Insurers and brokers need to move past the crisis management phase and think of future solutions to mitigate pandemic risks

The insurance market is on the back foot in handling the Covid-19 pandemic, according to Martin Mankabady, corporate partner at law firm Dentons.

He told Insurance Times that insurers and brokers need to push through the “firefighting” phase to instead think of future solutions that can mitigate pandemic risks, such as the proposed government-supported Pandemic Re scheme.

“It feels like the insurance market is on the back foot in terms of all of this at the moment, and I just wonder whether there’s more we can be doing to [get] on the front foot,” he says.

“Everyone is in the crisis management phase still and brokers are busy helping their clients and carriers are trying to assess what their exposures might be and handle claims as promptly as they can and everyone [is] working remotely, but it does feel like we’re on the back foot.”

Although Mankabady acknowledges that “a lot of players in the market don’t have the luxury of being able to look forward” as they are grappling with day-to-day operational concerns, he cites planning to protect against future pandemics as the best way forward.

He continues: “The view is there could be more of these down the lines and one of the things we should be thinking about is what can we put in place to deal with that, because I don’t think the capacity in the insurance market is big enough to swallow all of the costs of a pandemic on its own.

“Getting more on the front foot with those discussions about looking forward, about discussions around creating something that’s going to be big enough to withstand the big losses that might come through in the future – I think that would be a very positive move.”

With this in mind, Mankabady advocates setting up a Pandemic Re scheme modelled on the terrorism sector’s Pool Re initiative. The way this is structured and funded is an “obvious starting point”, he adds.

Underwriting focus

One area of contention that Mankabady feels will become a focal point once the Covid-19 outbreak eases is policy wordings and underwriting. This has become a particular hot topic with the confusion surrounding business interruption claims. The FCA is even in the process of obtaining a court declaration to gain legal clarity around key wordings used for these policies and extensions. This aims to settle once and for all which claims should or should not be paid.

Mankabady says: “I wonder whether policy wording is an area of the market where there hasn’t perhaps been the level of investment which maybe there should have been, or perhaps the focus.

“Partly there may have been some coverage creep against the back of the soft market and underwriters aren’t fully realising the kind of risk they’re then taking on. Maybe insurers have given slightly more coverage or removed some caveats or diluted wordings a little bit and maybe that is what’s causing some of the issues now, because it’s unclear precisely what is covered and what isn’t.

“One of the things that the market probably does need to focus on is its approach to underwriting and are there areas it can improve?”

Despite this, Mankabady does acknowledge that “with something like a pandemic, whether it’s covered or not, it’s a risk that probably people really haven’t properly assessed and couldn’t price”.

He continues: “We don’t know what the exposure is, we don’t know what the extent of the impact is, so it’s still a really difficult thing to try and price in and factor in.”

Insurer exposure

Looking ahead to a post-coronavirus market is easier said than done, however. This is in part because of the uncertainty around potential  exposures.

“It’s certainly a really uncertain time now and I still don’t think it’s clear what the potential exposures might be for the market,” Mankabady says. “Some people have issued profit warnings or estimated the impact of what this might have on them. Others are probably still trying to work it out and I think it is unclear, but it looks like it could be big – the question is how big?”

Mankabady therefore predicts that capital raising may be on the agenda for insurers. This is already the case for insurer Hiscox, which announced earlier this month that it plans to raise capital via its share placement.

“There’s already talk of some insurers looking to raise capital. Obviously, some are going to be hit harder and there’s going to be a capital crunch, there’s no doubt about it. It will be interesting to see the kind of appetite for capital raisings.

“If the insurance market doesn’t get too beaten up by politicians and it comes through this pretty unscathed, then there’s probably going to be support to back the market through capital raisings,” Mankabady adds.

The Covid-19 outbreak may also accelerate market consolidation and M&A activity hot on the heels of the Aon and Willis Towers Watson deal, says Mankabady, while certain lines of business may also end up going into run off.

“What’s going to be interesting going forward is what is the UK economy going to look like? If aviation and travel is down, then you’re going to see less premium generation in those parts of the market. But then wouldn’t you see a pick-up in other areas? Wouldn’t you see a pick-up in healthcare, in cyber, [credit]? If there’s more concern around those areas, you might see a big pick-up in that. There’s going to be some winners and some losers,” he says.

Opportunity for reinvention

For Mankabady, the Covid-19 pandemic is not all bad news for the insurance sector. Instead, he believes the current crisis is a “catalyst to reinvent insurance”, presenting a “real opportunity to do something different”.

He continued: “The market will emerge from this, bruised and battered, but it will be resilient and it will be in a position to see another day.

“We’ve come through tough times before. I see this as another tough challenge that we will come through and yes, balance sheets may have to be strengthened, there may be some consolidation, but I think what the insurance market needs to do is realise we have something really positive to bring and we can play a big part in getting economies up and running again.

“There’s a major part for them to play together with government in looking at some sort of backstop for pandemics going forward. What the insurance market [has] got to do is use this as an opportunity to really accelerate something that was going to happen anyhow and really look at their business models and say ‘can we do this in a better way, in a more efficient way? Can we embrace technology in a way we haven’t done? Can we become more digital? Can we start thinking about offering new products or products in a different way’ and I think it will just make the market more relevant.

“The market will come out stronger for it.”

How will working life change as a result of the Covid-19 pandemic?

Martin Mankabady, corporate partner at law firm Dentons, believes that more regular working from home will become a common feature of working life post-coronavirus, with many firms abandoning expensive London offices as a result.

He says: “The world will be different. I suspect that a number of people will carry on working from home on a more regular basis and that’s going to be quite unusual for the insurance market because they’re so used to the face-to-face interaction, and what I don’t know is whether that will continue to the same extent. I don’t think people are going to need the same amount of expensive office space they’ve got right now, so I think there will be changes.

“The insurance market often [has] quite healthy expense budgets; I wonder whether you’ll be seeing the level of international travel that you’ve had to date? Will there be an impact on that? Will you see a drop off in that? Will you see a drop off in a lot of the rendezvous and the gatherings and conferences that you have with the insurance market? Only time will tell but I wouldn’t be surprised if there is a tailing off in that and more people working remotely.

“That in itself is going to give rise to some issues for the market because clearly you’re going to have to supervise people remotely, which is probably more challenging than when you’re all sat on the same floor. People may have to look at perhaps an increased cyber risk if people are working remotely.

“There are going to be benefits with more remote working, but I think also there’s going to be some additional risks that are going to come out of all of that.”