Insurers add to reserves following UK Covid-19 BI ruling

Insurers involved in the UK’s Covid-19 business interruption (BI) test case have begun to increase claims estimates following the Supreme Court’s ruling on Friday, but reinsurance is expected to minimise the damage. All six insurers involved in the case bought by the Financial Conduct Authority (FCA) on behalf of policyholders over disputed non-damage BI pandemic claims lost their appeal at the Supreme Court. The FCA, meanwhile, won its appeals following the initial High Court ruling last year. The victory for policyholders has been welcomed by buyers’ representatives and thousands of businesses should now see their claims processed, although they will be subject to adjusting. The test case ruling is thought to affect 370,000 policyholders, 60 insurers and billions of pounds in claims, because many policies not included in the case have similar wordings. The rulings will also have international ramifications as similar cases in other jurisdictions have referred to the earlier High Court ruling. Six insurers – Hiscox, RSA, QBE, Argenta, Arch and MS Amlin – appealed the High Court’s ruling on certain policy wordings, and some have now put out statements on the financial implications of the final judgment. Hiscox has increased its estimate for UK Covid-19 BI losses in 2020 by $48m, net of reinsurance. This is on top of the $130m of reserves it had in place at the end of Q3 2020 for BI claims. The insurer added that its exposure to potential BI claims arising from further UK government restrictions due to Covid-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be fully run off by the end of June. The group therefore estimates exposure to restrictions already announced this year at below $20m if they extend to the end of March. The insurer welcomed clarity provided by the final BI ruling and said claims settlement had begun. But it noted that fewer than one third of its 34,000 UK BI policies may respond as a result of the judgment. Hiscox added that its previously disclosed additional loss estimate of up to $40m for event cancellation if UK government restrictions continued into 2021, will now be recognised in its 2020 financial result due to the expectation that covered events will be cancelled. QBE said the net cost of its UK BI claims remains unchanged in light of the Supreme Court’s judgment, at $70m, but noted that the gross cost will increase. This will use up more of the insurer’s aggregate reinsurance limits and therefore reduce its reinsurance protection for potential BI claims in Australia. Therefore, QBE has strengthened its provisions for BI claims in Australia by $185m. The group’s ultimate Covid-19 allowance has now been increased to $785m, including total risk margins of $300m, with full-year 2020 related costs expected to reach $655m. QBE said the UK’s Supreme Court judgment overturned established case law precedent. It explained that the Supreme Court upheld the High Court’s ruling in favour of insureds on one of its notifiable disease policy wordings under appeal, and reversed the ruling in favour of QBE on the other two. QBE also stressed that all other insurers were unsuccessful on their main grounds of appeal. RSA said it is continuing to evaluate the court judgment but does not currently expect the net loss from policies affected by the ruling to change materially from previous reports. It expects reinsurance to kick in and cover some of the loss. The insurer estimated its gross cost from the initial High Court judgment could reach £104m, which would reduce to about £85m after cat reinsurance. It also welcomed the clarity brought by the Supreme Court’s ruling and said it is now committed to paying claims as quickly as possible, including interim payments where appropriate. Lloyd’s said it will take time to “carefully consider and respond” to the implications of the Supreme Court’s judgment for its customers and its impact on the Lloyd’s market, which retains less than 2% of the overall UK property SME market. Lloyd’s added that it welcomes the “further and definitive clarity” of the judgment for many policyholders with certain non-damage BI extensions. Ratings agencies said the judgment will see “modest” increases in claims for UK insurers and the financial impact will be “manageable”. Fitch said the ratings of UK non-life insurers are likely to be unaffected by the ruling. But it added that the fact the Supreme Court overruled the previous Orient-Express vs Generali ruling, as well as further judgments, could see insurers face substantially increased BI claims going forward and beyond the pandemic. Moody’s, meanwhile, said the judgment is credit negative for UK insurers and reinsurers. But it said the financial impact on individual insurers “should be manageable”, net of reinsurance. “However, precedents have been set that could widen the circumstances in which policyholders make future claims,” said the ratings agency.

Insurers add to reserves following UK Covid-19 BI ruling

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