EPIC Risk Advisory Bulletin
Volume 1, Issue 24
In this issue, we take a focused look at:
- Supply Chain and Business Risks
- The State of Business Travel
- Insurance Products and Coverage Information
- Cyber Attacks are on the Rise
- Insurance-Linked Securities Rebound from Pandemic Disruption
- Western Wildfire Losses
- Presumptive Compensability Legislation
- News of Note
- Human Resources and Employee Benefits
- Coronavirus’ Impact on Healthcare and WC Budgets
- Insights from Across the Firm
The information presented here is intended to provide a high level overview of critical areas of concern for businesses around coronavirus. Consult your EPIC insurance broker for more in-depth guidance.
Supply Chain & Business Risks
The State of Business Travel
The fate of business travel has been up in the air since March. With no end to the pandemic in sight, it’s worth exploring when business travel will resume to pre-pandemic levels. Telework and video conferencing capabilities have kept workers connected across many professional industries, and it’s unlikely that large in-person events will return before an effective coronavirus vaccine is produced, distributed, and adopted on wide scale.
Research from McKinsey shows that a resumption of normal business travel activity will take years to occur. Corporate travel spending, which is a significant source of revenue for airlines and hotels, was in excess of $1.4 trillion in 2018. Half of that spending was concentrated in China and the United States. Historically, business travel has been slower to rebound than leisure travel, as was seen during the 2008-09 global recession. Then, international leisure travel recovered in two years, compared to the five years it took for international business travel to recover.
Despite claims from airline executives of a less than 1% chance of contracting coronavirus through flying, airlines have been particularly hard hit. Indeed, they have been making headlines as they struggle to avoid mass layoffs and retain some measure of solvency. By April 2020, U.S. airline capacity had declined by 70 percent from 2019 levels, which was a decline four times greater than what was seen after the September 11 terrorist attacks.
Once companies and employees feel safe using airports and hotels again, experts are predicting they will do so in phases. Public health, government regulations, vendor health, safety policies, and employee willingness to travel all play a role. Regional travel by car for in-person sales or client meetings and essential business operations in the manufacturing, pharmaceutical and construction industries is likely to return first.
Domestic travel by air or train for internal meetings and small group gatherings in the tech, real estate, finance and energy industries is expected to be next, followed lastly by international air travel for industry conferences in the healthcare, education and professional services sectors.
Of course, once events do resume, they will look entirely different than before the onset of the pandemic. Sales-oriented conferences and trade-show exhibitions may be the first to resume in-person events. However, many events will retain virtual and hybrid options, even using multiple locations to keep attendees levels lower at each spot, yet higher overall.
China and South Korea provide an interesting example of what the U.S. may hope to achieve. There, major domestic auto and construction trade shows resumed in April with 40,000 attendees. Health and safety requirements and mandatory mask and glove wearing, as well as physical distancing were enforced throughout the in-person event.
Insurance Products & Coverage
Cyber Attacks are on the Rise
It should come as no surprise that while the pandemic has crippled industry around the world, it has done nothing to slow down the nefarious activity of cyber criminals. Banks, healthcare organizations, and shipping companies are just some of the industries under attack.
In its digital defense report, Microsoft noted that cyber criminals have rapidly increased the sophistication of their attacks this year and are using techniques that make them harder to identify. Even the most well-prepared targets can be duped. Nation state actors from North Korea are perhaps the most active in targeting private commercial interests, hitting banks in 38 countries, and sometimes 30 at a time. A warning from U.S. government agencies indicates they have stepped up their attacks during the pandemic, with one group stealing tens of millions of dollars this year alone.
The North Korean group attempts to gain access to financial institution systems through spear phishing and watering hole attacks, as well as social engineering scams such as posting fake job applications on LinkedIn. After targeting a system, they patiently escalate privileges until they are able to gain access to the bank’s SWIFT terminal and server hosting the payment switch application.
Microsoft’s report supports this information, highlighting four trends reveled through its tracking activity:
- In 2019, over 13 billion malicious and suspicious mails were blocked, out of which more than 1 billion were URLs set up for the explicit purpose of launching a phishing credential attack.
- Ransomware is the most common reason behind incident response engagements from October 2019 through July 2020.
- The most common attack techniques used by nation-state actors in the past year are reconnaissance, credential harvesting, malware and virtual private network (VPN) exploits.
- IoT threats are constantly expanding and evolving. The first half of 2020 saw an approximate 35% increase in total attack volume compared to the second half of 2019.
Microsoft and nearly all cyber security experts warn companies to ramp up their defenses by investing in people and technology to stop attacks; regularly apply security update; put in place comprehensive backup policies; and enable multi-factor authentication (MFA). Its data showed that enabling alone would have prevented the vast majority of successful attacks.
Despite these warnings, the 2020 Travelers Risk Index found that fewer companies are taking steps to mitigate cyber threats than did so last year. Of the 1,200+ companies that participated in the survey, less than half said their organization has used hacker intrusion detection software, undergone a cyber risk assessment, or written a business continuity plan capable of responding to a cyber attack.
EPIC professionals are well versed in working with insurance providers to craft the best cyber offerings for clients. For more information about cyber coverage, contact your EPIC broker.
Insurance-Linked Securities Rebound from Pandemic Disruption
Issuance of insurance-linked securities slowed when the COVID-19 pandemic roiled markets earlier this year. However, interest in them has picked back up as investors seek ways to diversify their portfolios.
Broadly speaking, Insurance Linked Securities (ILS) are nontraditional reinsurance mechanisms that transfer insurance risk to capital markets. The market for ILS has grown substantially over the last ten years, with notable attention coming from pension funds and other institutional investors.
Reinsurers looking to buy protection for their peak risks offloading insurance risk into the capital markets in the form of catastrophe (cat) bonds, which securitize the risk for investment.
The funds are put into a collateral trust and typically invested conservatively. If there is a catastrophe event of significant magnitude, and the loss is great enough to trigger a payout, the investors’ capital will be used to refund the insurance company for claims they incur and the investors lose their capital. To date, very few cat bonds have triggered a payout.
While established ILS products offer investors investment opportunities not closely correlated to mainstream financial markets, some recent ILS structures are closer to those markets than has traditionally been the case.
First-half cat bond new issuance reached $6.6 billion, which exceeded the $4.7 billion that was issued during all of last year. Recent growth has come from mortgage insurers, which correlates some cat bonds more closely with the U.S. economy than is typically seen.
One issue that could impact the pricing of future cat bonds is the loss sustained by the World Bank’s Pandemic Catastrophe Bond. Part of the organization’s Pandemic Emergency Financing Facility, it transferred $425 million of risk to the market through the bonds and derivatives. When the coronavirus pandemic met necessary activation criteria, the steering body of the Pandemic Emergency Financing Facility allocated nearly $200 million to 64 of the world’s poorest countries. Losses to investors in the World Bank Pandemic Bond could result in higher prices for similar bonds down the road.
Despite losses, the overall insurance-linked securities market appears to be resilient and poised for sustainability.
Western Wildfire Losses
The staggering losses sustained to forest land and property along the western coast of the United States could further complicate an already tangled landscape for insurers, who frequently clash with regulators over how to price property coverage. Still early in fire season, insured losses are already positioned at $4 to $8 billion.
In California, where 15 percent of state land is considered uninsurable, the California Fair Plan Association is the only option for many seeking coverage. For residents in wildfire disaster zones, all policy non-renewals have been suspended by state insurance commissioner Ricardo Lara until December. The order was given a year ago and was intended to allow for increased capacity that has yet to materialize.
High value homes are driving much of the modeled loss in California, where agents are pairing basic Fair Plan fire policies with separate contents and liability coverage from conventional carriers to try to secure insurance for clients. Such pairings are known as Difference in Conditions (DIC) policies.
EPIC managing principal Stan Sanchez commented to Insurance Insider about such policies, saying, “the California Fair Plan is going to be way over-utilized and can do little for a homeowner whose property is valued at more than $3 million.” He described the high-net-worth market as one where rate rises “are highly divergent, with low-risk properties getting away with a 5% to 10% rate rise, medium-risk homes being charged a 10% to 20% increase, and high-risk properties seeing rates up as much as 100% to 200%.” Sanchez cites some who are paying $35,000 a year to insure a $2 million home in a high risk area.
Further north in Oregon, fires in the Cascadia mountains are bringing into question existing fire models and creating the possibility of large losses for many primary carriers there. The hope for high risk properties in both states is that sophisticated modeling techniques and a new approach to forest management may bring down insurance rates to single digit percentages and lower insured losses, respectively.
For more information about how these events may impact you, contact your EPIC broker.
Presumptive Compensability Legislation
An ongoing issue affecting workers’ compensation is presumptive compensability legislation from states. At least 18 states have proposed workers’ compensation bills related to coronavirus, including an expansion of coverage for either frontline, essential or all workers. Some states have issued executive orders, bulletins, emergency rules and directives on workers’ compensation coverage for certain workers. It is a dynamic situation that warrants monitoring by employers.
Fear of lawsuits and potential business liability is pushing a number of states to seek some degree of immunity for employers. Arguments in support of this action include sometimes confusing federal government guidance on pandemic safety rules; the continuing spread of coronavirus infections that may be traceable to workplaces; and a lack of federal law providing businesses immunity from coronavirus-related lawsuits.
While some states have immunity measures in place for businesses, it is unclear how courts will interpret these measures, should lawsuits begin to materialize. Thus far, the number of liability lawsuits has remained small overall. The federal government has taken action to attempt to provide national liability protection through the Safe to Work Act, but that has yet to be included in any passable legislation.
On a state level, some states, such as Michigan, where the house legislature has passed immunity protection, may not see that legislation enacted. There, Gov. Whitmer indicated a desire to veto the legislation, citing that existing laws already provided protection from willful negligence on the part of employers in failing grossly to protect workers.
As this is a fluid situation, remaining current on what is happening in your particular state is critical. Ogletree Deakins has assembled a searchable table to track which states have implemented or proposed amendments to state workers’ compensation statutes. The table also addresses workers’ compensation benefits for health care workers and first responders. Access the table
For more information, contact an EPIC team member.
News of Note
The passage of another two weeks has brought forth more developments across the insurance world. Here is a rundown of recent news stories of interest.
- English high court finds that business-interruption insurance can cover COVID-19 losses, National Law Review, Oct. 6
- D&O rate escalations and how COVID could make them even sharper, Risk&Insurance, Oct. 6
- California reports comp premium declines, Business Insurance, Oct. 6
- Cal/OSHA fines Los Angeles grocery stores for coronavirus violations, OH&S, Oct. 5
- COVID ‘long haulers’ ask who pays when sickness just won’t end, Bloomberg Law, Oct. 5
HR & Employee Benefits Insights
Coronavirus’ Impact on 2021 Healthcare and Workers’ Comp Budgets
While the course and impact of coronavirus was initially unpredictable, much has been learned since March about how it may impact employers’ healthcare and workers’ compensation budgets for 2021. Three affects are clear – mental health claims are up; elective procedures are down; and workers’ compensation claims are down.
The pandemic has created unanticipated levels of stress, anxiety and depression in many workers across America. As a result, mental health claims are on the rise. Employers have traditionally taken a passive approach to providing awareness and information around mental health. However, it’s become increasingly clear that employers should take a proactive approach to this issue by creating benefit plans with strong behavioral health coverage and actively seek to promote awareness of resources available for employees experiencing mental duress. Issues that start off with anxiety and depression may advance into a range of more detrimental issues, including substance abuse and physical claims, so heading them off with proactive awareness and education may help prevent more severe issues down the road.
While mental health claims are up, every other type of elective procedure is down. An uptick in these procedures is anticipated, as workers who have been deferring care move to resume those procedures. This could affect employers’ healthcare budgets in the year ahead, depending on how quickly employees seek to have elective procedures and how aggressively providers reschedule and bill for such procedures.
A final impact worth considering is the effect coronavirus is having on workers’ compensation claims. Overall, claims are down. This is in part because of the large numbers of employees working remotely; nearly half of the American workforce has worked entirely or partially remotely at some point during the pandemic. The result is fewer workers’ compensation claims. However, as they return to the workplace, an increase of safety incidents and resulting claims could be possible. Workers who do become injured on the job may take longer to recover and rehabilitate if their injuries are further impacted by the deferral of elective procedures.
The result for employers could be staffing challenges caused by employees who are out on active claims longer than they would have been in the past, had elective procedures not been delayed.
While gauging the specific impact that the ongoing coronavirus pandemic will have on 2021 healthcare and workers’ compensation budgets is difficult, claims drivers, population health and geography will all play a role. EPIC is able to provide coronavirus cost modeling for clients that is specific to their unique situation. If you are interested in receiving this insight, reach out to Suzannah Gill at email@example.com for more details.
Insights From Across the Firm
EPIC thought leaders have written numerous articles on matters relating to coronavirus, all of which are available on EPIC’s website. The most recent articles include:
- State of the Insurance Market for Roofing Contractors, October 6
- Weathering the Post-COVID Litigation Storm, October 5
- Plant and Harvest Your Wellness Budget Tree, October 5
- NEW WEBINAR: Pandemic of Presumptions: California’s New COVID Bills, September 30
- Market Review: Executive Risk, September 29
- Payroll and Rent Expense Protection, September 29
- Using Analytics to Determine Communication Success, September 28
Our understanding of coronavirus and its impact around the world continues to evolve at a rapid pace. This newsletter briefly touches on issues that businesses may want to consider as they approach their response to novel coronavirus. More topics will be considered in future issues as our understanding of the virus and its impact continues to evolve. Please reach out to your EPIC broker for more information.
For all of EPIC’s coronavirus coverage, visit epicbrokers.com/coronavirus
Disclaimer: This has been provided as an informational resource for EPIC clients and business partners. It is intended to provide general guidance on potential exposures and is not intended to provide medical advice or address medical concerns or specific risk circumstances. Due to the dynamic nature of infectious diseases, EPIC cannot be held liable for the guidance provided. We strongly encourage readers to seek additional safety, medical and epidemiological information from credible sources such as the Centers for Disease Control and Prevention and the World Health Organization. Regarding insurance coverage questions, whether coverage applies or a policy will respond to any risk or circumstance is subject to the specific terms and conditions of the policies and contracts at issue and underwriter determinations.
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