Jury still out on pandemic’s long-term impact

Stephan Winneg, managing partner, Karl Köllner GmbH, Brokerslink partner in Germany, recognises that it is still too early to tell the final outcomes from Covid-19

Q: Are insurance rates, along with terms and conditions, continuing to harden this year?

A: The rates and conditions on ‘traditional’ insurance lines have been hardening for a couple of years now. While insurers claim that property damage and business interruption rates have not yet reached an adequate level, it seems the market for liability – excluding motor, construction and erections all-risks, and machinery breakdown – is stable. In other words, the markets for these lines continue to harden, however at a more moderate level.

The situation is totally different for insurance lines like directors and officers (D&O) and cyber and related lines. Like almost everywhere in the world, limited capacity is probably creating more headaches for insureds and brokers than the exploding prices. Needless to say, these lines come with substantial changes in cover. Perhaps one of the most remarkable changes is the tendency to exclude ransom payments from cyber policies.

From an industrial insurer‘s point of view, it seems that increasing premiums, limiting cover and a considerably higher demand on clients regarding their risk management practices has not achieved the predictable and adequate results they have sought.

Another area is the limitation and allocation of capacity. We know that D&O capacity has dropped to a fraction of what it used to be and we also know that insurers have been more selective in providing capacity for nat cat risks. But we also see insurance companies reducing their capacity for property FLExA (fire, lightning, explosion, aircraft) risks. 

In the past, it was a question of reputation and power for the large global insurance companies in Germany to provide significant levels of capacity on individual accounts, but this has changed. Against the backdrop of large losses, the only way to ‘get off lightly’ is to reduce the share of risk. That is the latest consequence of the hard market.

In terms of the lines most affected, D&O insurance is surely top of the list. Cyber and trade credit lines are also obvious candidates. And, of course, the entire entertainment insurance market.

Q: Are claims getting more difficult to settle this year?

A: We have not observed any negative changes in the way insurers are handling claims, at least not related to the current market situation. However, after more than a year during which most insurance companies’ employees have been working from home, service quality levels across each and every aspect of the business – whether that’s underwriting, claims handling or day-to-day administration – have suffered.

Q: Has the relationship between insured, broker and insurer changed?

A: Yes, the relationships have changed and the most obvious aspect of this is the shift of power to the insurer. A couple of years ago, many insurers were more than happy to provide capacity at almost any price to industrial clients. The broker’s job was to find the cheapest cover and the insured could relax in the knowledge that almost any of their risks could be transferred to an insurance company. 

So, previously the power was with the insureds and their brokers as the insurers competed for market share. But today, insurance companies are extremely reluctant to provide capacity and, if they do, there is no competition at all on price. Market share is almost not a business target for insurers anymore. At the same time, insureds are threatened by ‘new’ risks – predominately cyber – and must realise that risk transfer to insurance companies is limited. Usually, the broker is the bearer of bad news. 

Besides the impact of the hardening market on the relationship between the three parties, there are other factors at play. The role of compliance and the way organisations work and communicate have changed the picture. The days when deals were done on a handshake are gone. Service level agreements, periodic tenders and a focus on measurable business benefits prevail over personal relationships and trust in the broker’s expertise and experience. The broker’s challenge is to adjust and redefine their own role accordingly. 

What do you see as the key risks going forward?

A: We are all facing a new dimension of cybercrime, or at least the exposure has become more obvious. The recent heavy floods in Germany have shown people in this country that climate change is no longer something that happens somewhere else. Insurance has come to a point where the possibilities to share a risk within an insured community are limited and might even come to an end – ransom payments in connection with cyberattacks, for example. The key risk is the gaps insurance leaves and the main challenge is how to address these gaps.

Q: How do you think risk management and risk managers fared in the pandemic? 

A: For me, the real risk managers during the pandemic were the employees whose working environments literally changed in one day. Parents who had to deal with a home office and closed kindergartens and schools, people who suddenly swapped their desk in an office for their dining table at home, all managed to keep companies going.

The big question for a risk manager has been: what are the scenarios we would have to consider in the future? Nobody really imagined a pandemic like the one we are still facing, so why would we be able to predict future threats like this? Perhaps the real lesson we have all learnt is that we have to be prepared for the unexpected  

Q: What are the key lessons learnt from the pandemic?

A: As far as business is concerned, I think it is still too early to talk about specific key lessons because we are still learning. Though we have learnt that work can be organised more flexibly and that technology is key – something that is very obvious to everybody who still works with physical files and ‘old-school’ IT systems. 

Many companies found that their businesses were not affected in the way they perhaps expected they would be and, at the same time, their costs were substantially lower as a result of there being no corporate travel or entertainment, no face-to-face meetings or conferences and, last but not least, a reduced need for office space. In other words, they learnt that a stable business based on lower costs means more profit. 

From an employee point of view, the pandemic may change their perspective on not just where they work but who they work for. If the company wants them to work from home, does it eventually not matter who their employer is? The concept of loyalty, the commitment and dedication to their employer, human relationships with clients, colleagues and company management, become less relevant and, from my point of view, understanding these characteristics will be the real secrets of success. 

The risks and lessons from the pandemic will inevitably drive these developments.