Covid-19 and the Effect on the HK Insurance Market

We have yet to realise the full impact of Covid-19 on the economy let alone the insurance industry, but we want to give clients a few pointers on how the industry could be affected and what this means for you in the future. For this article we have concentrated on the Property & Casualty (P&C) market.

Current estimates (from various sources) of the cost to the worldwide P&C insurance industry range between US$80bn - US$100bn. To put this into context, the cost of the World Trade Centre event was US$40bn and the insured costs of Hurricane Katrina (according to Swiss Re) was US$80bn.

Claims resulting from Covid-19 will certainly be made under the following types of policy.

• Event cancellation and contingency (The Olympics alone are estimated at US$2.6bn),
• Travel,
• Management liability (D&O and Employment Practices Liability),
• Workers’ Compensation / Employees’ Compensation,
• General liability,
• Professional Indemnity,
• Trade Credit,
• Cargo,
• Business interruption (in some cases).

Policies where claims may be made or where initial estimates may significantly increase are

• Business interruption (depending on the scope of wordings and government intervention),
• Surety,
• D&O,
• Medical Malpractice,
• Mortgage insurance,
• Product Liability.

Costs to insurers

On the positive side for insurers, it is logical that regular claims activity will reduce given the slowdown in activity.

The full extent of the cost to the P&C insurance industry will be affected by the final amounts paid resulting from the rulings by the UK High Court on various Business Interruption claims. In Hong Kong, wordings are generally not as broad as in the US or the UK so there are unlikely to be as many claims payable under Business Interruption policies. Insurers in Hong Kong learned from the effect of SARS in 2003.

Other impacts

Apart from insurance claims what other impact will there be? The effect will likely be felt as a combination of international and domestic factors.

Conditions in the international insurance markets affect Hong Kong as increased reinsurance (insurance for the insurers) pricing is passed on to the ultimate client. Reinsurers are likely to increase prices to recover claims paid, and as the industry routinely pays more in claims than it earns in premium, pricing could increase sharply as these claims were unexpected.

Premium is often based on a measure of a client’s business size which can be turnover, wage roll, exports, shipments or suchlike. Many clients will report reduced business size which will result in reduced premium amounts. Insurers will therefore, likely, increase their premium rates to achieve their required premium levels. Of course, some clients will cease business altogether further reducing the premium pool.

Finally, history indicates that a recession, especially where unemployment increases sharply, results in increased crime which in turn produces increased insurance claims. This will put further pressure on insurers to increase premium pricing.

Keep your premium down

All of this will be happening when companies are under severe cost pressure, so what can you do to minimise premium increases? The simple answer is to work closely with your insurers and brokers. Start well ahead of renewal and provide as much information as possible. As your broker, we need to persuade insurers that your risk is where they should allocate their capacity so we need to present it in the best possible light. You should highlight risk management and risk mitigation measures and have survey reports and suchlike available. If there have been claims, provide full information and detail how risk improvements have been made following the claim.

Consider higher deductibles and scaling back policy wordings. You may be tempted to consider reducing limits of indemnity, but we suggest this should be as a last resort. Insurers are likely to give greater discounts for a higher deductible than a lower limit of indemnity.

As with most things in life, the trick is to be prepared. We are here to work with you and to help you minimise the negative effect on your business of a hardening insurance market.