Lloyd's and the London Market are known for their speciality products and international reach. The COVID-19 pandemic has therefore impacted the London Market in many ways. While much of the business is written directly, a significant amount of business is generated and written via third party coverholders. The COVID-19 pandemic has highlighted the sheer spread of exposures in the London Market, including:
- Property/business interruption, for SME and large global policyholders;
- Contingency and Event cancellation;
- Personal Accident, travel and tour operator liability covers;
- Political Risk and Trade Credit;
- Excess Liability; and
It's no lie that London reinsures the world, and as the world slowly recovers from the COVID-19 pandemic, insurers globally are evaluating how best to aggregate their claims and claim on their international reinsurance programmes. The treaty reinsurance market, after almost a decade in the shadows, has therefore lit up in spectacular fashion. The volume of claims notifications is almost overwhelming for the market, and the true cost remains an unknown. What is also true however is that the London Market has always been dynamic and quick to evolve, and so there is no doubt that it will rise to the challenge of COVID-19, and the future beyond COVID.
We touch on each class of business below in more detail.
The focus in 2020 was of course the FCA Test Case. But while only a handful of London Market and Lloyd's insurers are household names for consumers, they provide important and specialist insurance capacity, in particular for SMEs. There are specialist products written by coverholders designed for restaurants, bars, childcare centres and nurseries, hotels and so on. Each of these sectors has been devastated by the effects of the pandemic, and so almost all London Market insurers have been affected by the FCA Test Case (in which only Hiscox, Arch, QBE and MS Amlin from the London Market were named)
2021 does not look to be any easier for the property insurance sector, and several open issues have yet to be determined. We successfully represented an insurer in having business interruption claims dismissed, on the basis that the cover for business interruption only responded to one of 34 diseases named in the policy (and COVID-19 was not one of them). While many new policies have COVID-19 exclusions, the sheer volume of claims from 2020 and the impact of the FCA Test Case means that we may well see some further test cases (perhaps this time instigated by insurers) on certain issues that were not determined by the Supreme Court. As important as all of the above, the sector may be seen by some as needing to rebuild trust in consumers and SMEs.
Contingency and Event cancellation
London has an enviable specialism in event cancellation and non-appearance risks. Worldwide events such as the Olympics, Ryder Cup, major tennis championships, Formula 1, most international football tournaments and domestic leagues are insured by the London Market. In addition, conferences and exhibitions are covered, as well as (more well-known) rock and pop concerts. The range of policyholders varies broadly, from the promoters or organisers of events themselves to third party ticket agencies, plus the hundreds of businesses that service the industry (right down, for example, to the companies that provide food and drinks/seating for these events).
Historically, full cancellations have been rare. In most cases, events are merely postponed to another day, but as we are all aware, mass gatherings were one of the first types of event to be banned in all territories. And as yet, many countries are still in lockdown, only cautiously considering a return to live concerts and sporting events where fans can attend, and the participants can stay safe. Despite most policies having an exclusion for communicable disease (and only a handful of policyholders paid the extra premium for communicable disease cover), the losses are still likely (globally) to be in excess of $6bn, and the market is faced with a double whammy: with no major events planned in the foreseeable future, and a long road to get back to the level of events pre-COVID-19, there are no risks for the market to underwrite to even attempt to recoup some of those losses. The level of losses combined with an uncertain future has led to many insurers pulling out of the sector. But that is no bad thing. While a few new names have entered to fill the void, ready to swoop on higher rates and better terms, the reality was that the contingency market seemed overcrowded for some time. Longer term therefore, one effect of the pandemic may be to create a more sustainable and balanced market.
Personal Accident and Travel
The London Market again insures, via third party coverholders, travel products sold throughout the world (we touch separately on the reinsurance aspect below). These policies of course have been heavily impacted, as one might expect. Policies have been put under a lot of scrutiny, focused on when government/foreign departments advised against travel overseas. Many policies excluded epidemic/pandemic cover, or did not provide cover where travel was cancelled because of government advice. These are all being tested in the UK and Ireland at least in front of the Financial Ombudsman.
Less well known is that the London Market provides insurance to tour operators. The Package Travel and Linked Travel Arrangements Regulations 2018 came into force fairly recently and meant that a tour operator was liable to the customer if the trip failed to go ahead. This led to numerous travel agents and tour operators (some for the first time) seeking out cover for airline failure, travel disruption and force majeure. Hot on the heels of the collapses of Monarch and Thomas Cook, this sector has seen claims emanate from tour operators who are all struggling to pay customers. The attritional nature of the claims means that 2021 will continue as 2020 ended, with tens of thousands of claims still to be evaluated and examined. It looks to be a busy time still to come.
Political Risks & Trade Credit
2020 was a tumultuous year for the trade credit industry. The industry was rocked by a number of crises, any one of which would have been defining for the period. Fraud and corruption scandals were of particular note, including Hin Leong in Singapore, and Wirecard in Germany, which together caused well over a billion dollars' worth of losses to lenders. Further, the collapse in oil prices in March roiled markets, and that volatility undermined a number of basic assumptions about how commodities markets function. On top of those issues, the COVID-19 pandemic has brought many key industries across the world to a standstill and is causing economic shrinkage and unemployment across the world. Commodities traders, in particular, have struggled with short-term disruptions amid COVID-19 and a deteriorating credit environment leading to a number of collapses in the market, including the UAE based Phoenix Commodities. These struggles seem set to continue in the short to medium term.
Most in the trade credit insurance market were braced for large-scale claims activity towards the middle and end of 2020. However, by and large, those fears have not yet materialised, especially in the London Market. Several factors seem to have contributed to this, including unprecedented fiscal support across the world and leniency from lenders, with many businesses restructuring loans and credit, rather than strictly enforcing their terms. The 'shock' nature of the current crash means that many lenders and counterparties are expecting their debtors to rebound once COVID-19 restrictions ease. In 2021, as governmental fiscal support programs start to run out, and as the unusual pandemic circumstances recede and businesses start to return to business as normal, we expect to see claims activity tick up significantly. It also seems likely that lenders, particularly in Asian markets, will have to strengthen their systems and processes, with some lenders following ABN AMRO out of the market altogether, with others retreating to only service larger and better established clients.
Alongside all of that, there is a move in the trade credit market to start taking a more robust stance on social-responsibility issues, including climate change. Many lenders are starting to factor in these issues more carefully when assessing clients and projects. We expect this to continue.
In the political risk world, 2020 continued to prove Mr Fukuyama wrong that history is not, in fact, over. We saw significant instances of unrest across the world, including large-scale protest movements in Hong Kong, Belarus and Thailand. This trend has continued in 2021, with significant unrest events in Russia and Myanmar already. We expect that in 2021 economic recovery from the pandemic will continue, but that global unemployment will remain high and that it will take some time for all of the pandemic economic losses to be recouped. Economic troubles have typically been key causes of civil unrest and political strife, and we expect them to contribute to a turbulent 2021. Further, the continual willingness of the governments in China and Russia to support nationalist political challengers and autocrats, alongside a rising tide of nationalist sentiment across the world, means that democratic values will likely remain under threat across many countries throughout South America, Africa and Asia. These factors have caused significant unrest in the past and we expect will continue to do so.
The COVID-19 pandemic has not led to a substantial number of claims for onshore downstream insurers. While it is possible that courts in some jurisdictions might be willing to consider the presence of the virus as 'physical damage', we are not aware of any substantial claims in the market on this topic being raised, nor of the issue being litigated in the English courts. Moreover, the market's prompt adoption of communicable disease exclusion clauses should further suppress the risk of any such claims.
There is concern that the mandatory lockdowns and social distancing requirements have forced some policyholders to defer maintenance and upgrade works. As mass vaccination programmes accelerate across the world, we are hopeful that these works should be able to proceed by the middle of 2021. The return of in-person meetings and inspections will also allow insurers to resume full surveying programs that had been put on hold.
As the downstream market continues to deal with the fallout of a number of challenging years and low investment incomes, we expect premium rates to continue to rise, particularly for smaller and medium-sized policyholders and for those who lack long-term partnerships with insurers.
On the renewables side, we anticipate this will continue to be a real growth area for the market. Developing renewable capacity remains a key political priority for many governments, including the Biden administration.
Through 2020 and into 2021, the excess liability insurers for US opioid manufacturers, wholesale distributors and retail pharmacies have become embroiled in a multitude of coverage issues arising from underlying claims pursued by state, county, municipal and Native American governments. These institutions allege that they have incurred costs to address the opioid epidemic, including costs for medical care, drug treatment, emergency services, law enforcement and other public services.
These claims, based in public nuisance and involving allegations of deliberate misconduct by those involved in the manufacture, distribution, and sale of prescription opioids, raise novel coverage issues for insurers around the application of "expected and intended" defences, and the extent to which occurrence-based liability policies providing indemnity against damages "because of" personal injury during the policy period, respond to claims for the abatement of a future nuisance.
That litigation raises the prospect of future 'copy-cat' litigation in other jurisdictions, while prescription rates in the US for other classes of addictive and recreationally-abused drugs such as benzodiazepines and certain ADHD medication suggest that the US opioid litigation may not be the last of its kind.
The team is currently acting for a range of London Market insurers as London arbitration counsel in relation to excess liability policies issued to opioid manufacturers and distributors in coverage cases arising out of the opioid crisis.
Reinsurers started the new decade facing various existing issues, including the ever-increasing number and severity of natural catastrophes, social inflation, and fierce competition in the market fuelled in part by the increase in alternative capital. This led to reports that the long-anticipated hardening of the market would finally arrive, bringing about the correction needed to improve results.
Enter COVID-19. Reinsurers have seen a wide range of reinsurance treaties being called upon to respond to the pandemic, including personal accident, property catastrophe, risk excess, contingency and political risk/trade credit covers. In turn, reinsurers have notified potential exposures to their retrocessionaires.
Cedants, reinsurers and retrocessionaires are left to grapple with treaty wordings which, for the most part, were not designed to respond to pandemic-type risks, but which do not exclude communicable disease. The central issues facing the market include whether a pandemic is a reinsured peril and, if so, how COVID-19 related losses aggregate under treaty limits.
While a number of disputed claims will settle, given the "all or nothing" nature of many of the disputes, we expect that there will be an uptick in arbitration in 2021 and 2022 as the market seeks to resolve the coverage issues. Importantly, although the majority of treaties include arbitration clauses, some affected contracts do not. The result may be precedent in the form of a court judgment. While there are discussions in the market about referring certain issues to the courts, in a similar manner to the FCA Test Case, the lack of consistency across wordings placed by various brokers will likely be an obstacle to an equivalent test case.
On the underwriting side, we have seen reinsurers adopting communicable disease exclusions and rate increases, as part of the hardening of the market. The reinsurance market and cedants appear to have adopted a pragmatic approach to renewals, prioritising the need to get cover in place, despite the widespread uncertainty regarding cover under renewing treaties.
Of course, the pandemic has not meant that the other issues facing reinsurers in 2020 have gone away. The changing climate means that we are again likely to see a high level of natural catastrophe losses in 2021, in particular hurricane and wildfire, and the trend regarding social inflation looks set to continue. 2021 is therefore likely to be a busy year for a reinsurance market dealing with both disputed COVID-19 presentations and the day job of adjusting and paying large losses.