AM Best has warned that pandemic business interruption (BI) coverage will continue to represent a significant source of uncertainty for Australian commercial insurers following the verdict of legal test case in the country.
The New South Wales Court of Appeal sided unanimously against the arguments made by insurers in its ruling.
The rating agency believes the re-evaluation and refinement of loss provisions for BI exposures following the case will lead to an adverse impact on commercial insurers’ operating earnings.
It also expects some insurers to reinforce their claims provisions and execute capital raising actions to bolster their solvency positions.
The extent to which the legal ruling will affect capital positions remains to be seen, although AM Best views companies with strong financial flexibility and a track record of accessing capital markets as being best-placed to contend with adverse capital implications.
Analysts noted that some smaller insurers exhibit limited financial flexibility due to their ownership structures and therefore may have less ability to raise significant additional capital, if required.
“Another key factor relevant when determining the financial impact of potential business interruption exposures for insurers is with regard to their ability to make recoveries from reinsurance programmes,” said Myles Gould, director, analytics, AM Best.
“Loss triggers may be a source of dispute with reinsurers, such as in the event of non-alignment of policy exclusions in primary wordings and reinsurance contracts.”
“This test case outcome remains only one piece of a much larger puzzle, with a number of other business interruption contract triggers yet to be evaluated ahead of understanding the full liability for insurers,” added Alex Rafferty, associate director, analytics, AM Best.