Covid was just the start...

For the lead up to many conference years, pre-pandemic, a continual issue for the market was soft cycle profit management.

Indeed, for many entities a profit could not be made without apparent trade-offs between increased retentions and decreasing reinsurance costs. This invariably led to a focus upon shaving expenses and reserve releases to offset low investment returns and low technical pricing of all direct classes of insurance.

Today, the market is no longer soft – or as soft – and is able to consider and discuss the hardening of rates. On the other hand, as a major counter factor, it faces the well-publicised major economic headwinds generated by supply chain pressures caused by Covid, the energy crisis and corresponding inflationary price pressures, and a heavy squeeze on profitability derived from the Ukraine war.

Increased legal activity

One noticeable outcome of the pandemic years, and currently, is just how busy and engaged external lawyers are by the insurance and reinsurance markets.?

Is this a sign that the market is now imposing a harder-nosed claims management focus, indeed using legal cost spend as a mitigation tool to counter and manage higher claims costs more generally? This was often eschewed as a tool for profit management during the soft market cycle, but has the appetite for such focus now changed?

To answer that, it is necessary to examine why this spend has come about. Covid generated this immediate need, being a novel, unpredictable, and unprecedented event with a huge economic cost from imposed lockdowns, which left the insurance market with a potentially crippling exposure.

Consequently, what both policyholders and markets needed urgently and immediately was legal guidance on coverage outcomes. What was also not considered in pre-pandemic modelling were the pressures applied by regulatory authorities, with or without direct government pressure, to come to coverage determinations quickly (and policyholder-friendly ones at that).

Throw into the mix that court systems in many countries were eager to make clear that they would facilitate the speedy resolution of coverage issues, if possible on a market wide basis, and so an environment was created for a sudden exponential burst of legal spend. This happened and is continuing to happen.

FCA pushed for coverage clarity

Nowhere was this more visible than in the UK. With a regulator (FCA) pressing for early coverage determinations, homogenised across the market, and the English courts readily confirming they would expedite procedures and appeals to deliver final decisions on relevant issues, the FCA test case litigation happened, sucking up significant front-end new legal costs.

Indeed, Covid issues and the pressure for early market-wide issue determination have not yet abated. So, currently the market awaits UK court rulings on the deductibility of furlough/government support payments for purposes of business interruption claim calculation.

Reinsurance market follows suit

For the reinsurance market, there has been an equal engagement of lawyers as it seeks a clear legal delivery on principles that should apply to aggregation. However, the route to this final outcome will take a different course to direct market/policyholder issues.

This is principally because many cedants and their reinsurers have pre-agreed to resolve matters by confidential arbitration; there is also no same pressure imposed by the regulator to participate in a market-wide test case, as policyholders are not directly affected by these disputes.

Indeed, it may not be until the English court ultimately receives an appeal on an English arbitration award that public clarity can be delivered and a set of market-wide principles delivered for market action.

So, there is perhaps no decision taken directly to use lawyers as a means to take a harder view on claims cost and cost management. However, the appetite of regulators to see a repeat performance of the courts speedily providing legal outcomes for market benefit, and the courts’ willingness to repeat their facilitation of this process, likely means that a template is now set up to see a repeat of lawyer expense bursts as and when the next market-wide generic coverage issue arises.