Tightening of policy wordings… likely in the future?

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There have been two crucial ‘black swan events’, within the last two years, which will force commercial insurers to re-look at their cover limits and exclusions carefully, as well as the message that these events delivered.

We cannot think that because the wordings and covers have worked well until now that they are adequate and cover the right risks, and secondly, the world is changing and perils which were considered unheard of just a few years ago are now much more in our considerations.

How the unexpected can occur

The two events I am referring to are the business interruption losses that arose as a result of the national lockdown imposed by the Government, in March 2020, and the riots that took place in Kwa-Zulu Natal and Gauteng, in July 2021, which had a quick and large impact on businesses within the two provinces.

It has now transpired that SASRIA has accepted liability for the damages emanating from the riots. Still, it has shown insurers how quickly the unexpected can occur and how quickly forecasts and predicted developments turn from what is considered likely, by underwriting experts and those that advise them.

While it appears not to have happened, there are covers that are linked to the prevention of access, loss of tourist attraction and performance guarantees that may well have been impacted, had the facts been slightly different.

Contagious disease extensions

In the light of the COVID-19 pandemic, insurers that were giving the contagious disease extensions, in terms of their business interruption policies, provided notice to policyholders (reinsurers also provided notice to them to exclude such cover) that all contagious disease extension cover linked to COVID-19 would be excluded, with effect from a specific date. Certain insurers would have excluded the cover completely, others just with regard to COVID-19, given that lockdowns or restrictions are not necessarily a thing of the past.

This was an extension that, over time, had its limits increased, given that underwriters did not see a high risk in providing the cover. Now that there are predictions that pandemics may become more prevalent, it’s unlikely insurers will provide this cover, certainly not at very high limits now that it is clear what the issues are and how widely they can apply.

With regards to riots, it will be interesting to see how insurers exclude any potential exposure, should this type of event happen again. The impact on claims volumes and clients’ ability to survive was felt, but so far it appears there was little financial impact. However, it may have been very different, and so, there is likely to be a tightening of policy wordings where riot-related damage is concerned.

Other types of exclusions

The one other major trend we are seeing now is cyber-related crime and large-scale hacking. Insurers have all inserted comprehensive cyber-related exclusions into their general policies, given the large losses that may be incurred as a result of a cyber crime. Only specific cyber liability policies or sections will provide cover with specialist underwriting and reinsurance cover, but the stats that are being released with regards to cybercrime are staggering, overshadowing all forms of other crime and being perpetrated from all parts of the world. Again, this was a risk that just a few years ago would not have been seen as something that all forms of losses would need to be excluded.

Another matter that comes to mind is the covers that are being provided by government-related insurance schemes such as COIDA (Compensation for Occupational Injuries and Diseases Act) and the Road Accident Fund. With large demands being made on Government to assist with SASRIA, the Road Accident Fund and other state-owned enterprises, the motor liability cover and employers liability section may need to be looked at, with formal exclusions for these types of perils more tightly expressed.

by Danny Joffe : Chairman of the Risk Committee

Photo by Nick Youngson/R M Media Ltd / CC BY-SA 3.0