COVID-19 Scenarios: What do they mean for insurers?

This is part two in a series of six blog posts providing COVID-19 risk advice. In part one we unpacked the insurance risks associated with COVID-19. Read the part one here.

By Claude Hamman, Head of Specialist Risk Advisory at Indwe

The concept of insurance is based on the premise of “the many paying for the few”, therefore insurers are not inclined to insure economic loss affecting an entire market or country simultaneously. A potential worst case scenario for the insurance markets is that insurers are required to indemnify clients without ever intending to cover loss of income as a result of a global pandemic and national lockdown. This scenario will impact solvency requirement and expose global insurers and re-insurers to these losses. Each policy will, however, have to be judged on its merits to determine the validity of the claim.

The alternative scenario or best case for insurers would have the opposite effect but would leave thousands of businesses without a lifeline and most likely result in the closure of many small businesses. The pending court cases will provide legal certainty on the way forward, in the interim, local insurance markets have committed to providing interim relief to support affected business (based on the policy wording) with the required policy extensions in place.

The global insurance markets have been exposed to multiple catastrophic losses over the past decade, resulting in a reduction in available risk capital. This has created a hardening market as insurers have become unwilling to take on risk without effective mitigation measures in place. Many South African and international insurance markets have reduced capacity and increased their rates as a result of this hardening market.

COVID-19 will likely lead insurers to carefully consider their exposures and, if the worst-case scenarios come to pass, many business are likely to see significant increases in premiums or face the possibility of being uninsured if they have too many undesirable risks.

There are insurers that would consider underwriting undesirable risks subject to specific warranties and risk control improvements being implemented by the insured. The problem arises at claims stage when large and/or complex claims are lodged with the insurer.

Firstly, has the company adhered to the warranties and completed the relevant risk management improvements as promised? Often companies are eager to agree to said warranties and risk control improvements without understanding what this will require and cost to complete.

Secondly, insurers can take inordinate amounts of time to process complex claims only to be repudiated and handed to the legal team to battle out in the courts. This tactic, in particular, should be considered ahead of selecting preferred insurance markets.

An insurance contract is one of utmost good faith between the parties and if one party knowingly enters into a contract with the intention to delay and eventually renege on their obligations, this results in many questions being asked around the value of insurance.

Read part three in our risk advice series: What should insurance and risk management advisors be doing?

For more information and guidance, speak to an Indwe advisor today on 0860 13 13 14 or visit

Indwe is an authorised Financial Services Provider. FSP: 3425

About the author:

Claude Hamman is the Head of Specialist Risk Advisory at Indwe, he’s a member of the IRMSA Educational and Technical Committee, a certified Risk Management Professional (IRMSA), a member of the Insurance Institute of South Africa and an affiliate of the Business Continuity Institute (BCI).