Cincinnati Financial Corporation’s CEO Steven Johnston said the company’s property catastrophe reinsurance panel will be expected to “follow our fortunes” on any Covid-19 pandemic related losses that fall under that program’s coverage for the re/insurer.
Having revealed in its latest results announcement that its property insurance policies do not include a specific virus or pandemic exclusion clause, some have questioned whether this leaves Cincinnati Financial as one of the more exposed insurers to Covid-19, at least to the ongoing litigation on business interruption claims.
President & CEO Steven Johnston explained, “While we will evaluate each claim based on the specific facts and circumstances involved, our commercial property policies do not provide coverage for business interruption claims unless there is direct physical damage or loss to property. Because a virus does not produce direct physical damage or loss to property, no coverage exists for this peril.”
The firm’s 10Q filing further explained this:
“Because a virus does not produce direct physical damage or loss to property, no coverage exists for this peril – rendering an exclusion unnecessary. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific exclusion for COVID-19.”
Which, given the ongoing litigation and uncertainty over business interruption claims from the Covid-19 coronavirus pandemic has resulted in a lot of attention for Cincinnati Financial since its announcement yesterday, with the re/insurers share price tumbling 12.5% yesterday and now standing 37% below where it was back in February.
CEO Johnston explained the re/insurers thinking on this issue, as well as the broader issue that insurance should only really pay out for claims that were intended to be covered.
“Some loss events, such as this global pandemic, are not insured because they are uninsurable due to their size and scope. Efforts to retroactively rewrite insurance contracts to add coverage are unconstitutional, threaten the ability of the insurance industry to pay covered claims and cannot be the solution,” he explained.
“A crisis of this magnitude calls for bold solutions from our Federal government. We stand ready to do our part to support the families and businesses in our agents’ communities, helping them to proactively manage risks and promptly paying covered claims with empathy and compassion.”
However, as we’ve explained before, wordings and contract terms and conditions are set to play a significant role in defining where claims from Covid-19 fall and right now, even putting the litigation attempts aside, there is little certainty as yet how big an impact the pandemic will have on property insurers as a case-by-case analysis of portfolios and contracts will be required.
While a virus may not cause direct physical damage to an insured property, whether it could cause a direct “loss” is less well-defined typically and it will be an interesting case to follow this re/insurers results over the coming quarters to see whether any claims fall to its property book and how they then follow on to its reinsurance panel.
Cincinnati Financial explained in its 10Q filing that while it has not yet booked any losses from the Covid-19 pandemic, it warns on the potential including to its property book and raised another interesting prospect of the potential for legal costs associated with property policies to rise, something that could also fall under certain reinsurance provisions, we imagine (similar to other loss adjustment expenses).
“We have not determined any material effect on our loss experience for the first quarter of 2020 as a result of the pandemic. Because of factors that reduce exposure to certain insurance losses, such as fewer vehicles on the road or reduced sales and payrolls for businesses, there could be a reduction in future losses that generally correspond to reduced premiums. However, there could be losses or legal expenses that occur independent of changes in sales or payrolls of businesses we insure. At this time, we are not able to determine premium or loss effects for future periods.”
But the re/insurer also warned that:
Risks to our business include legislation or court decisions that extend business interruption insurance to require coverage for COVID-19 when there was no direct physical damage or loss to property. These actions would extend coverage beyond the terms and conditions we intended for those policies, meaning we would be forced to pay claims when no coverage was contemplated and for which no premium was collected. These amounts could have a material, adverse impact on our business, financial condition, results of operations or cash flows.
Johnston reiterated the fact that “most of our standard market commercial property policies, in States where we actively write business, do not contain a specific exclusion for COVID-19,” during the re/insurers earnings call yesterday.
But, it’s clear that Cincinnati Financial would expect its property catastrophe reinsurance program to respond, should it take a significant claims burden from Covid-19.
During the earnings call, CEO Johnston explained that, “We are going to receive our fair share of Covid-19 claims, I think, that is just natural. But, we feel strong in our position, with our coverage language.”
Johnston said that around half of the business policies written by Cincinnati Financial do contain extended endorsements for business interruption, which means roughly half the book could be exposed to Covid-19 attempted claims it seems. But all of their policies have a standard sub-limit covering business income of $25,000.
Cincinnati Financial has a roughly $800 million property catastrophe reinsurance treaty in place and when asked on the chance of it being exposed, CEO Johnston said, “I would say there is not a virus exclusion in there.”
He expanded on that saying, “It is a property catastrophe risk policy and they follow our fortunes and we don’t have a virus exclusion in there.”
“It’s basically that they are following the fortunes of us, in terms of we are aligned with our policy provisions with the reinsurers that we cede to,” he expanded.
Johnston further explained that the $800 million catastrophe reinsurance tower attaches at $100 million of losses to Cincinnati Financial.
“Our program attaches at $100 million which is why we feel confident that we won’t get there. But it’s nice to know that if there would be some legislative action, or something that is just unanticipated, that we have the program and that we are in a follow the fortune situation,” he explained.
Of course, Cincinnati Financial is just one reinsurer in this situation, but the first to highlight it publicly.
Many U.S. commercial property insurers will have a similar lack of specific exclusions and a reinsurance program that follows their fortunes, with ILS fund participation likely in many of these reinsurance arrangements as well.
It also further highlights the quota share related issue that could be a source of much of the Covid-19 impacts to insurance-linked securities (ILS) investors, as often these arrangements lack exclusions as well and have proliferated in recent years in the ILS market.
But, once again, we’d highlight the fact that this could come down to a case-by-case analysis of portfolios for the ILS industry, to enable them to truly understand when and where the greatest risk of losses and exposure may come from.