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The pitfalls of prophecy in a fast-changing world

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The speed of the pandemic crisis and its impact on global insurance is complex and controversial. And predicting the outcome of a swiftly changing series of events can have unfortunate consequences.

On July 10 reported on a global study released locally by major law firm Sparke Helmore, which predicted insurance businesses would “almost certainly” collapse under the combined pressure of the pandemic and a global recession.

The report, Approaches to Coronavirus, was compiled by Global Insurance Law Connect, an international alliance of legal firms. Sparke Helmore is its local arm, and provided commentary about the Australian market.

Reports of this nature aren’t unusual, and are usually valuable sources of information on global industry affairs. But this time, through the combination of a fast-moving crisis and a much slower process of actually compiling and publishing, Sparke Helmore last week found itself under fire from big guns around the local broking and underwriting agency sectors.

The report predicted a dire future for the Australian insurance industry, with “significant numbers” of insurance businesses under threat of collapse.

It’s normal practice for to seek local comment for such reports, and Sparke Helmore Partner Gillian Davidson provided back-up commentary, using the report as a base.

While the report said it was “not seeking to be alarmist”, it certainly was alarming.

“Small businesses that specialise in niche areas will struggle,” Ms Davidson said, with insurers, intermediaries and underwriting agencies all possibly affected.

The report saw “obvious impacts” in travel, life, health, event cancellation, business interruption, and possible problems in Liability, defence costs, financial lines and Directors’ & Officers’.

Ms Davidson told “significant numbers” of business interruption claims could be paid, despite insurers’ intentions to rely on exclusions.

The gloomy emphasis of the report is startling, but coming from an authoritative source – and Sparke Helmore is a major player in the insurance legal sector – it has to be taken seriously.

But there’s the rub. The report was compiled in March, at a time when the global insurance industry was struggling to come to grips with a world turned upside-down.

In March insurers were scrambling to devise ways to ease customers’ pain as businesses went into lockdown, brokers were focused on much the same thing with the added likelihood of a very hard market in the June renewals period, and underwriting agencies were facing capacity restrictions. On top of that we had debates here and overseas about business interruption wordings.

Four months later, things have moved on. No companies have gone to the wall, and we are not aware of any that are close to collapse. Insurers, brokers and underwriting agencies have adjusted to the new normal as best they can, and so have their customers and clients. It’s an uncomfortable, uneasy and incredibly challenging period for the industry, but so far there has been no sign of the carnage envisaged by Sparke Helmore.

Of course, there are more minefields ahead for the industry to negotiate – how could there not be in a rapidly changing situation like this? And while we hesitate to look too far backwards for fear of falling into the same trap, a Vero survey compiled between April 30 and May 5 found most SME owners and managers had not changed or cancelled their business insurance, even though two-thirds of the respondents had seen their revenue decline by up to 50%.

The industry’s response to the Sparke Helmore report has been hostile. Steadfast MD and CEO Robert Kelly led the charge, calling it “the most erroneous statement I have seen anyone make about insurance”.

That long delay between compiling and publishing only came to light when Sparke Helmore found itself obliged to admit its predictions had been made as coronavirus panic hit the world in March. It issued a statement last week admitting the report was written at a time when “predictions around potential impacts on many industries including the insurance sector, were concerning”.

It says that “as we stand today, the severity of those predicted impacts has not yet come to pass in this country”. Note that phrase “not yet”.

It’s surprising that when it was finally ready to publish in July someone didn’t consider the present-day environment and wonder if it wasn’t perhaps a bit outdated and its apocalyptic tone in need of some retuning taking into account where we’re at today. The old journalistic adage about accuracy – “when in doubt, leave it out” – may have helped avoid all the unwelcome reaction the report has stirred.

Sparke Helmore’s later comments do remind us that we’re still a long way from the finish line, that litigation “could be the outcome more often than not and the small niche players – the particular subject of our comment on potential business failures – could be hit the hardest”.

That’s a long way from predictions of industry-wide mayhem, but it’s also a subtle reminder that while anyone can guess what lies ahead, no one can see around the next corner.