Australian insurers can cope with Covid BI claims says Fitch

Australian risk managers will be pleased to see the legal tide turning in favour of policyholders in the ongoing dispute with insurers about the validity of business interruption (BI) claims for Covid-19-related losses. They will also be pleased to hear that although Fitch Ratings said BI claims on top of other pandemic-related losses may place insurers’ profit margins under pressure, their capital position is not under threat. Fitch said this week that BI claims are likely to be the largest source of pandemic-related claims for Australian non-life insurers, despite the high level of uncertainty about the ultimate cost. Major Australian non-life insurers have booked large provisions in response to court rulings, which could lead to a surge in BI claims. These losses will exacerbate pressure on Australian non-life insurers' earnings, but Fitch thinks overall pandemic losses will be manageable as insurers are supported by sound capital buffers. Fitch noted that in a recent landmark case, Australian courts decided in favour of policyholders, saying that pandemic exclusions in policies that refer to the Quarantine Act are not effective. This Act was repealed and replaced by the Biosecurity Act in 2016 and some policies had not been updated to reflect this. The insurance industry, represented by the Insurance Council of Australia, is in the process of appealing the outcome and maintains that BI policies were not priced to cover pandemics. Policyholders also recently won a significant victory in the UK courts, as the appeal by insurers in a test case that looked at policy wordings linked to the applicability of BI coverage was judged in favour of policyholders. “While this will not set precedent, it may influence the way BI claims are paid in Australia. At the same time, government responses to the coronavirus pandemic in the UK and Australia have been different, with the latter being swifter to impose lockdowns and the spread of Covid-19 more contained,” noted Fitch. Following the UK test case, QBE Insurance Group said it will strengthen loss reserves by a further $185m for potential BI claims from its Australian business. QBE expects losses from its UK business to remain at $70m because of reinsurance protection in place. Insurance Australia Group made a post-tax provision of A$865m and raised A$776m to bolster capitalisation. Suncorp Group has also made a BI-related provision of A$195m. “Insurers set claims reserves based on assumptions that include estimates of exposure to industries that have been affected by lockdowns and customer risk categorisations. Claims are still largely booked on an incurred, but not reported, basis and could be released if court cases are decided in favour of the insurers. The ultimate cost will depend on the outcome of ongoing or future litigation and on potential claims from future lockdowns. We think the risk from the latter will reduce as policies are renewed and insurers update policy wording and clearly stipulate pandemic exclusions,” stated Fitch. The ratings agency added that the uncertainty regarding BI losses adds to existing pressure on Australian non-life insurers’ earnings. It pointed out that the sector's net profit fell to A$0.9bn in the 12 months to September 2020, from A$3.4bn during the previous 12 months, because of a large drop in investment income. The sector's coverage of the regulatory prescribed capital amount remained “solid” at 1.74x, added Fitch.

Australian insurers can cope with Covid BI claims says Fitch

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