3 June 2022

Covid-19 and the insurance market

The Covid-19 pandemic has significantly impacted the insurance market, both directly and indirectly. The direct cost to the insurance market of Covid-19 related claims has been estimated in the region of $70bn, making it the third largest catastrophe loss of all time.

Munich Re and Swiss Re both reported substantial Covid-19 related losses in their Q1 22 results. Swiss Re posted $820m for Covid-19 claims, much of which are attributed to their life and health portfolio. Munich Re declared a $124m loss on their life and health book driven by $150m of Covid-19 claims.

Business interruption insurance policies in New Zealand have always contained a pandemic exclusion, which meant the pandemic had very little direct impact on the New Zealand market. In Australia the situation has not been so straightforward and protracted litigation continues around policy coverage. The result is that insurance companies are still holding provisional reserves for Covid-19 Business Interruptions claims – IAG (NZI’s parent) has posted a reserve of $1.22bn.

Covid-influenced inflation ups claims costs

The pandemic’s long lasting impact on the insurance market relates to the economic spin-offs, notably high inflation and supply chain disruption.

Inflation is driving up the costs of claims. According to the Cordell Construction report on residential building costs, the cost to build a 200sqm brick and tile house rose by 6.1% in 2021.

The time it takes to reinstate damaged property is also taking longer due to supply chain disruption. This is having a significant impact on both building materials and replacement equipment, whether it be machinery or consumable goods.

Premium increases in New Zealand market

The impact of inflation and the disrupted supply chain combined with an increased frequency of losses are the perfect storm driving up the costs of claims and negatively impacting insurance company results.

This combination of factors is the main contributor to the premium increases that we are presently experiencing in the New Zealand insurance market.

A worrying by-product of this situation is underinsurance. It is vitally important that all clients consider their sums insured on material damage and business interruption policies in light of the current environment.

It is wise to consider getting an updated valuation on buildings (both domestic and commercial) to ensure that the sum insured reflects the current rebuilding costs.

Plant and machinery is another area where the replacement costs in today’s world need to be carefully considered.  In addition indemnity periods and business interruption values should be looked at in light of how long it might take to get a replacement part or new machine if vital equipment is damaged.

Pandemic’s impact on travel insurance

Now the world is opening up again, it is important to understand the extent of coverage and the potential uninsured exposure to additional costs prior to booking any overseas travel.

Whilst most insurers will provide some medical cover when an insured contracts Covid-19 when overseas, there are still varying approaches to cover provided under other sections of travel insurance policies for claims due to cancellation, loss of deposits or other expenses incurred due to Covid-19.

COVID-19