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Insurers are asking questions to understand their exposure

03 September 2020 Myra Knoesen

“Experts are talking about Black Swans and Grey Rhino’s as risks that may destroy countries and companies. It is our job to prepare our organisations with effective resilience and business continuity measures to ensure that we can survive another ‘COVID 19’ type event. If a business continuity plan was not in place or it was found to be lacking in some respect, now is the time to prepare and build resilience,” said Claude Hamman, Head of Specialist Risk Advisory at Indwe Risk Services, a member of the IRMSA Educational and Technical Committee, a certified Risk Management Professional (IRMSA), a member of the Insurance Institute of South Africa and an affiliate of the Business Continuity Institute (BCI).

Opening the door to more risk

“Many organisations were forced to take extreme measures to ensure continuity and enable remote working practices without much preamble to the lockdown and the wider COVID crisis. Entire supply chains were shut down and customers all but disappeared for fear of contracting the virus. The unintended consequences of the lockdown and control measures taken during lockdown has not yet fully been realised, risks and opportunities continue to emerge. The digitisation of many business was forced by the lockdown which creates new opportunities for growth but also opens the door for more cybercrime and cyber risks. The WEF 2020 Risk Report highlights several catastrophic risks, including but not limited to cyber threats and the impact of global warming/severe weather events, as key risks which could fundamentally impact countries and organisations around the world. Consider the impact if any one (or more) of the major WEF risks follow the global pandemic crisis in the next decade?” Said Hamman. 

“Which of these global risks are currently insurable? Cybercrime, for example, has remained a major threat, it is best to secure effective cyber liability cover and implement effective cyber risk mitigation measures to protect against the next crisis before the next major disaster strikes. The result will be a massive increase in the cost of cyber liability cover or it may be discontinued entirely. For the uninsurable risks, an organisation must decide which risks they are willing to accept and which of those they can avoid entirely by rethinking their internal systems/products and processes,” added Hamman. 

Insurance risks associated with Covid-19

“Firstly, let’s clarify the current position. Insurers provide Business Interruption (BI) cover to businesses to indemnify clients against loss of income that a business suffers after a disaster causing physical damage. Typical disasters include fires and floods that result in the destruction of a property which leaves the business unable to trade until its premises has been reconstructed/repaired or an alternative premises has been acquired. Prior to the Global Covid 19 Pandemic outbreak insurers provided Business Interruption insurance with an extension for Infections Disease outbreak which, depending on the specific policy, may indemnify the organisation in the event that the business is forced to close as a result of an infectious disease outbreak. Unfortunately, this cover is no longer available as insurers have now cancelled or excluded all pandemic and infectious disease cover relating to COVID, primarily due to international reinsurers withdrawing their support” said Hamman. 

Hamman refers to the current legal discourse. “Consider the Café Chameleon versus Guardrisk judgement for the latest on the Contingent BI (CBI) cover status relating to the lockdown and the COVID 19 outbreak where it was determined that each case must be ‘decided upon its facts and the law’ and the ruling does not open ‘the floodgates of liability’. In his finding, Judge Le Grange applied the ‘but for’ test to assert that, without the prevalence of COVID-19, there would not have been a national lockdown, therefore the national lockdown forms part of the proximate cause.” The subsequent response by Santam on its stance on CBI states – ‘It is our contention that a national lockdown would not be implemented for an outbreak within a specific area and that by application of the Trends clause, irrespective of an incidence of disease around a specific premise, all revenue would be impacted. As a result, claims resulting from an interruption due to the national lockdown are not covered. In our view the national lockdown is not a direct consequence of any specific insured event or a response thereto. It was a pre-emptive measure to prevent and delay the spread of the virus, these are two positions that needs to be clarified in order to give clarity on the way forward for insurers and insureds” said Hamman. 

“The second type of insurance relates to Directors and Officers (D&O). COVID 19 threatens multiple stakeholders, specifically the employees and customers are potentially exposed and if the regulatory requirements for prevention, testing and cleaning are not adhered to, the Directors and Officers may be held liable if they were negligent in their duties. D&O insurance will not cover the directors and officers for any illegal act and these insurers are asking COVID 19 related questions to understand their exposure and more importantly how the organisation is dealing with the management of the business,” added Hamman. 

“There is also a Health and Safety concern which arises due to the thousands of employees that are now working from home. This is problematic and exposes employers to potential liability in the event that the employee is injured while working from home. The bottom line is risks emerging from the COVID 19 crisis and ongoing lockdown regulations must be viewed as uninsurable and require improved risk management,” continued Hamman. 

What do these risks mean for insurers?

“The worst case scenario for the insurance markets are that insurers are required to indemnify clients for the closure of their businesses during the lockdown and as a result of the pandemic outbreak. Each policy will, however, have to be judged on its merits to determine the validity of the claim. The best case for insurers would have the opposite effect but would leave thousands of businesses without a lifeline and most likely result in the closure of many small businesses,” said Hamman. 

“The global insurance markets have been exposed to multiple catastrophic losses over the past decade resulting in a reduction in available risk capital. This has created a hardening market as insurers have become unwilling to take on risk without effective mitigation measures in place. Many South African and international insurance markets have reduced capacity and increased their rates as a result of this hardening market. Covid-19 will likely lead insurers to carefully consider their exposures and if the worst-case scenarios come to pass, many businesses are likely to see significant increases in premiums or face the possibility of being uninsured if they have too many undesirable risks,” he added. 

“There are insurers that would consider underwriting undesirable risks subject to specific warranties and risk control improvements being implemented by the insured. The problem arises at claims stage when large and/or complex claims are lodged with the insurer. Firstly, has the company adhered to the warranties and completed the relevant risk management improvements as promised – often companies are eager to agree to said warranties and risk control improvements without understanding what this will require and cost to complete. Secondly, insurers can take inordinate amounts of time to process complex claims only to be repudiated and handed to the legal team to battle out in the courts. An insurance contract is one of utmost good faith between the parties and if one party knowingly enters into a contract with the intention to delay and eventually renege on their obligations, this results in many questions being asked around the value of insurance,” said Hamman. 

“It is important to have both an effective risk management framework as well as a Business Continuity Programme in place. Consider futures thinking using scenario planning to identify possible scenarios and identify risks which will emerge as the scenarios unfold. Organisations should ensure that they perform a due diligence on their risks to identify their insurable risks,” concluded Hamman. 

Writer’s Thoughts:
As Hamman outlined, resilience is not about identifying the specific event that could potentially disrupt and destroy an organisation, resilience is about ensuring the organisation can endure the impact of identified risks materialising as well as the ability to flex resources to ensure the desired business resumption targets are achieved in the event of an unknown risk occurring. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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