Why it’s difficult for insurers to forecast future COVID-related losses

Commercial insured losses caused by the ongoing pandemic cost The Travelers Companies Inc. more than $100 million during the three months ending June 30, but it’s difficult to predict how much more it will cost the insurer in the long run.

New York City-based Travelers reported last week that company-wide, there were $114 million in charges directly related to the COVID-19 pandemic. All figures are in United States dollars. The $114 million in charges was primarily from the insurer’s United States workers compensation business, but there were also losses in other lines including management liability.

During a conference call July 23 with investment banking analysts, Travelers officials were asked what COVID-19-related losses might look like for the rest of the year.

“It’s hard to forecast the future,” Travelers CEO Alan Schnitzer replied. “There is some uncertainty. We don’t know the trajectory of the diseases. We don’t know when we are going to have a vaccine. We don’t know what the outlook for the economy is. Frankly, it is probably the uncertainties for the economy that have the biggest impact, from the pandemic, on us.”

The $114-million figure is the insurer’s estimated losses during the three months ending June 30, whether or not a claim was filed. But if a loss [such as an auto accident] were to occur later this year, it would be booked in the quarter in which it occurred.

“There will be COVID-related loss activity, but there will be some offsetting declines in losses due to people across the country sheltering in place,” said Schnitzer. He suggested there has been a noticeable drop in the frequency of personal auto claims since the World Health Organization declared COVID-19 a pandemic this past March.

Travelers officials did not discuss Canadian results during the July 23 conference call. Travelers was Canada’s 12th-largest property and casualty insurer in 2019, with net premiums written in Canada of Cdn$1.7 billion, according to Canadian Underwriter‘s recently-released 2020 Statistical Guide.

Canada is facing much the same economic disruption as the United States from the ongoing pandemic, with share prices falling and layoffs caused by lockdowns.

In management liability, Travelers is seeing an elevated level of claims activity associated with the volatile stock market and work force reductions, Schnitzer said July 23 of the company’s overall results.

Management liability claims can be incurred if shareholders sue a publicly-traded company after a large drop in its stock price. Stock markets in both Canada and the United States saw large declines this past winter when COVID-19 started to spread.

Travelers reported July 23 its combined ratio in in bond and specialty lines was 93.8% in the latest quarter, a 19.9-point deterioration from 74.9% in the same period of 2019. That increase was due in part to management liability claims arising from COVID-19 as well as elevated losses in employment practices liability losses and cyber losses arising from ranswomware, said Thomas Kunkel, executive vice president and president of bond & specialty insurance at Travelers.

Travelers reported July 23 a net loss of $40 million during the three months ending June 30, compared to net income of $557 million during the same period in 2019. The drop in profitability was mainly due to catastrophes in 2020 Q2 as well as a large drop in investment income. The combined ratio deteriorated 5.3 points from 98.4% in Q2 2019 to 103.7% in the latest quarter. Catastrophe losses accounted for 12.3 points of combined ratio in the latest quarter but only 5.3 points in 2019 Q2.

Travelers recorded $854 million in pre-tax catastrophe losses in the latest quarter, of which US$91 million was due to civil unrest, chief financial officer Dan Fry said July 23.

Top line revenue was $7.4 billion in the latest quarter, down from US$7.83 billion in 2019 Q2. Investment income dropped from $648 in 2019 Q1 to $268 million in the latest quarter. Premiums dropped slightly from $6.99 billion in 2019 Q2 to $6.96 billion in 2020 Q2, due in large part to rebates on personal auto policies to customers driving less or not at all because of the pandemic lockdowns.

Feature image via iStock.com/TomFoldes