and that was only May! The magnitude of the effect of the pandemic at that time was comparable to that of the terror attacks on 9/11. 8 months later and the pandemic is still raging on. It’s safe to say that liability claims will only continue to increase as they take time to mature and could continue to crop up over a number of years.
The losses in the primary insurance market are now also being felt by reinsurers. For those unfamiliar with the term, reinsurance is defined as ‘the practice whereby insurers transfer portions of their risk portfolios to other parties (reinsurers) to reduce their risk of paying large insurance obligations.’ In late September, Beazley announced they expect to receive claims totalling around $340 million, double what they had originally anticipated. This revised estimate assumes the events industry returns to some semblance of normality by the second half of 2021. Even this forecast remains highly uncertain as many claims are most likely to be long-tailed and it could take several months (or even years) until the sum total of losses is determined.
Contingency cover is yet another piece of the billion dollar puzzle. Just as the name indicates, this protection is for risks that aren’t necessarily standard insurance offerings, such as event cancellation. Since almost all events have been postponed or cancelled since Q2 2020 and many businesses have been inoperable for nearly a year, Lloyd’s Covid-19 contingency business class is predicted to account for 31% of total losses, the largest contributing market sector. Geographically speaking, the USA stands to suffer the largest losses at 40%, with the UK and Europe coming in second and third at 15% and 7% respectively.
Need a few specifics?
There are several significant events, namely Wimbledon and the Tokyo Olympics, that account for particularly substantial losses. Prior to the official announcement that the 2020 Olympics would be postponed, reports indicated that Swiss Re faced up to $250 million in losses if the event was cancelled due to Covid-19. While not completely off the hook, as the Olympics have merely been postponed instead of outright cancelled, the pay-out from the insurer stands to be lower since some losses will be recouped once the games do actually take place.
Wimbledon on the other hand is a particularly interesting example to highlight. Following the SARS outbreak in 2003, the tournament began purchasing pandemic insurance for a whopping ~$1.9 million annually. Over 17 years, Wimbledon has paid out approximately $31.7 million in premiums; however, because of their conservative approach, they are set to receive $142 million in restitution for this year’s cancellation...it’s safe to say, it was worth every penny.
Now, let’s talk about insurance companies
The pandemic caught everyone off guard and resulted in insurers merely reacting to the crisis for the better part of the first half of 2020. The second half of the year we saw a bit more of a proactive approach through 3 main offensive and defensive actions intended to jumpstart the industry’s recovery:
1. Raising Capital
- Insurers attempted to shore up their balance sheets in the face of mounting claims by raising additional capital.
Ex. Aon raised $23.6 billion in 2020; Beazley has successfully raised around $300 million; and global reinsurance capital levels returned to their pre-pandemic high at $625 billion by the end of September 2020
2. Exiting Products
- We saw more than one example of companies off-loading their riskier insurance offerings. They also reduced coverage by adding exclusions (to explicitly exclude coronavirus) to existing products.
Ex. Munich Re has eliminated their event cancellation cover for pandemics
3. Raising Prices
- Insurance premiums went up...a lot.
Ex. Event cancellation coverage is up 35-150%.
It’s no secret that insurance policy wording can be unclear with complex exclusions or difficult to spot clauses that are often overlooked (if you missed our post back in October, you can read more here). Many claims made for business interruption cover due to COVID-19 were not paid out to policyholders that thought they had been prudent and took out the necessary coverage to protect their investment. Insurers however had a difference of opinion, maintaining their policy wording contained pandemic exclusions. In early January 2021, after a lengthy battle, the UK Supreme Court sided with business interruption policyholders. This ruling will now see policyholders compensated by their carriers for lost revenues over the period their business operations were suspended. Despite the outcome, the negative reputational damage to the industry is going to mean insurers will have to put a special focus on rebuilding customer trust in 2021. Improving the clarity of coverage and addressing claims quickly are a likely response of this ruling.
More, More, More
With vaccine distribution well underway, the outlook for the return of live events in 2021 is already better than last year. Major events are announcing dates for Q3 / Q4 and the overwhelming consensus is that, barring any major complications, we can expect to be back in action (knock on wood) by August. Even so, many event goers may have reservations about diving straight back into the mosh pits and cramming in shoulder to shoulder with screaming strangers. We expect to see higher demand for small and medium sized events. Not only will people presumably be more comfortable attending these types of events but the health and safety plans will be easier to implement, crowd control will be less complicated and any outbreak will have a smaller impact. In other words, they’re less risky. (We talked a bit about this here.)
Hand-in-hand with increased demand for events, the proportional demand for event cancellation insurance is also expected to increase. Many companies had to learn the hard way and will not make that mistake again, especially considering the lingering uncertainty. At the start of the pandemic, many event organizers rushed out to buy insurance while the governments were closing borders and implementing regulations but that’s comparable to attempting to buy property insurance when your house is already on fire.
Demand is great, but many insurers have been tentative to offer event cancellation insurance under the current circumstances. We’ve talked a lot about the calls for government intervention and countries like the US, the UK and Germany have already created funds to help financially reinsure in the event of a COVID related cancellation for events in 2021. So now that carriers in these markets have the backing to provide cover, here comes the fun part: How will companies be able to access those funds? Will there be any requirements that must be met to claim? They could conceivably require event organizers to:
- Require attendees to be vaccinated or provide negative COVID tests,
- Prepare improved event safety and hygiene protocols,
- Conduct health screenings (for public indemnity) before entering an event, etc.
Even beyond the logistics, many questions still remain. Not least of all, what are the long term implications of the pandemic on event cancellation coverage and without continued government intervention, how will event organizers obtain it in the future? What about hybrid events? Event industry trends imply an increase in virtual offerings, will cyber risk become a standard part of the insurance offering?
While we can’t claim to have the answers to these questions, we feel confident in the assumption that more in-person events will be taking place outdoors. Because of the nature of COVID and what we know about how it spreads, open air events are viewed as significantly less risky. We sure hope event organizers have adverse weather extensions included in their insurance policies. Climate change didn’t take a break just because we’re too busy dealing with a global pandemic.
And back to insurance
Following the losses impacting portfolios in 2020, contingency has entered a hard market with carriers exiting some of these lines of business (Swiss Re & Chubb) and as a result, a significant reduction in availability. In addition, the fears of a global recession, vaccine rollouts and uncertainty regarding the state of the events industry further reduce the already dwindling supply. The fallout of fewer carriers and greater risk will likely lead to rate increases for contingent lines and tighter policy wordings.
The rejection of COVID claims created a greater divergence in predicted vs actual loss ratios. Unplanned losses and the aforementioned reputational damage has shifted the focus to improving the customer experience. According to PwC’s 23rd Annual Global CEO Survey Report, 70% of insurance CEOs intend to take necessary steps to adjust their industry perception and regain customer trust throughout 2021.
Insurance is no stranger to market shocks having survived wars, catastrophic weather events and major terror attacks, with a resilience that has allowed the industry to bounce back time and again. The suitable capitalization for stress events is a result of this disaster experience and the reason we don’t see major insurers going bust or taking bailouts like banks were forced to do back in 2008. Not only are insurers well equipped to handle shocks, they are also nimble businesses that adapt and change with the times, albeit pragmatically.
That said, the pandemic has accelerated some changes that until now remained relatively traditional, namely digitization. The operational requirements of the insurance process necessitated the need to implement virtual business practices in order to continue doing business. This digitization may well reduce the reliance on legacy systems and allow automation thus creating the ability to test new ideas, embrace new tech partners, monitor risks in real time and improve the dynamism of the market. Also, lest we not forget digitization will drive costs down, which every insurance CEO out there likes the sound of at the moment.
If adopting technology in this conservative market is the future, it would be worthwhile to watch out for the newcomers: insurtechs, the "class of 2020" so to say. Insurtechs had a promising year and a good amount of money has been invested. Carriers like Lemonade and Root went public via IPO and Hippo is anticipated to go public either via IPO or special purpose acquisition company (SPAC) at some point this year.
There’s certainly plenty of hype around these new industry players, so stay tuned for part 2 where we’ll take a deeper dive into the world of insurtechs.