This article can be viewed online at: https://www.mynewmarkets.com/articles/183772/emerging-pandemic-risks-from-covid-cyber-civil-unrest-mergers-and-more-part-1

Emerging Pandemic Risks From Covid, Cyber, Civil Unrest, Mergers, and More... Part 1


Insurance Journal examined industries experiencing changes and challenges due to the COVID-19 pandemic, societal unrest and other market forces experienced in 2020. Here are the first five industry sectors that could see new and emerging risks in 2021 and beyond.

Commercial Real Estate

Real estate owners are dealing with tenants who cannot pay rent. Some tenants are going out of business due to pandemic related shutdowns, while others are ending their leases as they maintain a work from home structure for their employees. These trends are shaping the future of the commercial real estate market.

Wes Robinson, national property brokerage president of RPS, says there is endless discussion about what the corporate real estate footprint will look like in the not too distant future.

"This, of course, will depend on corporate management philosophy, job/industry description and geographical presence, but there is a fair amount of certainty that an abundance of office space will soon be available," Robinson said. "Perhaps that gets filled with more and more businesses, but a likely alternative is to repurpose that space for other occupancies."

As an example, if a company decides to vacate a high-rise building in New York City, the landlord has a decision to either do their best to fill that space with another office tenant, or perhaps convert that space to a hotel, apartments or condominiums.

"This may be something risk managers, insurance agents and brokers, and underwriters will need to tangle with more and more as these decisions come due in the months to come," Robinson told Insurance Journal. The implications for insurance is that the insured may ultimately be presenting a different risk than what was originally underwritten for and affecting multiple lines of coverage.

There are some important concerns that may need to be addressed that will present opportunities for insurance professionals in the future, he said.

"Builders risk and liability insurance for the actual construction of the renovation will need to be placed," he said. "The more structural components are affected, the more costly and expensive the coverage will be."

Office space typically carries a low property/casualty rate. "If space is converted, that will come with a higher exposure base from both a property and casualty perspective," he added. Restaurant/bar additions, exercise gyms, ballroom/convention space, and an increased public foot traffic are all exposures the carriers will want to rate for, according to Robinson.

From a casualty perspective, office space is rated on square footage while restaurants are rated based on sales. Hotels and apartments are often rated by the number of rooms. "A consistent methodology will need to be determined for proper rating and premium generation," he said. "Additionally, past loss history may not be indicative of future performance if core operations may be changing or introduced to the program."

Entertainment

The COVID-19 pandemic has had a huge impact on the specialty insurance industry especially the entertainment and event insurance markets.

According to Thomas Sepp, chief claims officer at Allianz Global Corporate & Specialty (AGCS), the pandemic is one of the worst loss events for the insurance industry in history -- claims could be as high as $110 billion in 2020, according to Lloyd's estimates. AGCS alone has reserved about $571 million for expected COVID-19 related claims.

The entertainment and events industry has been one of the hardest hit industries, with lockdowns and safety concerns over COVID causing the cancellation of countless live events and sporting events, as well as the closure of theaters, cinemas and theme parks. Film and TV production has stopped, restarted and at times stopped again.

The cancellation or postponement of events and productions is one of the largest sources of COVID-related losses for the global insurance industry, bringing a surge in claims. Unlike traditional lines of insurance, it was not uncommon for entertainment policies to write-back cover for infectious diseases, AGCS says.

A common concern is on-again/off-again production and the added cost that brings to the production. Another issue is coverage availability.

According to EPIC Insurance Brokers, an ongoing issue for all entertainment production remains securing insurance for projects. "Lenders require it, and with the pandemic raging, it has been increasingly difficult to obtain," EPIC says. The cost of insurance can be too much for some independent and smaller producers to pay, where policy premiums can at times exceed $400,000.

For now, the entertainment industry globally is projected to lose $160 billion of growth over the next five years. Hollywood has gone from 2019's record-breaking $42 billion in worldwide box office sales to its worst year in 20 years.

The good news is that productions are picking up, John A. Hamby, senior managing director, national entertainment practice leader, told Insurance Journal. All have new COVID protocols. "While there are some productions starting now and very soon, the majority are waiting until summer or later in hopes that things will be better then," Hamby noted. "Overall, the risk profile of production companies is evolving, and will continue to evolve this year as things get better," he said.

Employer Liability

Insurance rates for employment practices liability insurance are continuing on an upward trend, in part because commercial rates in general are on the rise, but more specifically due to COVID-19 and ongoing litigation concerns over the #MeToo movement.

2020 shined new light on the importance of EPLI coverage and emerging exposures such as a hybrid workforce and a focus on diversity and inclusion practices, as well as possible vaccine mandates could lead to further changes in the market.

Jordan Kurkowski, vice president and professional lines broker with AmWINS Brokerage in Grand Rapids, Mich., says an employer's risk today is heightened by both increased public intolerance for harassment and instant, worldwide distribution of news through social media.

Last "year has been a whammy of layoffs, severance packages, furloughs along with the riots of Black Lives Matter and the #MeToo movement," Kurkowski said. "It's an underwriter's nightmare."

EPLI claims often follow large changes in workforce, including reductions, promotions and demotions.

"There is more of that happening during this time period with massive unrest in our country," he said. "We've seen political and religious beliefs trigger some of these claims, too."

Remote work, or a hybrid work model that includes both remote workers and in-facility workers, can present some concerns when it comes to employer liability issues. Employees might have trouble maintaining a positive work-from-home environment and such challenges could lead to unsatisfied employees. Both employers and employees will have concerns about today's current workforce dynamics.

In conjunction with COVID-19, a new overtime rule was changed and put into effect at the beginning of 2020, according to an October 2020 blog by Founder Shield's Jeff Hirsch, head of Product. "It had been untouched for 15 years, so the transition has been complicated. Add in remote work, and employers are scrambling to keep up with the unprecedented shift."

Hirsch wrote that as more employees educate themselves on old and new wage and hour laws, the industry should expect to see an uptick in employment practices lawsuits. "Plus, remote work often means employees feel 'on the job' for more hours than usual -- and they want compensation for it," he wrote.

The largest group of employment related legal disputes -- 472 lawsuits, according to Jackson Lewis' data -- are related to disability issues, leave and accommodation claims by employees who were unable to come back to work because they were sick or had to care for someone with COVID-19. "Class actions in general have not come to fruition as predicted," said Stephanie Adler-Paindiris, a principal at Jackson Lewis in Orlando, Fla., told Law.com in December.

During the first six months of 2021, Adler-Paindiris believes there could be a "huge boost of class actions" dealing with systemic discrimination, as employers ask their workers to return to the office and potentially require them to take the COVID-19 vaccine.

Management Liability

The long-term consequences of the pandemic on corporations and their executive leadership will take years to unfold. However, insurers are expecting significant fallout as claims related to the economic turmoil from the pandemic continue to emerge in the U.S. directors & officers (D&O) liability insurance segment.

The good news: there is limited risk to ratings of individual D&O insurers as a result of pandemic-related claims, according to Fitch, noting that carriers with significant D&O premiums are larger, diversified entities. Also, recent pricing changes are supportive of improving profitability post-pandemic, which will depend on the path of the economic recovery.

In 2019, insurance agency Woodruff Sawyer forecasted the rise of D&O premiums -- the first increase in nearly 10 years -- and predicted it would continue on into 2020 and beyond. Today, the broker says that that rise shows no sign of decline as securities class action lawsuits and record settlements, corporate bankruptcies, and COVID-19 continue to impact an already difficult market.

To add additional pressure, insurers are watching as over 600 unresolved securities class action court cases wind their way through the judicial system, Woodruff-Sawyer says.

Woodruff Sawyer's 2021 D&O Insurance Trends: A Looking Ahead Guide reveals that underwriters are concerned that their insureds are not fully aware of the high cost of litigation, with 83% of underwriters saying they believe that companies underestimate the current risk. "That doesn't bode well for insurance renewals for the riskiest clients -- recently IPO'd biotech and technology companies -- whose volatile share prices often make them targets for shareholder litigation," the agency says.

Insurance carriers cite multiple factors to justify their underwriting approach and D&O appetite, the report revealed:

  • Securities class action frequency is coming off an all-time high.
  • Suit severity and settlement costs have increased, making excess layers too cheap relative to risk; and
  • Derivative actions are still on the rise with notable settlements tapping "A-side only" insurance.

Civil unrest and social justice problems of 2020 will continue to play a significant role in 2021's D&O market, says Priya Cherian Huskins, Esq., senior vice president, Management Liability, and editor of Woodruff Sawyer's report. "We are now starting to see shareholders file breach of fiduciary duty suits against the boards of major corporations for failing to live up to their diversity commitment disclosures." Cherian Huskins says that a corporation's approach to social, environmental and governance issues is becoming increasingly more important to stakeholders.

Nonprofits

The COVID-19 pandemic has cut into nonprofits' financial resources while increasing demand for their services, including rising community need for food services, housing assistance and much more.

Almost three out of five nonprofits cut costs last year and more than half expect to continue cutting costs in 2021, according to The NonProfit Times. The 2020 Eagle Hill Consulting Nonprofit Survey, conducted by Ispos, included 505 respondents from a random sample of nonprofit employees across the United States. In recent months, nonprofits have implemented: Program reductions (30%); Hiring freezes (30%); Furloughs (25%); Salary reductions (24%) and Layoffs, 20%. More than four out of five indicated that their organizations changed how they serve constituents, in response to COVID-19.

In the Nonprofit Industry Market Update by Gallagher's Peter Persuitti, managing director, Nonprofit Practice, many nonprofits are facing 20% to 30% revenue reductions as they continue to work through the current economic and pandemic environment. COVID-19 has increased operating expenses overall.

"Nonprofits of all types and sizes are desperately seeking cost reductions and seriously slashing budgets," Persuitti said. "It is more important than ever for entities to focus on their total cost of risk and not just the line item of insurance costs. We know that reducing loss prevention or risk management efforts now may result in higher claims later," he said.

"COVID-19 has not masked the fact that we continue to see plaintiffs pursuing litigation of mostly older Sexual Abuse and Molestation (SAM) claims, and headlines of bankruptcy and cyber breaches for Nonprofits continue," according to the market update. Several nonprofit insurers are tightening their appetite for certain classes of nonprofit business, and even excluding certain exposures such as foster care, residential services, affordable housing, according the Persuitti.

General liability and auto liability continue to see upward premium pressures. Nonprofit organizations with losses may find it difficult to purchase coverage at any price or may be forced to reduce limits while paying the same or even higher premiums, Gallagher says. Sexual abuse and molestation coverage is another area that is highly scrutinized by underwriters.

The pricing of this property insurance is also rising with most insureds seeing double-digit premium increases, year over year, the Gallagher report noted. Also changing is cyber insurance for nonprofits. While many nonprofits haven't consider cyber coverage in the past, Gallagher says it has seen sizable losses as more nonprofit staff are working remotely and use technology to solicit donations and manage donor data.

Come back Monday, April 19 for Part 2