Rethinking Risk: The Potential Impacts of COVID-19 for Personal and Commercial Lines Loss Costs

April 30, 2020 / 9 min read

With much of the country staying at home and closed for business due to COVID-19, a substantial portion of the economy has nearly ground to a halt.

Beyond that, many other activities that comprise the social fabric of our country are on hold as well. Most schools and colleges are shut, youth sports cancelled, shopping (other than for groceries) is increasingly online, and family and social gatherings have increasingly become video conferences. All of this has led many insurers to face the question: How have these changes in “activity” affected insured risks?

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Short-term effects

Personal auto: The line of business where changing behavior and a reduction in exposure is most evident is personal auto. Any number of sources indicate a significant reduction in miles driven¹ and auto accidents.² Relatedly, in most cities and towns there is no longer any real rush hour traffic, which tends to result in a disproportionate number of accidents due to vehicular density. Many carriers are responding to this changed environment by providing a premium credit or refund during this extreme period of social distancing.³ On the flip side, many carriers, at no charge, are offering enhanced coverage for commercial use of personal vehicles used in delivery services while emergency government orders remain in effect.⁴

Commercial auto: The observations here are not as clear as personal auto. Much of our manufacturing base is still producing goods that must be transported and the Federal Motor Carrier Safety Administration recently relaxed hours-of-service requirements to ensure the flow of certain essential products.⁵ Online retail has grown significantly, resulting in increased delivery traffic. However, many contractors are effectively shut down or their business is significantly reduced. Use of public and private transportation services are reduced. So, the impact on commercial traffic will likely be mixed, depending on the class of business. However, even classes with steady or increased usage are probably experiencing reduced exposure to risk due to the significant reduction in total vehicles on the road, leading to fewer collisions.

For both personal and commercial auto, the severity of claims will likely be higher right now as accidents are occurring at a higher speed. Also, if supply chain disruptions continue, it’s possible that repair costs will be higher than normal if parts sourcing becomes more difficult,⁶ and increased repair times lead to higher replacement vehicle costs.

General liability: There is an obvious reduction in restaurant and brick-and-mortar retail activity, with many businesses subject to emergency closure orders. With the exception of grocery stores and some other essential retail, there should be substantially fewer liability claims, as many claims from these types of business are of the slip-and-fall variety.⁷ Conversely, there is a possibility for claims that seek to hold businesses responsible for exposure to or the transmission of the virus and some actions have already been filed.⁸

Property: With many commercial businesses shut down and millions of workers working from home rather than at their offices, what will the impact be on property losses? Normally, vacant commercial properties are associated with higher loss activity as no one is around to see that plumbing is working correctly or that machinery is being maintained, and the potential for vandalism and/or theft is higher when nobody is around. However, many commercial properties that are closed for business right now are not really vacant and are still being looked after and maintained. Will more people at home mean reduced loss activity for personal property? Or will there be an increase in personal losses due to dwellings that are crowded and in use all the time, as adults try to work from home and the children try to home school?

Medical malpractice: While portions of our healthcare system are under stress due to the surge in COVID-19 cases, many healthcare providers have been sidelined, including dentists, eyecare providers, and dermatologists. The sharp reduction in elective and nonemergency procedures has reduced exposure on that front. However, exposure may likely increase in several months when healthcare providers deal with a backlog of procedures. That surge may result in more claims than usual as doctors are likely to be overworked by the sheer number of procedures and/or try to claw back some of their lost income by working longer hours. Should this be an underwriting issue or an actuarial issue?

Specialty lines: The directors and officers (D&O) line may be adversely impacted with claims alleging loss of revenue or profit, insufficient duty of care, and misleading statements on exposure to COVID-19. Similarly, errors and omissions (E&O) claims may result from allegedly misleading statements about the pandemic. However, overall E&O exposure may be reduced due to many professionals being sidelined similar to health care professionals. Finally, many cyber security experts have noted the increased cyber risk, as many workers are at home transmitting sensitive information over less secure networks.

Long-term effects

When will we be back to “normal" and what is “normal?”
At ISO, we’ve taken a pause on submitting pricing-related filings to regulators for all lines of insurance, as the recently completed and currently in-process reviews do not fully reflect the current insurance environment. However, those reviews that are being completed now would not be effective until October and November and would apply to policies written starting then. What will the insurance environment look like in six months? We have decided to release pricing-related filing information to customers in the interim and, starting in May, will make decisions about submitting these filings to regulators with or without modification due to COVID-19.

Will we have a better lens into COVID-19 impacts by waiting? In May, we may know whether we have truly flattened the curve and reduced the rate at which the disease spreads. What will remain uncertain and hard to predict is future outbreaks and how social distancing evolves based on government actions, business decisions, and individual choice. Just because a government withdraws its emergency shutdown order does not mean that people will immediately run out to eat in restaurants, especially if there aren’t any proven treatments or a vaccine available. Also, while businesses may be able to reopen their offices, will they take the risk to have all their employees back on site under the same conditions? Will government look to enact some level of immunity for businesses at some point to encourage the opening up of the economy?

Considerations for pricing
There are still many different views on how the COVID-19 virus will play out over the coming months and years. The odds are high that what actually happens with the insurance environment 6-18 months out will turn out to deviate from the assumptions we make now. Recognizing the uncertainty, perhaps the best course is to assume an environment of partial social distancing. This does not mean that the economy will remain as significantly shut down, but it may delay the robust recovery that everyone is hoping for when conditions return to “normal.” It also means that public gatherings such as movies, sports events, leisure travel, and in-restaurant dining will be at reduced levels from pre-COVID-19. And work from home may be more common than pre-COVID-19 for businesses that can operate that way.

Will the recovery be rapid starting in late 2020? Or will the slowdown be prolonged into 2021, pending the development of effective treatments and/or a vaccine? Does experience from the Great Recession and recovery (2008-2011) provide useful information for actuaries as we move from an extreme reduction in activity to a period of reduced but increasing activity? There were no issues of social distancing during the Great Recession and social distancing may continue to have a major impact on insurance exposure even as the economy recovers.

Do existing rating plans respond to reduced exposure?
Many rating plans adjust to changes in exposure directly or indirectly through a responsive exposure base, such as payroll or sales for many general liability classes, or through distinct usage rating factors, such as mileage bands and “commute” or “not commute” to work for personal auto. Some personal auto carriers offer a more direct mileage-based premium option. More complex commercial accounts may include retrospective or experience rating components that will automatically adjust premiums based on actual losses.

However, many classes of business are rated on exposure bases that don’t directly respond to reduced activity. For example, businessowners coverage, which provides a package of liability and property coverage, is often rated solely on the property exposure for both coverages. Assuming the liability exposure is impacted more than the property exposure, it will be more challenging to reflect the COVID-19 impact for these classes within the confines of the existing rating plan. It may also be more challenging in commercial auto, where rating plans are often more responsive to number of units than to actual miles driven.

These are just a small sampling of the issues that insurers along with their actuaries will have to consider as they price insurance policies that will be effective over the next couple of years. These issues will also challenge the reserving actuaries who report up to the chief financial officers as they attempt to estimate insurance liabilities in the current environment. And then, when we get back to “normal,” how will actuaries deal with the unusual insurance exposure and loss data generated out of the current environment? That’s a challenge we’ll all be happy to have.

Jack Stewart, “Some auto insurers offer discounts as COVID-19 curtails driving”, Marketplace, April 7, 2020, <https://www.marketplace.org/2020/04/07/some-auto-insurers-offer-discounts-as-covid-19-curtails-driving/>, accessed on April 29, 2020.
Marc Bain, “Covid-19 has halved California’s traffic accidents”, Quartz, April 18, 2020, <https://qz.com/1840736/coronavirus-reduces-california-traffic-accidents-by-half/>, accessed on April 29, 2020.
Insurance Journal, “Insurance Premium Discounts, Other Relief Offered During Coronavirus Crisis, April 24, 2020, <https://www.insurancejournal.com/news/2020/04/24/566209.htm>, accessed on April 29, 2020.
Andrew G. Simpson, “From Free Coverage to Medical Masks. P/C Insurers Deliver Some Good News”, Insurance Journal, March 30, 2020, <https://www.insurancejournal.com/news/national/2020/03/30/562696.htm>, accessed on April 29, 2020.
Federal Motor Carrier Safety Administration, “Frequently Asked Questions Related to the FMCSA Emergency Declaration”, March 20, 2020, <https://www.fmcsa.dot.gov/emergency/frequently-asked-questions-related-fmcsa-emergency-declaration-03192020>, accessed on April 29, 2020.
Verisk, “Examining How COVID-19 Could Impact Auto Parts Supply Chain”, <https://www.verisk.com/insurance/covid-19/iso-insights/examining-how-covid-19-could-impact-auto-parts-supply-chain/>, accessed on April 29, 2020
Marianne Bonner, “10 Most Common Types of Business Insurance Claims”, The Balance Small Business, November 18, 2019, <https://www.thebalancesmb.com/common-insurance-claims-462673>, accessed on April 29, 2020.
Insurance Journal, “Anticipated Coronavirus Claims Scenarios Across Major Coverage Lines: Viewpoint”, April 9, 2020,<https://www.insurancejournal.com/news/national/2020/04/09/564371.htm>, accessed on April 30, 2020.

Rethinking risk: The potential impacts of COVID-19 for personal and commercial lines loss costs

Short-term effects

Long-term effects