How will COVID-19 affect your insurance rates?

The coronavirus pandemic, in the short term, is having a downward impact on auto insurance rates in Ontario, but that’s mostly related to people not driving to work. In the longer term, say in the next 3 to 5 years, COVID-19 is likely to drive up insurance rates for everyone, especially for businesses, particularly because of large class action lawsuits against airlines, cruise lines, nursing homes, and insurance companies themselves.

In Ontario, the COVID-19 pandemic is leading to lower auto insurance costs in the short term, as insurers react to reduced traffic and lower than usual claims by returning a portion of premiums to policyholders. There is some evidence that the pandemic could also lead to a reduction in renewal rates, as evidenced by CAA Insurance offering 10% off both auto and home insurance renewals, an offer that’s also available to new customers. Given the lower claims numbers, it’s reasonable to expect that other insurers could do something similar.

Insurers have also been sympathetic to financial difficulties experienced by their customers and have taken several steps to be flexible and go beyond their normal processes to support them.

In the longer term, however, the pandemic is likely to follow in the footsteps of similar large-scale events, like the 911 terrorist attacks, and lead to an overall upward trend in premiums for the next several years, as massive class action lawsuits in Canada and elsewhere play themselves out, and we uncover the true financial costs of the pandemic.

Already there have been 17 class action lawsuits filed just in Canada related to COVID-19, and countless individual suits, most of them claims against institutions like long-term care facilities where thousands of people have died from the virus. There are also a number of cases against airlines for how they are handling refunds for cancelled flights. Perhaps most notable from an insurance perspective, there is now a class action lawsuit directly against insurance companies that have denied claims for business interruption related to the pandemic.

Most businesses that have a business insurance policy would have coverage for business interruption. This is a type of coverage that typically would pay for a business’ lost earnings in the wake of an insurable loss to their property. So, for example, if you own a restaurant and had a fire, you would put in a claim to fix the damage from the fire, but you would also claim the earnings that you lost during the weeks or months that it takes to carry out the repairs and you were not able to open for business as usual.

The wording of business interruption policies typically states that the business interruption needs to be related to physical damage to the insured property by an insured cause. Some policies also included extended coverage if your business is not able to open due to physical damage to an adjoining property. For this reason, most insurers have taken the position that they will not pay business interruption claims if the business simply has to shut down, or has a dramatic decrease in revenues, related to the COVID-19 shutdown.

Their basic argument is that enforced shutdown by the Government does not constitute physical damage to your property.

Of course, policyholders can always challenge an insurance company’s interpretation of what’s covered and what’s not, and at least one law office in Regina is representing businesses that want to challenge the current interpretation. If that lawsuit is successful, it could open the floodgates in a big way. Think of the tens of thousands of businesses that have shut down or at least lost revenues during the pandemic. If they are all able to claim business interruption, the costs for insurance companies worldwide could be in the hundreds of billions. Billions in Canada alone.

Even if the lawsuits fail, there is considerable cost associated with defending these lawsuits, and so depending on exactly how many lawsuits arise, there could be substantial legal costs, that will add to the upward pressure on rates.

As if the news wasn’t bad enough, COVID-19 has also wreaked havoc on the stock market. So whereas typically insurers could expect to offset claims costs by investing premiums and getting a return of 2 to 5%, investment returns are expected to be much lower for the foreseeable future. Without the benefit of these investment returns, we can expect additional upward pressure on premiums in all lines of insurance.

If a significant portion of the lawsuits that are underway are successful, and that’s a big IF, COVID-19 could easily become the single largest insured loss ever in the history of insurance. Because most of the existing lawsuits are related to businesses, the biggest impact would likely be felt by business insurance customers. This could potentially double premiums for some businesses.

Although businesses are expected to see the biggest increases, insurance industry experts also expect personal lines of insurance to be negatively affected. The reason is that all insurance companies buy reinsurance to protect themselves against major losses, and the premiums they pay for that reinsurance are part of the costs that go into determining the premiums that they then charge their customers. If a significant number of the pending legal actions are successful, they will trigger not only multi-million dollar insurance claims, but also potentially billion dollar reinsurance claims. These major reinsurance payouts will no doubt drive reinsurance premiums up, and insurers will need to adjust their premiums accordingly.

Sadly, all this comes at a time when the insurance industry had already been in what is called a hard market, with rates having gone up for the last several years, before anyone had ever heard of COVID-19. Although we’re not able to offer a great deal of hope that rates will stabilize anytime soon, we can tell you that insurance in Canada is a very competitive industry, and you can usually find a better deal by shopping around with broker who can get you multiple quotes. Overall, rates aren’t going anywhere but up, but you may be able to save yourself, or your business, from the worst of it.