Whether they are convinced that they absolutely need them or not, some reinsurers aim to try to put pandemic exclusions into casualty reinsurance contracts next year, a reinsurance broker representative revealed recently.
Amanda Nguyen, U.S. Casualty Solutions Leader for Reinsurance within Aon’s Reinsurance Solutions business, shared some details of a conversation she had with one reinsurer’s head of wording during an interview with Carrier Management, noting that the reinsurance company representative said, “We’re going to try to get an exclusion in every case. We’re just going to put it out there.”
“We don’t actually think we need it on the traditional casualty lines,” the reinsurer said, noting the clearer need in workers comp and medical malpractice, Nguyen reported. “It wasn’t one of the big two,” she said, without further identifying the reinsurer.
“What we don’t want to have happen is coverage that has always existed for contagious disease that is non-pandemic [gets] removed.”
Amanda Nguyen, Aon Reinsurance Solutions
“To me that defines the approach that’s going on” she said, summing up the thought process of some reinsurers. “Why not ask and then leave it up to the brokers and the clients” to resist.
Asked to share more information on the proclivity of reinsurers to take this approach, she said, “I wish we had a one-line answer to that because it’s incredible how all over the map the marketplace is in the reinsurance space.”
Nguyen noted the importance of contract discussions. “It is the product we sell. It’s a contract. We’re working really hard to try to get the best outcomes on the language because what we don’t want to have happen is coverage that has always existed for contagious disease that is non-pandemic [gets] removed,” she said.
“We really want to [ensure] that if there absolutely needs to be some type of exclusion, that it is reasonable and appropriate for the client and that it does not take away coverage that the clients always had and for which reinsurers could price in the losses.”“Our standard is we’d like no exclusion. But it can be challenging when you’re trying to build consensus and it can be challenging when you’re trying to bring in certain partners that are of interest to the client to have on their panel. And so we’ll work with our client to find the narrowest—i.e. the best-for-the-client—approach possible,” she said.
Few Claims on Casualty Biz
Nguyen noted that one reason there’s not an across-the-board standard of reinsurers universally adding pandemic exclusions is the fact that “there isn’t a ton of casualty claim activity.”
“When you look at the numbers on a relative basis, it is still a small portion of what we’re seeing in the United States. In other venues [there’s a] different distribution, but certainly in the United States it is a very small amount so far.”
“We’re reserving judgment” on how the casualty claims situation will play out, she said. “There’s always a surprise, but by and large, if you look at a general liability umbrella policy, it’s very difficult to trace a gross negligence-type situation when you’re in a pandemic lockdown” to a specific insured.
Another reason for the lack of uniformity on exclusions starts at the primary insurance level. For insurers, it is harder to add exclusions on admitted paper than in the E&S space. “What are your remedies? Can you apply them? Should you? Is it even appropriate to apply an exclusion? We talk to different clients of different sizes and scope” who are wrestling with the questions. “In speaking with some of our middle market or SME-focused clients, I can tell you that they struggle in the admitted space even if they have proprietary or ISO-based exclusions they could use. They struggle to use them because they can’t justify putting in broad-based exclusions to the Department of Insurance when they’re not really getting claims.”
They’re also “struggling with perception,” she added, explaining that insurers like other businesses operate in “a cancel culture” and don’t want to be perceived as bad business operators. “They don’t want to be seen as taking advantage of their insured when they don’t have claims or they have very limited claims,” she said.
For larger accounts, where there are some more obvious exposures—where employers liability issues or other potential claims may be emerging—”we understand that some exclusions are able to be taken up” on the admitted retail side, she said. And, while E&S carriers are not quite as “all over the map” as admitted carriers and reinsurers, Nguyen said that even with freedom of rate and form available, the E&S writers are not uniformly adding exclusions. “Not everyone did it. Not everyone did it with the same type of language,” she said, recounting conversations she has had with retail broker counterparts at Aon.
Moving up to the reinsurance marketplace, “you’re operating where there aren’t a ton of claims, it’s unclear how you prove that there is loss going on, certainly in GL and umbrella and auto, and there is talk of deceleration of [social inflation] trend in general that could be happening at the same time. So, it’s very tricky.” (See related article, “Casualty Re Market ‘Rational’ Despite Likely COVID Whiplash on Social Inflation.”)
Many reinsurers are being thoughtful and differentiating between cedents in renewal pricing discussions, and that “holds to the COVID discussion as well,” Nguyen said. “It very much depends on the original book of business. What’s in it, what’s not in it, what’s the underwriting and claims management approach, and so on.”
Still, she reported, “There are a few reinsurers—a few seems a lot, and a couple seems too little—that are being really emphatic and categorical about the need for some type of exclusion.”
“Terms have to be clearer with regard to pandemic, and we will do that in the renewals to come.”
Thierry Léger, Swiss Re
Asked whether she might characterize the reinsurance exclusion writers as coming from Lloyd’s or Europe or the U.S. or Bermuda, perhaps, Nguyen said, “We’ve heard rumor that one or more of the larger guys are going to try at 1/1 to put something forth [on] a broad basis.”
“I haven’t yet observed that personally, and I’ve just done some very material transactions with them at 8/1, both of the biggest guys, she added.
Nguyen did say that she has “seen some fear coming out of Lloyd’s but not across the board. [And] we’ve seen a couple of the specialty reinsurers in the U.S.” move toward exclusions.
During a virtual media conferences in early September, executives from the two largest reinsurers—Swiss Re and Munich Re—simply called for clarity in contract wording.
Thierry Léger, group chief underwriting officer for Swiss Re, said, “Terms have to be clearer with regard to pandemic, and we will do that in the renewals to come. Also, we view it as important that the pandemic peril will be more standardized within the claims modeling of our clients and of ourselves. [That] will require a bit more time, but we are already on that journey,” he said.Moses Ojeisekhoba, Swiss Re’s chief executive officer for Reinsurance, addressing a question from the media about how reinsurers are responding to the pandemic today, spoke first about current discussions between the industry and governments. “When you look at the financial impact of a pandemic of this scale and you juxtapose that against the capitalization of the entire industry, it is extremely clear that the industry alone cannot pay for such events. So, one critical component in preparation for the next event clearly is the public-private partnership component—how we work with governments to ensure that there’s sufficient capacity to absorb the risk that ultimately comes,” he said, also noting the significant infrastructure that the industry can bring to bear to deliver payouts in such partnerships.
Going on to express pride in the industry’s overall operational ability to continue to serve customers during the pandemic by moving to a virtual environment almost overnight, Ojeisekhoba concluded his response by turning to the issue of policy language.
“I think this issue around clarity of language—understanding what is included or not included and charging appropriately for them, understanding where it makes sense [to have] standardization rather than everybody making their own policy wording bespoke, which then creates confusion—I think these are things that are super important in trying to make sure that we don’t end up in this type of situation again further down the road,” he said.
Léger agreed. “The whole pandemic still is ongoing.” Therefore, finding “a way to cover pandemics in a clearer way or to exclude it where it needs to be excluded is very important,” he said.
During Munich Re’s Sept. 7 virtual media conference, Torsten Jeworrek, member of the board of management, predicted that rewrites of terms and conditions would be part of a hardening reinsurance market over the next two years. “Why is that necessary? It has…not only to do with Corona,” he said. Instead, this “is the usual pattern of the soft market, which we have gone through [during] the last 10 years or so, that all the terms and conditions weaken here and there.”
Now is the time to look at such conditions,” he said.