Like other commercial insurers reporting first-quarter earnings, W.R. Berkley Corporation included a provision for COVID-19 related losses. But that doesn’t mean the specialty insurer or the industry is on the hook for claims excluded by policy language.
“In no way, shape or form should this be interpreted by anybody [to mean] that we are acknowledging—this is not a statement about coverage or anything related to that topic,” said W. Robert Berkley, Jr., chief executive officer, responding to a question from an analyst on an earnings conference call on Monday evening.
The analyst suggested that earnings charges like W.R. Berkley’s $66.5 million provision for COVID-19 related claims, an $86 million provision from Travelers and $13 million booked by Chubb in the last few days for the first quarter could be misinterpreted by “creative” plaintiffs’ lawyers. “To the extent that people are putting IBNR numbers out there, is there the potential for the plaintiffs bar to say, ‘Look, this is proof that these are losses, these should be covered. The industry is putting dollars aside,” the analyst said, prompting Berkley’s answer.
“No, we do not think that that is the case at all. From our perspective, the money is set aside for a variety of different reasons,” Berkley said, promising that the company would explain more details of the estimate in its upcoming 10-Q filing with the Securities and Exchange Commission.
“The vast majority of what we put up is IBNR,” Berkley said, in opening remarks, referring to incurred-but-not-reported losses. “We are of the view that one cannot just sit and take a completely wait and see attitude,” said Berkley, attempting to explain the provision. “Given what we see out on the horizon, we felt as though it’s our job to be proactive and to be thoughtful. So, undoubtedly, the various analyses that we went through to come up with this number will not prove to be spot on, but we felt as though we needed to do something and that is how we came up with this number.”
“Based on the information we have, I can’t tell you whether we got the porridge too hot or too cold, but it is our best estimate. And again, most of that is IBNR,” he said.
Much of the plaintiffs’ bar with support of litigation funding vehicles that are out there seem to subscribe to the unfortunate idea of never letting a crisis go to waste.”
W. Robert Berkley, Jr.
The premium growth was the fastest rate in five years, the company reported, attributing the growth to rate increases that have been needed to keep up with loss costs that were rising as a result of social inflation even before the pandemic.
During the call, Berkley, who has commented on activities of the plaintiffs’ bar and litigation funds that support them contributing to rising loss costs on prior conference calls, voiced concerns about more such activity related to COVID-19.
“Much of the plaintiffs’ bar with support of litigation funding vehicles that are out there seem to subscribe to the unfortunate idea of never letting a crisis go to waste,” Berkley said. “Some seem to be unencumbered by what the words in a policy say and are very skilled at managing the media,” he said, seeming to focus his remarks on widely reported activities of state and federal lawmakers aimed at retroactively rewriting the language of property policies related to business interruptions.
Earlier in the day, Alan Schnitzer, CEO of Travelers offered a similar assessment. “We should all be concerned that many frivolous lawsuits will be brought and will undermine the nation’s recovery [by] adding expense to R&D related to the development and distribution of COVID-19 tests and therapeutics, delaying employers from responsibly bringing employees back to work and retail businesses from responsibly opening to customers,” Schnitzer said. (Related article, “Travelers CEO Sounds Alarm: Lawyers Could Slow COVID Recovery”)
Berkley ended his opening remarks seemingly anticipating the question about misinterpretations of the IBNR provision that the analyst would post later. “It’s important people not misconstrue the provision that we put up. Our policy wordings, from my perspective, are very thoughtful. We have the appropriate exclusions in place when it comes to things such as viruses. And of course, we have the additional triggers in place to make sure physical damage is required in order to trigger business interruption.”
“But nevertheless, there’s still a lot unknown,” he said.
Trying to get a clearer picture of the IBNR provision in advance of the 10-Q filing, one analyst asked if he could think of it as “a best estimate of all future losses” driven by the COVID environment—a “one-time hit” for Berkley. Another asked for a line-of-business breakdown.
“The way I would encourage you to think about this is [that] we took a snapshot at the end of the quarter, and we looked at that snapshot and looked at everything that we knew. And based on what we know, we did our best to come up with what [we thought would be] an appropriate estimate…based on the available information at the time,” Berkley said. “I can’t promise you that the number won’t go up or the number won’t go down. What I can promise you is, based on the available information at that moment, we did our best to estimate what we think the cost will be for this company.”
“So, no, this is not just [the] claims that had come over the transom. It is not that at all. It is our best estimate, understanding the situation and understanding our portfolio, what do we see the costs associated with this circumstance being,” he said.
RLI Reports; Executive Weigh In
While both W.R. Berkley and Travelers included such loss provisions in their earnings reports, a third company to report on Tuesday—RLI Corp.—did not. Commenting on some of the details of a $61.3 million bottom-line loss, driven mainly by stress in the capital markets, and underwriting income of $72 million producing a combined ratio of 92.0, RLI President and Chief Operating Officer Craig Kliethermes, revealed that his company has already received 500 claim notices.
During a conference call on Wednesday, Kliethermes said that while the claims related to multiple insurance products, roughly 95 percent were related to business interruption related.
In dealing with the claims, company claims examiner conduct an investigation of each claim, “including taking into account the loss details and any documentation provided by the insured, the nature of the claim as well as any other relevant and available loss details. Every claim is individually analyzed in conjunction with the insurance product purchased by the insured, and is then handled in accordance with the appropriate claim handling laws and regulation that apply.
“RLI will stand by and fulfill its obligation to pay claims we owe, but it will take more time to assess and quantify any amount,” he said.
My view is the only solution for this is a federal one, similar to what happened after 9/11. Our industry needs to help the government shape that solution, so that if and when this happens again, there’s a fund and backstop for uninsurable pandemics.”
Jonathan Michael, RLI
Chief Financial Officer Todd Bryant reiterated that the claims team is in the process of individually analyzing the claims. “We have not put up any indemnity estimate in the quarter. But just given the sheer number of the claims. We did put $5 million in the quarter for the cost of investigating and defending or adjusting those claims,” he reported.
Like the other executives, Kliethermes and RLI CEO Jon Michael devoted part of the call to restating the industry’s position on paying only claims that are covered by policy language. Kliethermes also said that every one of the RLI’s property policies that he has personally reviewed in recent weeks “has a trigger which basically says that there has to be direct physical loss of or damage to property.”
In addition, “the vast vast majority” of RLI’s policies have a specific virus or communicable disease exclusion. “That’s not on every policy. But certainly, the vast, vast majority contain those exclusions,” he said.
Echoing other executives on the broader industry perspective, he said, “A viable insurance industry operating with contract certainty is necessary for the economy to restart and function normally and efficiently. Through governmental overreach and an opportunistic plaintiffs’ bar, we are bearing witness to another attempt to retroactively rewrite and impose coverage into policies that don’t provide it. This poses a visible threat to the insurance industry and will impact the cost and availability of insurance going forward.
“No industry should be asked to accept the transfer of risk onto its balance sheet without the opportunity to consider price, underwrite, or risk manage the exposure,” he said.
CEO Michael concluded the call in a similar manner. “For our industry, the real existential threat is that regulators and politicians are attempting to retroactively impose coverage on policies that did not provide coverage, and insurers did not underwrite for that coverage nor charge premium for that coverage. Plaintiffs’ attorneys will attempt to force the issue as well. In the end, only the lawyers win,” Michael said, going on to call for a TRIA-like vehicle of pandemics.
“My view is the only solution for this is a federal one, similar to what happened after 9/11. Our industry needs to help the government shape that solution, so that if and when this happens again, there’s a fund and backstop for uninsurable pandemics,” he said.
Chubb Plan To Be Revealed Soon
Separately, on an earlier call yesterday, Chubb CEO Evan Greenberg, endorsed the idea of a prospective partnership with the federal government to cover pandemics.“I absolutely see a public-private partnership prospectively,” Greenberg said, first nixing the idea of one that would address the risk on a retrospective basis. “The retrospective one would say, why don’t you pay the BI [business interruption] losses and the government will backstop you 100 percent? Well, right now, the government’s current program to provide loans that then become grants if you retain your employees, is a very efficient way versus now we create some BI way,” he said, noting the complicated process involved in adjusting business income insurance claims involves proving the loss, proving what the insured’s expenses and loss revenue were. “The adjudication of that is messy and takes time….
“It is time-consuming and it’s one at a time. And what matters right now is cash flow to small businesses.”
“And so, it wouldn’t be an efficient way of dealing with the cash flow needs. The government’s already created a program. So, what problem are we trying to solve?” he asked.
Turning to a prospective mechanism, Greenberg envisions the government taking on the tail risk that insurers cannot cover.
“Why doesn’t the industry underwrite pandemic? Because of the size of the tail….It’s an event that has no geographic or time limits.”
He continued: “The industry has a finite balance sheet that can’t take infinite risk. If the government would take the tail risk and take the significant loss in a pandemic event, the industry, I believe, could take a retention, and could be underwriting pandemic,” he said, revealing that Chubb has put together its own proposal for this. “We will be sharing that around shortly with the appropriate parties, both inside the industry and outside the industry,” he said.
Before that analysis, which concluded the call, Greenberg had his own tussle with an analyst wanted to get a better sense of what type of number Chubb might book in the second quarter to reflect COVID-related losses.
“Should we assume that you will put up a catastrophe loss for what you expect will be your ultimate exposure from COVID,” the analyst asked,
“It’ll depend on what we know. Get used to being in a world with a lot of unknowns and a lot of uncertainty right now,” Greenberg said. “You’re requesting certainty when there’s a great deal of uncertainty.”
“We will let the facts speak to us. We will put up our loss based on the facts as we know them at the time, when we come to close the books on the second quarter. And I’m not going to speculate ahead right now,” he said, declining to describe exactly how Chubb might approach the task.
“We will put up—and we always do—our best estimate of ultimate loss to an event,” he confirmed.