New Normal… in underwriting

As the world waits with bated breath for a cure or vaccine to be found for the dreaded Covid-19 and as lock-downs all over are gradually getting eased, a new phrase has found its way into the dictionaries  — ‘New Normal’. It is true that this virus has changed our way of life almost irreversibly in certain areas. What we took for granted earlier or what was considered normal, would no longer be so and we will be looking at a New Normal. For instance, a percentage of the total workforce in many organisations may work from home on a regular basis, offices may become smaller, prime emphasis will be on hygiene and many many more. It can be called a paradigm shift in our behavior, attitude to life and above all in business strategies.

Covid-19 has not only endangered human lives all across the world but the estimated economic losses due to the pandemic are mind-boggling. ADB estimates the global economy to suffer losses in the range of US $ 5.8-8.8 trillion which will constitute between 6.4% and 9.7% of the global GDP. Shrinking volumes in manufacturing, falling demand, low capital investments,bankruptcies, job losses, etc. have started/ are expected. These are but early days.  a lot depends on how soon we can say we need not fear the virus any longer.

The general insurance industry being closely linked to world trade is expected to suffer in a big way on multiple fronts:

• Volumes in most lines of business are expected to be muted.
• Losses due to Covid-19 and its aftermath are expected by Lloyds to be around US $ 107 billion, mainly coming in from liabilities, Trade credit, Employee benefits, event cancellation & business interruption where pandemics had been covered. This however does not mean other lines like marine cargo will not be impacted at all. They will be, but to a lesser degree. The volumes in marine cargo are expected to shrink.
• Lloyds estimates the investment losses of insurers worldwide to be around US $ 96 billion. Many insurers/reinsurers had been flexible in underwriting, given the huge investment returns which gave them an overall decent Return on Investment. Now that avenue has been closed with some bonds reduced to junk status, many on which yields have reduced and equity investments taking a severe beating. 
• All the above may lead many insurers to face solvency or capital adequacy issues and the need to infuse additional capital, which will be very scarce.
• Mergers & acquisitions could well happen.

So, what does the marine cargo underwriter do?  Losses will stare at him in the face, though Covid triggered losses will be hardly any, given that the virus does not affect cargo directly. As trade shrinks, premium volumes would go down and hence the Loss ratios could throw up ugly numbers. This gets compounded because the investment returns too have plummeted. He tries to make good both the underwriting as well as investment losses by staying away from risks, increasing premium rates to abnormal levels or imposing very strict underwriting safeguards. Will this be the New Normal? No, such underwriters would fold up very soon. Past follies cannot be changed with a single stroke of the underwriting pen. So what could be the New Normal?

Certainly there is a case for increasing premium rates and markets will harden , especially in the face of shrinking capacities. It must however be remembered that premium cannot be increased beyond a particular point — some competitor may undercut you or the client may decide to be self-insured in some cases or even opt for a basic cover at a cheaper price. Now let us look at the issue from the client’s standpoint. His business is also suffering and he is under pressure to cut costs and try to increase turnover/ margins. He has had a bad experience with Covid-19 & the attendant lock-downs ( whether he had claims or not) as he was tensed and nobody ( the client, the intermediary or the insurer) was sure if his cargo stood covered or not at different points in the supply-chain, He would not like such anxieties in the future. His ask will be —  If an All-Risks policy is taken, as long as the goods are in the ordinary course of transit, outside his control, any loss, damage or expense till the goods reach him or his buyer should be covered. This may sound outrageous and the purists may ask, can a Marine policy without insuring clauses or Marine policy without exclusions be issued. All of these cannot be met by the underwriter, obviously but there can be some options given to the client.

There could be a policy with simple ICC-A or ICC-C coverage  at different premium levels ( maybe slightly higher then expiring) but if the insurer offers a wider coverage like for instance, including losses caused by Delay if the delay is on account of an insured peril and prices it higher and builds in suitable safeguards, that would offer a choice to the client. He would know that he can have it insured if he wishes at a higher price. That should give him comfort and the choice to go for it or not would be his. This could be the New Normal. Understanding client expectations and offering solutions, challenging the status quo and yet not exposing oneself ( the insurer) to added risks at non-viable prices.

Another example could be the Institute Cargo clauses themselves. Last amended in 2009, the way business is done has changed in the last decade and Covid-19 has brought out the anxieties which the Duration clause of ICC brings to the client. No doubt the point when cover commences and cover ceases under the policy need to be spelt out. Fine with 8.1.1, 8.1.2 & 8.1.3 but why 8.1.4 limiting cover to 60 days after unloading from the oversea vessel? If it is outside assured’s control, cover should continue. Look at a situation where a vessel is captured by pirates and ransom is  being negotiated. It may take many months, but still cover continues under the policy as ordinary course of transit and any loss/damage caused during this period is payable except for losses caused by delay like perishable cargo going bad. If this indefinite period can be considered as ordinary course of transit, why limit the number of days after discharge from the vessel for cover to terminate? Covid-19 has shown such circumstances can arise. There could be still such unforeseen instances. Similar time limitations in Institute cargo clauses (Air cargo) & Inland Transit clauses should be re-looked. Absolutely no reason for limiting cover to 7 days after reaching the destination town, but not the particular named destination therein.

Similarly, specific add-on coverage for cargo ( especially foodstuff, pharma, etc) where no visible physical damage is found, but even without testing if there is a regulatory order for destruction fearing harm to public health, such claims should be admissible. Add-ons can be priced high and included with sub-limits under the policy. These are but a few instances of recognizing client requirements and meeting them.

Insurers who go in for this New Normal will survive the Covid-19 reverse in the short and medium term and thrive in the long term. Those who prefer staying on the sidelines or simply quote obnoxious premium rates alone will get sidelined for sure.