Insurance in a Global Pandemic
By Greg van Ginkel
Prairie manufacturers are used to dealing with challenges. From supply chain issues to international border closures, the impacts of the COVID-19 pandemic on this sector are significant. Insurance coverage for manufacturers is no exception.
Impacts of COVID-19 on the Insurance Industry
In considering the impact of COVID-19 on manufacturing insurance, it’s helpful to first understand how the pandemic has affected the global insurance industry. A traditional industry with deep roots and a long history, insurance underwriting is largely driven by people in offices. The transition to working from home presented new challenges for these operations, including limiting underwriters’ access to important systems and files. This has reduced insurers’ capacity to process submissions and, in many cases, has left manufacturers with fewer viable insurance options.
Simultaneously, COVID-19 has reduced profits for businesses around the globe. These businesses are turning to their insurers, who are and will continue to be inundated with general inquiries and claims across multiple lines of insurance. The global insurance industry has had to react to this influx of activity while managing the challenges of remote work.
In addition, the volatility and falling interest rates within the financial markets will likely impact general insurers from an earnings and solvency perspective. The impact of COVID-19 on global insurance markets is largely felt through asset risks — notably, capital markets volatility and weaker premium growth prospects.
As the insurance industry is global in nature and as countries are at different stages of their own COVID-19 pandemics, there are major barriers in gaining quick responses to decisions that are required to underwrite certain classes of risk. Within manufacturing, any type of activity or product that has the potential — or the perceived potential — to create property damage or result in bodily injury will be scrutinized very heavily, which will result in loss of coverage, higher deductibles, and increased premiums.
Underwriting considerations for manufacturers
As a direct result of COVID-19, the factors used to evaluate risk have broadened. Different types of insurance, including cyber, credit, property, and general liability are being scrutinized more stringently by underwriters in the manufacturing sector.
The insurance industry is rapidly adopting technology used to collect and analyze data. The underwriting community is able to gather and analyze data more precisely than ever before. This has resulted in a much more targeted approach to underwriting, pricing, and the acceptance of risk. When assessing manufacturing risks, underwriters analyze the specifics of the products being produced, including what the products are, where they are sold, who will use them, the production process, the physical attributes of the manufacturing facility, and where that facility is located.
An underwriter’s perception of manufacturing risk is determined by the type of operation or products produced. For example, a Prairie agricultural manufacturer producing non-moving parts, such as harrow blades, has much different exposures than does a business producing grain augers or post hole thumpers that people use and have a greater exposure to injury. Similarly, the physical property risk of loss is much different between a light metal manufacturer using non-flammable materials or processes and a plastics manufacturer.
The effect that products and operations may have on third-party losses covered by the insurance industry are highly scrutinized. A manufacturer’s ability to articulate details of their operation and how they mitigate risk is crucial. Similarly, insurance brokers must be familiar with the manufacturing sector and the nuances associated with specific operations. If a broker representing a manufacturing company is not able to effectively communicate the intricacies of the business, it is likely that underwriters who are unfamiliar with that operation will pass on offering terms.
Being able to separate one company from the rest of the industry while articulating why that entity is a better risk will result in more and better terms than those received by competitors. That is not to say that the terms of this coverage will be ideal, but that this work will help to obtain coverage that may not otherwise be available.
How insurance market conditions impact manufacturers
Insurance rates for the manufacturing sector have been on the rise since 2019. COVID-19 has exacerbated a withdrawal in underwriting capacity since then, resulting in more competition among insurance customers. This lack of capacity is, in part, due to declining financial results for insurers around the globe. This decline is influenced by several factors, the most notable of which is losses related to claims surpassing revenue from insurance premiums. These factors have significant implications for various lines of insurance that many manufacturers carry.
For instance, it is anticipated that credit insurance will be hit hard. This insurance covers businesses against debts that cannot be paid by their customers or suppliers. Coverage for credit insurance has limited exclusionary language — if corporations go out of business due to COVID-19, insurers will be faced with significant default claims. Consequently, rates for this line of insurance are set to increase dramatically.
For manufacturers selling into the United States, product liability litigation exposure is significantly higher than it is for manufacturers selling within Canada. A liability claim south of the border is likely to result in a minimum of tens of thousands of dollars in litigation costs. The impact of this reality on small and medium-sized manufacturers is considerable, as they will ultimately pay for this cost in the form of increased premiums or deductibles. With the volume of litigation having increased significantly throughout the pandemic, it’s expected that premiums for this line of insurance will only continue to increase, even if a manufacturer’s exposure has remained consistent.
Due in large part to the SARS outbreak in the early 2000s, most insurers have since introduced exclusionary clauses for communicable diseases and epidemics/pandemics to property and casualty products, including business interruption insurance (BI). Indirect loss coverages, like BI, typically pay a claimant only if physical damage occurs to a business’ assets. As a result, COVID-19-related BI claims may not be covered — or, if they are, that coverage is likely to be limited to the time it takes to disinfect the affected property. It is notable that there are several mass tort and class action lawsuits already underway to dispute related policy restrictions.
Mitigating rising premiums
Manufacturers can help mitigate the impact of current underwriting restrictions, rising deductibles, increased business interruption waiting periods, and rising premiums.
One of the keys to doing so is demonstrating that there are strict processes in place to account for and mitigate anticipated supply chain issues should the manufacturer suffer an insurable loss, such as fire. Risk mitigation consideration should be given to purchasing spare pieces of critical equipment or components where lead times for such components may be impacted by the supply chain.
It is recommended that manufacturers consider limitations of liability on product performance when negotiating pricing with their customers. The implementation of indemnification clauses and hold-harmless agreements should also be considered. Though these contractual elements may appear to reduce a manufacturer’s competitive advantage, they have the potential to sustain and protect the industry. If significant losses continue to occur for manufacturers, the insurance industry may reduce coverage or eliminate it entirely. These losses existed before the pandemic and have only been exacerbated by supply chain shortages and delays.
An additional area that requires risk mitigation is workers’ compensation claims. We may see spikes in workers claiming they were not adequately protected by their employers against exposure to the COVID-19 virus brought about by their normal working duties.
In the Prairies, most employees are covered under provincial workers’ compensation plans, but the cost of claims overall will be passed on through higher future premiums. Manufacturers will need to implement measures to help reduce the chance of virus spread.
Risk mitigation has always been important in manufacturing. Since COVID-19, it is now one of the most important areas of this business sector — not only for safety, but for reducing the cost of risk transfer as well.
Greg van Ginkel is Managing Partner with EQUA Specialty Risk Partners Corporation in Regina, working as a specialist in risk strategy and program formulation for North American organizations. With nearly 40 years in insurance and risk management, Greg has extensive experience with risk in almost every industry, including manufacturing, power utilities, construction and design, energy, telecommunications, finance, real estate, government, education, agriculture, and transportation.