By Jeff Sistrunk

Law360 (September 11, 2020, 4:03 PM EDT) -- Kramer Levin Naftalis & Frankel LLP partner Dan Rabinowitz recently spoke with Law360 about how the COVID-19 crisis has impacted insurers and reinsurers and also weighed in on U.S. lawmakers' proposed Pandemic Risk Insurance Act, which would create a $750 billion government-backed reinsurance program for pandemic coverage.

Rabinowitz, who is based in Kramer Levin's New York office, advises clients in the insurance and reinsurance industries on a broad array of transactional and regulatory issues, including mergers and acquisitions, capital markets and restructurings. 

This interview has been edited for length and clarity. 

How has the pandemic impacted different insurance lines so far?

You can definitely see a distinction among different lines and how they have been affected. We are still in the early stages, so it is hard to know which lines will be impacted severely versus other lines.

As a general matter, it appears health lines and workers' comp will probably be the most impacted because they are bearing most of the direct impact of people incurring medical expenses and experiencing disruptions in their lives due to the medical consequences of COVID. That is offset to a certain extent by the fact that some other people put off nonurgent doctor's visits, especially during the most acute period in mid-2020.

Property and casualty lines have not seen uniform impact, unlike what you may see following an event like a hurricane. Historically, the impact of that type of natural disaster on the property/casualty side has been fairly consistent. With COVID, policy language is everything. Some carriers excluded pandemics or viruses explicitly or otherwise have language in their policies that essentially immunizes them.

Courts have begun to address these policy terms as policyholders have challenged carriers on business interruption claims, and a number of carriers have successfully argued their coverage was not triggered by COVID. However, other carriers will not be so successful, and others have been paying out business interruption and event cancellation claims, and that has shown in some carriers' earnings reports and results. For property and casualty, it is very much a mixed bag, and issues are playing out both in court and in legislative bodies.

Looking at the life sector, unless the lethality of COVID increases on a global scale, we are unlikely to see the kind of mortality shock to actuarial assumptions that would cause a ripple in life insurance company results. Life carriers have started to see effects on the earnings side, because people are not buying life insurance in large numbers and some existing policyholders are not making payments on premiums and are letting policies lapse. The data on that is still largely anecdotal, so the overall impact on the life insurance sector remains to be seen.

What about COVID-19's impact on reinsurers?

By definition, reinsurance "follows the fortunes" of the primary insurance. For those primary carriers that are adversely affected by COVID because they either wrote coverage that responds automatically to an event — for instance, event cancellation or workers' comp — or are, for whatever reason, exposed to business interruption claims, the reinsurers backing them will also be exposed. As it is with the primary carriers, COVID will be a mixed bag for reinsurers.

We were already starting to see a slowdown in capital, a leveling off of capacity, if you will, in the reinsurance markets. The reinsurance industry had seen many consecutive years of capacity increases, both in the traditional reinsurance markets — that is, people investing in the Munich Res and Hannover Res of the world — and also people contributing to alternative arrangements like alternative risk transfer and cat [catastrophe] bonds.

Why might some investors be avoiding reinsurance right now?

There may be a perception that this is an existential moment for the reinsurance industry, so investors are making a cost-benefit analysis. They may think that, before, we were OK investing in reinsurance when all we had to worry about was hurricanes and earthquakes. Those were known quantities. But now, with all the uncertainty surrounding the pandemic, investors may be more reluctant.

I do not think capital is truly being eroded because of losses or exposures. I think it is more a matter of investors' tastes migrating away from reinsurance. The fact that there has been a plateauing is not the same thing as a hard market, however. The amount of reinsurance capacity is back at the levels we saw in 2016, 2017 and 2018. There is still a robust amount of capital.

I do not think there will be an epochal loss of investor appetite for reinsurance. Ultimately, people will come back to the basics and see that underwriting methodologies have held up in that policies either exclude pandemic-related risks or courts recognize appropriate boundaries between what is insurable and what is not.

To sum up, I think there will be some short-term hardening of pricing and short-term reduction in capacity. I do not doubt there will be enough capacity in the reinsurance markets to absorb anything COVID can throw at it in the long term.

What are your thoughts on the proposed Pandemic Risk Insurance Act?

The PRIA legislation has a lot to recommend itself. It has the support of a lot of business groups around the country who find themselves without the kind of coverage they might have expected from their carriers and want to plug that gap. The insurance industry views it as taking some of the political pressure off of them, because it socializes something that, according to the industry, cannot be underwritten or privately absorbed.

From a political standpoint, it seems that politicians will find it attractive to say "We protected small business" and put in a measure to activate government resources to aid businesses in a pandemic. The planets seem to be aligning for a bill like PRIA to pass.

There has yet to be a major procedural push to advance PRIA. That may be chalked up to the fact that it is an election year, and there tends to be a bias toward inaction. I also think that people on both sides — the policyholder side and carrier side — are waiting to see how these business interruption cases will go in court. If courts largely find that carriers do not have to pay these claims, that could make PRIA more urgent and change its contours.

--Editing by Jill Coffey.

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