Putting aside the human tragedy of the Covid-19 pandemic for a moment, along with the immediate disruption of implementing disaster & contingency plans and organising teams of homeworkers, Legal Expenses Insurers (LEI) could very well be in for a difficult few years.
Of course, they won’t be alone with nearly every sector of the economy being negatively affected in one way or the other, with the possible exception of the supermarkets. Many general insurers have already lost half their market value in the last month, with more pain still likely as the full extent of the pandemic unfolds. Even household names such as Saga, Prudential, Aviva and Hiscox have not been immune with 40%+ losses at least.
The Bank of England has just lowered the base rate to 0.1%, its lowest ever, and Boris Johnson alluded to the probability of at least a 12 week lockdown at his regular briefing yesterday, following the previous decision to close all schools. With current estimates suggesting a 20% drop in GDP, and more than 1 million workers being laid off, it may be reasonable to assume that this “black swan event” is shaping up to be at least as damaging as the 2007-8 financial crisis, and possibly even more so.
For those LEI MD’s FD’s and underwriting directors who experienced the financial crisis of 2007-8, and the subsequent economic downturn and recession of 2008-9, you already know there is big trouble on the horizon. The question is, just what is the scale of the trouble ahead?
No doubt by now, many business plans are or soon will be in need of a significant forward guidance adjustment, to reflect the new reality, that was impossible to imagine just 60 days ago.
Legal expenses exposures/risks and underwriting results are very closely intertwined with the general health and wealth of the UK economy, and their overall results tend to ebb and flow with the ups and downs of the economy. Any major shock involving businesses, individuals, families or the housing market will directly impact LEI’s bottom line, and I think there can be no doubt about it, Covid-19 will seriously impact all of these areas, despite the various attempts of the Government to prop them up.
Reflecting upon what did happen during and after the 2008-9 recession, it is quite possible that the following areas will be tested once again.
Commercial BTE – Claim numbers and costs will increase for the duration as redundancies are imposed and employment disputes and compensation awards quickly follow. Increases in the more costly contractual disputes will also spike as numerous contracts are breached. Legal advice helplines will be inundated.
Family / Personal BTE – With large numbers of policyholders being made redundant or unfairly dismissed without due process, personal employment dispute numbers and costs will also see a significant uptrend for many months, or even longer.
Landlord BTE – This class of business is likely to be hit particularly hard with the increasing number of landlord schemes that also include rent arrears for up to 12 months, following a default by the tenant. With increasing job losses leading to defaults, rent guarantee claims are going to skyrocket. The financial measures so far proposed by the Government do not prevent such claims being made, and I predict very heavy underwriting losses for this class of business.
Looking beyond the initial impact of the increased claims numbers, costs, and underwriting losses, which could extend for a number of years. Insurers will then notice a reduction in written premium as tens of thousands of businesses, individuals and landlords are removed from their customer base.
If you were in the LEI market during the 2008-9 recession and witnessed the resulting fall out, do you think this crisis will be, less damaging, more damaging or about the same in terms of the impact on underwriting results?