2020 vision: anything but clear in the US
From pandemics to civil unrest to political turmoil, the remainder of 2020 will require constant assessment and adjustment for US (re)insurance markets.
Key forces impacting the (re)insurance markets remain in flux, including state and/or federal liability shield legislation, the spectre of retroactive (re)insurance liability for coronavirus losses, shifts toward non-admitted markets, and the potential for a sustained economic downturn. Any one of these issues could have a material impact on the (re)insurance markets in the US, but together could truly test the sector.
Covid-19 continues to dominate the legislative and regulatory landscape while only some state legislatures remain in session. Legislative focus on Covid-19 issues has created a patchwork of differing short- and long-term obligations for insurers, including the lingering threat of statutorily compelled retroactive liability for BI coverage despite policy exclusions. Fortunately, no state has adopted such legislation to date, but the debate is not over.
Most Covid-19 regulatory actions focused on moratoria on cancellation or non-renewal, premium reductions due to lowered risk exposures and expedited remote claims handling. The fact that 51 US jurisdictions are seeking to address these issues has created a complex set of compliance requirements. The refusal of some regulators to allow pandemic exclusions in insurance policies, coupled with the almost universal exclusion of pandemic risks by reinsurers, has created a potentially dangerous disconnect.
Despite state legislative discussions regarding retroactive liability for BI coverage, the immediate threat comes from state and federal courts now considering hundreds of cases alleging that the pandemic, and resultant emergency orders closing businesses, triggered BI coverage. Thus far, courts have been nearly unanimous in rejecting these arguments, but it is still early days. Stay tuned.
Racial tensions and related civil unrest have given rise to many civil protests – most peaceful, but some violent – causing loss of life and damage to both public and private property.
Continuing incidents of questionable use of force by police against persons of colour are likely to trigger further civil unrest and riots with consequent property damage and loss of life. The resulting claims under various insurance policies will likely take years to work their way through the legal system before cedants and reinsurers can truly understand the extent of covered losses.
The November state and federal elections have created a huge distraction for elected officials at virtually every level of government. This year, perhaps more so than most prior years, the battle lines with respect to fiscal policy have been sharply drawn and bitterly fought.
A change in the White House, particularly if coupled with Democratic control of both the House and the Senate, would dramatically alter the government’s approach to healthcare, taxation and environmental issues, among others, and would likely have long-term implications for the insurance and reinsurance sector.
Both state and federal governments are actively considering, and in some cases have already adopted, statutes providing Covid-19 liability shields for certain groups or industries – such as businesses, schools, churches, cities and counties. As states continue to adopt a patchwork of similar but distinct liability shield laws, with varying degrees of protection extended to different groups, (re)insurers will also have to carefully consider their potential liability (or lack thereof).
The federal government is actively considering possible approaches to management of pandemic loss on both a prospective and retrospective basis. One model under consideration is based on the Terrorism Risk Insurance Act. Another model is based on a more public/private sharing of risk supported by a large portion of the insurance and reinsurance industry. It is unlikely the federal government will act this year in light of the elections, but eventually it will be under pressure to do so, especially if there is a second surge in autumn and winter.
Covid-19 shelter-in-place orders required many insurance regulators to enable, at least on a temporary basis, regulated entities to make certain filings electronically. The past five months have demonstrated that this form of business is not only possible, but more convenient for all parties. Nonetheless, most regulators continue to expect a return to paper document requirements, such as noting that paper copies of the electronic documents will be required within two to four months after the end of the state of emergency. For those hoping Covid-19 has sped up a move towards electronic transactions/filings, it seems there is more work to be done in making these changes permanent.
There has been an unprecedented move of risks, both personal and commercial lines, from admitted markets to excess and surplus lines markets. This trend is likely to continue in the short to medium term, particularly if states continue to refuse to approve rate and form filings addressing pandemic exposure. In the long term, we expect the markets to return to equilibrium within one or two years, as has happened in the past. Admitted markets (and regulators) should eventually be able to adjust to the new reality as they learn from the experience of the non-admitted markets and adjust their rates and forms accordingly.
Andrea T Best is a partner in the London office of McDermott Will & Emery. She advises clients on insurance regulatory compliance throughout the United States, working with insurers, reinsurers, intermediaries, brokers, trade associations and others in the insurance market.
Dan Brown is a partner in the San Francisco office of McDermott Will & Emery and represents insurance companies, start-ups, agents, brokers and other stakeholders in all aspects of the admitted, exempt and surplus lines insurance markets in the United States.
John P Mulhern is a partner in the New York office of McDermott Will & Emery and represents clients in insurance regulatory, business planning and transaction matters at the state and federal level in the United States as well as internationally, with particular focus on cross-border trade.