COVID’s Impact on Insurance

COVID’s Impact on Insurance

By: Crystal Jacobs 

For nearly one year, the world has been battling a common enemy … the COVID-19 pandemic. The impact has been fierce and there is no business or person who is immune financially, mentally or emotionally. We continue to see giant shifts in industries across the spectrum, leaving a great amount of uncertainty about how this will affect each of us. As we have reached the end of 2020, businesses are attempting to plan for 2021 among an unprecedented amount of uncertainty.  

In the alarm industry, your business is impacted by many factors – consumer appetite and need, manufacturing, overall business costs and insurance premiums. Insurance companies tend to be lean on their proverbial crystal ball to determine what impact large-scale events – such as natural disasters – will have on their loss figures. These forecasts come at the expense of insureds as insurance companies pass down those loss costs through premium increases.  

I would be remiss if I didn’t express my frustration with this process as it relates to COVID-19. Whether or not the reaction is right, a COVID-19 world where businesses have been shuttered, increasing premiums seems like rubbing salt in a wound. 

Cycles and Predicting Them 

All industries experience cycles of some kind and insurance is no different. Very similar to other financial industries, there is a large component of supply and demand that impacts our market cycles. In insurance, the cycles we refer to are: 

  • Soft markets: generally characterized by low rates, high limits, flexible underwriting and many available options. A soft market in insurance, generally favors the insured. There are usually many carriers to choose from and insureds benefit from great cost reductions due to competition driving down rate. The reality is, however: what goes down must come up. 
  • Hard markets: typically favor the carriers, as they get more premium for the exposures they insure because there are less willing to insure. But that doesn’t come without greater risk. 

We have the ability (and have done so) to get ourselves from a soft to a hard market gradually; but, in recent history, our slide into a hard market has been more like a rocket launch driven by large, sometimes tragic losses. While some self-proclaimed experts may disagree, the last time we decided we were in a hard market was during 2002-2003, post the September 11th terrorist attacks. 

The cycles of our market are typically driven by property and casualty insurance because it is the easiest way to determine what we call potential maximum loss (PML). 

Take hurricanes for example, insurers track by zip code types of properties, total insured values, etc. so that when a storm is named, they can easily hit a button to see what kind of losses they are more than likely going to be paying. Because of these tracking systems and the fact that property insurance has been around for a significant amount of time, there is an immense amount of historical data to determine loss. 

Fast forward to COVID-19 and we are amid a rapidly hardening market due to uncertainty. We don’t know what the full impact will be on the insurance industry. There is no data to tell us what could be next. There is no data to tell us what our PML is. We are going in blind. What does this mean? It means carriers are reacting as if the worst could happen and are changing their playbooks rapidly. 

In all fairness, though, I don’t believe any industry knows what the full impact will be on them. 

Using the hurricane example, after a storm is named, property insurance carriers issue a “moratorium” – no new business can be written in zip codes that will be potentially impacted. This is driven by the “fortuity doctrine.” (A fancy name to say you cannot insure a burning building).   

As a response to COVID, carriers have been adjusting their appetite for certain classes of business. Sure, some of the industries make sense; others do not. Long-term and senior living facilities, for example, are one of the industries facing this.  

You will also see carriers adding a COVID, communicable disease or pandemic exclusion to their policies when renewals become due. This serves two purposes: reiterates that a policy wasn’t ever intended to pick up this exposure to being with and covers the loss in progress issue – again, you can’t insure a burning building. 

Specific to the alarm industry, while we haven’t seen class-specific restrictions all together, we are seeing more scrutiny given to commercial services and PERS services.   

Capacity Restrictions and Rate Changes 

The other issue we are facing is capacity restrictions, including carriers pulling out of the market, placing open-ended moratoriums on businesses or reducing the limits they are willing to write. For the alarm industry, we have seen a seismic shift in carriers’ willingness to put up higher limits, so if you need limits above a million dollars, you will have limited options. 

As capacity reduces and people have less options, rates increase. For example, the $800 I charged for a one-million-dollar policy, I can now charge $1,000. As I said before, that seems like rubbing salt in a wound, but there is a reason for it. As a carrier, the less options there are, the more risk I must assume. Yes, I get more premium, but think about it this way: If I sell 1,000 policies for $1,000, I will make a million dollars in premium but, I will have a billion-dollars-worth of exposure. Should a single insured have a policy limit loss, it takes away the premium and then some. There is an approximate 30 percent range for claims costs that do not go back into your policy, meaning it doesn’t reduce your insurable limits when it is paid. 

Here’s how to plan for restrictions and changes: 

  1. Understand the limits you need for your contracts and, in general, to appropriately insure your business. Make sure that your carrier can provide you with those limits. 
  1. Understand your carriers appetite for the nuances of your business. If you are doing any PERS or commercial business, you need to ensure they understand what you are doing and that they are willing to address that exposure 
  1. Prepare for premium increases. The biggest impact will be on your comp and your property, but these are not the only lines affected. We have seen carriers noting a minimum of 20 percent increases. 
  1. Don’t be afraid to get mid-term quotes. If you are concerned about your renewal, talk to your agent. Talk to me.  

These unprecedented times will continue to cause uncertainty for the foreseeable future whether related to our personal health, family health, school districts, business or insurance. Just where is that “light at the end of the tunnel?” 

That’s the million-dollar question, isn’t it? I don’t have the answer. What I do have is a silver lining and that is programs like Security America. A program that has managed 15 years, providing coverage to an industry that was misunderstood or misclassified by insurance carriers; has continued to evolve as exposures have evolved; withstood without major rate increases or capacity limitation, and will continue to stand strong even in uncertain times.  

While no insurance program is completely immune to market changes, Security America has the unique ability to manage change and prevent non-industry events from substantially impacting our ability to offer protections to the alarm industry.