Rays of hope shining through

Ricardo Pinto dos Santos, CEO of MDS Portugal, the Brokerslink partner in Portugal, finds some glimmers of hope in an otherwise tough year.

Q: Are insurance rates, along with terms and conditions, continuing to harden this year? And are there more exclusions?

A: Due to a number of catastrophic events and the pandemic, we are facing an increase in rates across life and non-life insurance. Also, on the underwriting side, we see that most insurers are hardening their criteria and becoming more cautious on risk assessment.  

In several lines of business, the lack of capacity has become an issue and we are facing new exclusions, namely, the cyber and data exclusion (LMA 5401) and communicable disease exclusion (LMA 5394). These have become current market practice in property, while in other lines we have not seen these changes.

Health insurance should also be highlighted here. Following a period of reduced use of this type of insurance because of lockdowns, there has been a surge in demand for medical care, which in most cases surpassed the frequency of claims observed in previous years. On the other hand, the cost of claims grew significantly with Covid-19 testing and with the additional charge for personal protective equipment (PPE) required for a large portion of medical procedures. Also, in the near future it is anticipated there will be increased demand as a result of the greater concern around the prevention and worsening of untreated illnesses during lockdown. Therefore, we expect a hardening in the health insurance market.

According to what we have seen, the most affected lines by far have been cyber and D&O, both in terms of levels of rate hardening and lack of capacity. These are closely followed by property and health insurance.

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

A: From our own experience, we don’t feel that settling claims is becoming more difficult in 2021. While societies are fighting the pandemic, the insurance industry is also facing complex challenges. But it is an undeniable truth that the industry was able to react to the crisis, displaying confidence and high levels of resilience through the multiple waves of the pandemic we have seen so far. And, once again, it has shown it is able to react, manage, recover and learn from such a major crisis. 

The claims settling on an ‘as usual’ basis is a clear demonstration of these innate characteristics, empowered by the large investments in technology and digitalisation that we have seen in recent years.

On a global scale and related to Covid-19, it should be mentioned that losses under property and business interruption policies are still a matter of discussion throughout multiple markets. In Portugal, from day one, the local insurance market immediately declined all the reported claims relating to business interruption losses caused by the pandemic and has not given any signs of a willingness to engage in extra-legal discussions.

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

A: The pandemic radically changed consumer needs and reinforced the view that the insurance industry, more precisely brokerage, is a people business. At a time when face-to-face contact is limited and with digitalisation permeating our lives, customer relations and trust have never mattered more. 

The pandemic helped accelerate the sector’s digital transformation and created growth opportunities, boosting more efficient and effective business models, and new contact and sales channels. We have implemented hybrid distribution systems and facilitated product subscription. Claims management became even more virtual and we have strengthened compliance to better fit the new reality. The pandemic and digitalisation have also contributed to the development and availability of new products and services, responding to customer needs.

Q: What do you see as the key risks going forward?

A: For decades, insurance brokers, insurers, reinsurers and risk management consultants have advised organisations on their exposure to the risk of business interruption. And, considering the impact of the Covid-19 pandemic on businesses and industries around the world, how this type of risk exposure is managed going forward needs to evolve. 

In an increasingly complex and global world, with technology advancing at exponential speed, and supply chains operating with a matrix of components and customers anywhere in the world, the need for an efficient and reliable business continuity management approach is as pressing as it ever has been. 

For a few years now, cyber risk has been considered one of the most perilous to public and private organisations of any size. The pandemic encouraged a societal move from a physical to a digital world where all of us – families, students and corporations – are cyber-reliant and, therefore, cyber-vulnerable. So, if cyber risk was concerning to start with, the pandemic has blown it up to unforeseen proportions and it has now become an extremely pressing matter.

The pandemic has also ushered in a more complex environment for decision-making, forcing managers to make hasty decisions, often based on limited detail or even non-existent information. These actions may come back to haunt managers and their assets in the mid to long term.

Let us not forget either that the risk posed by natural disasters has gained relevance, given their increased frequency and severity. Climate change is affecting the world and Portugal is no exception, being singularly exposed to climate phenomena.

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

A: Societies evolve when they face challenging moments of historical consequence, and the pandemic has led to a change in awareness. Covid-19 came to show that anything can change in the blink of an eye and managers were forced to work in an environment of enormous complexity, where rapid decision-making and the adoption of new security measures were required to ensure business continuity.

Regrettably, and broadly speaking, we felt that the risk management and risk managers in most organisations were not fully prepared for such an unexpected and unforeseen event of the size and complexity of the Covid outbreak. In many cases, risk management was, and still is, mainly focused on known and foreseeable risks, meaning those of high impact and high frequency. 

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

A: As I have mentioned, the pandemic created an even more complex decision-making environment, forcing managers to make quick decisions, often based on poor or non-existent information. This has underscored the need for placing risk management as a top priority tier. It must be on the board of directors’ agenda in any organisation and form a part of their business strategy.

That said, it is critical for the success and continuity of any business that all risks that can affect an organisation – including, of course, cyber and climate change – are carefully analysed and managed. Regarding the risks that the pandemic threw up in 2021, I would highlight three areas:

Cyber – cyber risk has been exponentially boosted by the pandemic. In fact, as individuals and organisations changed their way of working as a response to the Covid-19 outbreak and began to rely primarily on technology and remote working, the frequency of cyberattacks mounted. Cyber criminals took advantage of this new context to launch various attacks. For example, through malicious domes, online scams and phishing, malware, ransomware and distributed denial of service (DDoS).

Supply chain disruption – more specifically, how supply chain diversification can have synergistic effects on the management of other risks, such as climate change-linked extreme phenomena throughout specific areas of the globe.

Political and social risks – mainly because of the economic and social crisis and the upsurge of popular movements that arose from the current pandemic and government measures such as lockdowns.