Analysts say European gas crunch won’t trigger mass BI cover

The European insurance and reinsurance market should not fear a spike in business interruption (BI) losses from problems caused by potential gas shortages across Europe later this year, according to analysts at investment bank Jefferies. The analysts point out that German authorities have already warned of gas rationing in the fourth quarter of this year because of the nation’s heavy reliance on Russian gas. The recent scare over potentially enormous BI insured losses from Covid-19 lockdowns means there is a much sharper focus among insurance market investors on BI claims than ever before, despite the fact the losses were largely contained. The Jefferies team said there is clearly a nervousness in the market about potential BI claims from a gas supply crunch. Risk and insurance managers working for industries exposed to gas supply problems, such as chemicals and glass manufacturing, should be checking their BI policies right now. But the Jefferies analysts believe the fact that most BI policies require a physical damage event to trigger cover means insured loss should be relatively low. “Prior to the pandemic, it seems to us that few investors had ever considered business interruption policies a source of material earnings volatility. Government-imposed lockdowns and quarantines in response to Covid-19 changed all of that, with business interruption risk becoming one of the most material sources of uncertainty and, for a time, was considered to be a source of existential risk for many commercial underwriters,” stated the Jefferies team. “Subsequent litigation proved costly, often related to ambiguous disease clauses, which were intended to respond to localised illness (such as salmonella in a restaurant), rather than government restrictions from a pandemic. Since then, although the cost was less than feared, ongoing litigation has kept these risks at the forefront of investors’ minds,” it continued. But given the new sensitivity to BI insurance risk, Jefferies said it understands why the current gas crisis in Europe is sparking questions from investors. Germany is particularly vulnerable because about 55% of its gas supply has historically come from Russia. Nord Stream 1 is only running at 40% of its total capacity of 55 billion cubic metres a year. Jefferies said that given industrial companies use a lot of oil and gas, it is reasonable to presume that some industries could potentially experience substantial business interruption. But the analysts believe the insurance market is well protected against losses from this potential coming BI event. “Most insured business interruption cover comes in the form of an add-on to property policies, making business interruption-related claims contingent on an underlying physical damage claim,” they stated. “The shutting off (or reduction) of gas supply [across Europe] will certainly create business interruption losses. However, it is difficult to envisage how this will spark widespread physical damage required to warrant a property claim and therefore a contingent business interruption loss. It is feasible that in a handful of cases, machinery that is not designed to be turned off could be damaged by this loss of gas supply, but we expect these instances to be isolated and immaterial,” concluded the Jefferies team.

Analysts say European gas crunch won’t trigger mass BI cover

Germany faces Q4 gas rationing but flood of claims unlikely

Want to read this article?

Read Next

UK arenas face heightened terror threat, says Pool Re, as Martyn’s Law remains in draft form

Talanx ‘increasingly confident’ of beating full-year profit forecast on Q1 results

US property market stabilises but concern over casualty loss trends

AGCS’s revenue falls in Q1 as rate momentum slows

UK tells firms not to pay ransoms in cyberattacks

UK arenas face heightened terror threat, says Pool Re, as Martyn’s Law remains in draft form

Talanx ‘increasingly confident’ of beating full-year profit forecast on Q1 results

US property market stabilises but concern over casualty loss trends

AGCS’s revenue falls in Q1 as rate momentum slows

UK tells firms not to pay ransoms in cyberattacks

Want to read this article?

Read Next

UK arenas face heightened terror threat, says Pool Re, as Martyn’s Law remains in draft form

Talanx ‘increasingly confident’ of beating full-year profit forecast on Q1 results

US property market stabilises but concern over casualty loss trends

AGCS’s revenue falls in Q1 as rate momentum slows

UK tells firms not to pay ransoms in cyberattacks

Related Articles