The Covid-19 pandemic has presented all the worldwide insurance markets with a new challenge that is currently dividing that market in the way it will respond to the needs of its clients. Atlantic Insurance has previously reported on the impact Covid-19 has had on various jurisdictions, particularly focused on various South American regions, which can be viewed here.

As Atlantic is an International Marine Broker, we wanted to consider the impact that the approach of various Marine Insurers, in particular, and the decisions that are being considered by them might impact our Clients who are specifically engaged in maritime operations.

As the potential exposures to insurance policies, that hitherto had not been a consideration to Underwriters, have manifested and the potential increase in consequential claims that Covid-19 has brought, the response by direct insurers and professional reinsurers around the world has been to introduce exclusions relative to that exposure.  Renewal terms across the market now incorporate exclusions in the policy terms to clarify and limit the breadth of coverage afforded to an event such as the Covid-19 pandemic or any similar events. The rationale being that the coverage afforded by their policy had not previously taken into consideration the exposure to claims that Covid-19 now potentially presents to Underwriters and the introduction of an exclusion defines more clearly the scope of cover afforded by that policy.

For those policies that are currently in effect and do not, as yet, contain a defining exclusion clause, it has opened up a significant debate as to whether those policies were intended to respond to claims arising from such an event as Covid-19. It is being argued by certain insurers that, for a claim to be covered for business interruption there has to be a physical loss. A pandemic, in their view, does not constitute such an event and therefore does not trigger the policy coverages as there was no intent to cover this type of event afforded by the policy. This argument, certainly as far as certain UK insurers who are arguing this defence are concerned, is being reviewed and considered by the Financial Conduct Authority (FCA) as a matter of urgency to provide clarity for policy holders placed into those markets. The FCA’s finding will be applicable to all UK regulated insurers.

Interestingly Lloyd’s of London, back in March 2020 estimated the Lloyd’s market’s exposure to losses arising from Covid-19 of being in the region of US$4 billon. An early estimate, given the extent to which the pandemic has impacted so many businesses worldwide, however, as described above, some insurers that operate within the Lloyd’s market do not believe they have that exposure to losses.

The International Group of P&I Clubs, who insure 90% of the World’s shipping, have set up a sub committee to review the impact that Covid-19 will have on their mutual members. It has been determined so far that, as there are no specific exclusions contained in the Club Rules for the 2020 year of account, claims that may arise directly under the coverage afforded by the Club Rules will be responded to accordingly and is very much in line with a Club’s ethos to support the shipowner’s needs. The claims will be covered by the Mutual’s funds and reinsurance, where applicable recoveries can be made. In the highly unlikely event that there would be a shortfall, further premium demands could be demanded from the Club Members in the shape of additional supplementary calls. The foundation upon which the Clubs were founded.

However, as the reinsurance market, to which all insurers including the Group Clubs are reliant upon, are also applying similar exclusions as renewals are presented, it will be a matter of time before coverage for pandemic related claims will be impacted. The commercial market is looking at solutions that will afford protection against the exposure that Covid-19 and similar pandemic events present. Lloyd’s of London have published proposals on how the market might meet the needs of business in the future, though this is likely to be in the form of additional coverages designed to stand alone or as an overall solution for insurers that will require the premiums to be charged as a separately identifiable cost and passed directly or indirectly to their insured clients.

Insurers, of course, may elect to provide a limited extension to their existing insurance offerings, knowing that they will have to absorb any losses on their balance sheets without the benefit of any reinsurance support. A strategy that the Mutual Clubs are well positioned to consider, given the mutual nature of the coverages that they offer and the pooling arrangements that are already familiar to their business model, as described above. That would provide a solution for their mutually insured members relative to P&I risks. However, for the additional ‘non-poolable’ coverages that the Clubs offer, such as Charterers cover, Specialist Operations and other extended contractual coverages and of course Fixed Premium P&I coverage. These currently require specifically placed reinsurance programmes to enable these offerings and are with the direct insurance market or with professional reinsurers. The Clubs will likely be impacted by the exclusions that the commercial market now, or will, impose on them also. It could certainly differentiate Fixed Premium P&I insurance from Mutual P&I insurance if the Fixed Premium insurers, including the Clubs, are forced to apply such exclusions, whilst the Mutual market looks to absorb the risk.

There may of course be Government intervention that will in time assist Underwriters in assessing and evaluating the risk to them through limitation doctrine. The marine market has seen this approach applied in other areas of high exposure such as pollution, wreck removal and passenger exposures. However, to gain International acceptance and adherence to such doctrine will take many years and much debate to implement and the potential of a truly global approach is even less likely.

Covid-19 has, without doubt, forced insurers to consider the impact that the potential of increased claims will have on their business. Whether insurers are willing to absorb the risk, relying on their existing reinsurance arrangements that currently do not have exclusions or write back a limited level of coverage and retain the risk or apply absolute exclusions will, in time be guided by the reinsurance market that underpins the actions of the direct insurer. In whichever way this unprecedented exposure is addressed by insurers, there will inevitably be a consequential knock-on cost to the buyer of insurance. The potential value of the claims that are already known will change the course of the market across the world.

It goes without saying that Atlantic will continue to monitor the situation – and any stance that a particular market may take – very closely. Where needed, we will duly raise and highlight any specific concerns with our clients.