10 minute read 18 Aug 2020
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How insurers can assess, quantify and resolve COVID-19 exposures

Simon Woods

EY EMEIA Financial Services Insurance Strategy Leader, EY Global Financial Services IBOR Lead

Senior advisor to board-level executives in financial services. Business leader. Industry thought leader. Passionate about having the courage to challenge conventions and foster innovation.

Gail McGiffin

EY Global Insurance Underwriting Leader

Sales executive. Decision scientist. Customer advocate. Innovator.

10 minute read 18 Aug 2020

Insurers must prepare for the inevitable — and potentially dramatic — increase in claims, regulatory scrutiny and litigation.

As the insurance industry continues to manage the human and commercial impacts of the COVID-19 pandemic, insurers, reinsurers and brokers are assessing their exposure. Specifically, they are looking to clarify:

  • Exactly what their policies cover relative to COVID-19
  • How ambiguous contractual language might increase potential liability
  • The cost of paying covered claims across the business, based on scenario-based quantification
  • What financial mitigants are in place (e.g., reinsurance) and how effective these may be

At the same time, they are preparing for brand damage from negative media and adverse public sentiment if insureds find they don’t have the coverage they expect. As with other COVID-19 concerns, insurers must act amidst great uncertainty.

In our view, it is essential for insurers to understand and assess these exposures. For some, it will be a large and difficult undertaking, based on the variety of product types and number of in-force policies, and the complexity of the value chain, particularly where insurers are using bespoke policies originating from brokers. The quality of existing systems, data and records, as well as sales processes and distribution channels, will also determine the degree of difficulty of gaining visibility into exposures.

In jurisdictions without regulatory oversight of products, the industry is hoping for a narrow legal interpretation of wording where exclusionary terms are ambiguous, such as pandemic exclusions in business interruption (BI) policies. But in these jurisdictions there is significant risk that courts, regulators and ombudsmen will read policies more broadly and force insurers to pay more claims than expected.

Based on our engagements and conversations with leading insurers during the COVID-19 crisis, we believe many insurers have more work to do to understand fully and prepare for the potential financial impacts of covered claims. Identifying the exposures and modeling the impacts across a broad range of scenarios are necessary steps, despite considerable uncertainty about final legal or regulatory outcomes.

This article describes how insurers can understand and quantify their exposure and outlines actions they may want to consider as they seek to manage those exposures and reduce uncertainty.

A backdrop of uncertainty

The question of exposures is playing out as economies slowly return to some semblance of normality, and families, businesses and communities begin to recover from the crisis. The property and casualty (P&C) insurance industry remains in the spotlight, which could quickly become uncomfortable. Lawsuits, negative press coverage and harsh public opinion could result in significant brand damage if insurers are perceived to be denying covered claims and failing customers in their hour of need. Government authorities and regulators have already been asking about pandemic exclusions within BI policies, especially in jurisdictions where the product wording approval process is not regulated.

Insurers should seek insight and guidance wherever they can find it. They should monitor regulator opinions and watch carefully as the first test cases work their way through the courts in the UK and other markets.

Forward-thinking insurers are developing action plans on several dimensions of the business, from analyzing the portfolio impact on covered claims, to claims methodologies in the event of adverse legal findings on coverage intent, to proactive policyholder communications, to resolution strategies for litigation and regulatory investigations. All of these steps are necessary to the successful management of exposures going forward.

Identifying and understanding exposure

Understanding the extent of exposures across the portfolio and value chain is a complex task. The end goal is a complete inventory and mapping of contractual legal exposure and full quantification of financial impacts. The first challenge insurers will face in achieving those objectives is the sourcing of filed product forms and issued policy contracts. While most insurers will have ready access to in-force policy contract language and quote proposals, there may be cases where bespoke policy wording has originated from brokers or managing general agents (MGAs), introducing variability in contract intent that must be identified and analyzed.

Once they have the contracts and understand the degree of variability from standardized, regulated product forms, insurers must undertake a full review of language and clauses that introduce deviations or ambiguity. This may sound like an impossibly heavy lift. However, the right technology will radically streamline the process. For instance, advanced tools for textual analytics can provide insight into the language of large volumes of bespoke policy contracts and enable dashboards for real-time monitoring of potential exposure introduced by explicit wording or wording inconsistencies. Such a capability may prove extremely useful to insurers as the unwinding of the crisis extends for years to come and as insurers transform their businesses to be more digital and data-driven. It will also help improve the clarity and consistency in product wording.

Having identified both intentional and problematic contractual language, insurers may also need legal and/or forensic analysis to clarify whether the latter actually establishes liability or introduces ambiguity with interpretation. In some cases, the risk may lie not in the contract, but in proposals, especially in the absence of an issued policy. That may require additional forensic review of distribution channel sales practices.

Modeling and quantifying the aggregated impacts

The lack of complete visibility into potential exposures creates uncertainty in the buying of reinsurance and the setting of reserves. It can also compound claims servicing issues if the expected volume of claims processing is unclear. Insurers need to establish clear paths for both covered claims and claims not covered, while accounting for situations where ambiguous policy language may result in protracted litigation.

In jurisdictions where product form language is not regulated and much litigation is expected, insurers need to prepare for a huge number of claims submissions. Not only will these claims be complex, but regulators and customers will also expect timely payments. Insurers must think through the many different ways the matter of COVID-19 claims — both covered and not covered — may play out as they model the potential financial ramifications and processing impacts.

Such insights set a foundation for estimating the overall financial and operational implications. Insurers may factor in a range of variables in the sizing of their exposures. Insurers will want to take into account the different types of products and policies in their portfolios, categorizing pre-approved and regulated products vs. those that are bespoke and unregulated. Similarly, they’ll need to identify all of the products that have explicit coverage for pandemics and those that are silent or ambiguous on COVID-related coverage grants. From there, it’s a matter of determining:

  • Number of policies by product type
  • Limit of liability by product type
  • Length of indemnity by product type
  • Deductibles by product type
  • Reinsurance thresholds and levels of protection, including treaty vs. facultative
  • Expected cost of litigation per contested case

Robust modeling will help insurers derive better estimates of financial impacts across a range of scenarios. Such scenario modeling will be part science and part art. Beyond the insurers’ own policy-related data inputs, the differences between best-case, worst-case and baseline scenarios will be determined by factors such as reopening timelines (affecting length of indemnity) and the potential emergence of a second wave of COVID-19 cases (thereby challenging definitions of occurrence). In jurisdictions that do not regulate product wording, it may be appropriate to consider scenarios where court decisions could establish legal precedent affecting large numbers of cases.

Developing the right response strategies

The huge effort to understand and quantify COVID-19 exposures pays off most immediately in the form of effective response strategies, which are best developed in advance of regulatory reviews and litigation. Insurers can define frameworks based on risk and materiality to establish a baseline and set priorities in terms of types of policies, customer segments or geographic markets they need to address first. For instance, in markets where policy wording is clearly defined, insurers may wish to standardize communication with agents and customers to manage expectations around which types of losses will be covered. Insurers in unregulated jurisdictions may wish to adopt special claims handling processes for cases with known ambiguities or inconsistencies in policy wording.

Especially in the case of unregulated product wording, the legal determination of coverage intent will be at the heart of the matter. Still, insurers in these jurisdictions will benefit from proactively thinking about how they will deal with adverse decisions on coverage that affect broad sections of their portfolio. A strong methodology for assessing these cases should address:

  • Materiality and proportionality
  • Tolerance for error
  • Risk of fraud
  • Level of social and regulatory scrutiny
  • Financial contingency planning

Once insurers have clarity on the portfolio impact for both covered and uncovered exposures, they can implement claims processing approaches with appropriate levels of automation. For example, for explicitly covered simple claims, the entire process, from first notice of loss to payment, can be automated. For more complex covered claims that require extensive documentation and analysis, cases can be triaged and directed to specialized claims adjusters. Claims not covered or related to ambiguous policy wording can be referred to a specialized forensic unit.

The strongest response strategies will also feature proactive regulator engagement, as well as effective customer communications and robust documentation. When it comes to communications plans, technology solutions can accelerate and enhance the necessary customer outreach. Similarly, claims case management tools can provide workflow, document management, reporting and audit trails — all of which help enable the successful execution of response strategies, and any subsequent regulatory review or response to litigation outcomes.

Response strategies should also contemplate proactive risk management support for customers. This may include loss mitigation services, disaster recovery plans, business continuity plans, contingent operations activation, educational services and implementation of post-COVID-19 risk assessment procedures.

Analyzing customer value in a post-COVID world

Even as the industry moves through the immediate and near-term imperatives, it is important to keep in mind the longer-term implications and opportunities. For instance, the COVID-19 crisis has confirmed the need for clearer and more consistent policy wording. It has also revealed opportunities for innovative product coverages and risk management solutions.

Senior leaders may also acknowledge the inevitable turmoil of litigation, especially in unregulated jurisdictions. Given the toll on the industry’s reputation as a whole, as well as on individual brands, insurers would be well-served to find new ways to communicate, educate and strengthen trust with both customers and intermediaries. Those efforts should include not only the clarification of policy contracts, but also the development of high-value services that can help customers prepare for this new form of global disaster.

Over time, as exposure aggregation modeling tools for pandemic risks become more sophisticated, the industry will be able to more accurately quantify the financial impact on the portfolio for covered losses. This, in turn, will improve underwriting, pricing, claims servicing and loss control across the portfolio; individual customers stand to benefit greatly as these capabilities mature and the industry can bring greater predictability to exposure management, in addition to clarifying product intent.

The bottom line: clarity on exposures will benefit the business

Preparing for COVID-19 claims is an important step as insurers seek to respond to customers and recover from this crisis. The first step is to think through and even formally model a range of potential outcomes, each of which will have distinct financial impacts. Assessing and sizing exposures can inform insurers’ planning efforts, generating actionable insights that can be turned into effective and efficient response strategies. For instance, triaging and accelerating claims processing can define the most efficient path with the complexity of both covered and disputed claims.

This work can also establish a foundation to strengthen sales and service processes across the business, from the standardization of policy contract language in unregulated jurisdictions to development of new products and solutions for pandemic risk preparation. Ultimately, the P&C insurance industry will demonstrate its resiliency in the face of COVID-19. In rising to the challenge of long-term viability, insurers will also find new ways to innovate and provide enduring customer value.


This article describes how insurers can assess their exposure, actions they may take to manage those exposures and how to reduce uncertainty through a variety of strategies and tactics.

About this article

Simon Woods

EY EMEIA Financial Services Insurance Strategy Leader, EY Global Financial Services IBOR Lead

Senior advisor to board-level executives in financial services. Business leader. Industry thought leader. Passionate about having the courage to challenge conventions and foster innovation.

Gail McGiffin

EY Global Insurance Underwriting Leader

Sales executive. Decision scientist. Customer advocate. Innovator.