Andrew Horton, Chief Executive Officer (CEO) at Beazley, has said the company is expecting disputes around reinsurance coverage following the Supreme Court’s ruling on business interruption (BI) losses linked to COVID-19 in the UK.
Speaking during a Q4 earnings call, Horton explained that there has been a long-held expectation in the reinsurance market that reinsurers will not bear a significant proportion of the pandemic BI losses.
But after the recent legal decision in the UK, these assumptions could be tested, Horton believes, and lead to many potential legal challenges in the months ahead.
Beazley reported that its combined ratio deteriorated to 109% in 2020 on the back of first-party COVID-19 losses and elevated ransomware reserves, resulting in a loss before tax of $50.4 million for the year.
This compares with profit before tax of $267.7 million in 2019, a year in which Beazley’s combined ratio reached 100%.
The loss included COVID claims costs of $340 million, which remain unchanged since the company last updated its estimate in September.
But Beazley, which both supplies and utilises reinsurance, expects that there will be some contention over the level of COVID BI losses that will be transferred to reinsurance programs.
“My view is that there is probably a good chance of having disputes in the reinsurance market based on the ruling that has taken place in the UK,” Horton said alongside his results commentary. “But I think it will be on a case by case basis, and I’m sure the wording in the reinsurance market is not all consistent. And therefore there will be relationship issues and a whole load of things taken into account.”
The recent Supreme Court ruling, which largely sided with policyholders over re/insurers, set a new legal precedent and provided some clarity over which events are covered by business interruption policies, but it remains to be seen exactly how claims costs will be apportioned within the re/insurance market.
“The reinsurance renewals probably went ahead without anyone thinking they were going to pick up any major losses from the COVID-19 event. And that’s why it was a relatively muted renewal,” Horton noted.
“So there is a presumption in the reinsurance market that they’re not going to be bearing a lot of these losses and I think that’s been there for a long period of time. Now, that’s going to be tested as people start making claims against. And then we’ll see what happens. But I think this is all ahead of us because not much has happened so far.”
Beazley executives also commented on their own reinsurance buying during the earnings call, which includes a new contingent quota share that allows the firm to unilaterally cede up to $200 million more of its liability business as a quota share.
“That gives us good flexibility to take the most advantage we can of the conditions that we have,” said Chief Underwriting Officer Adrian Cox, who added that Beazley had come within its budget for reinsurance purchasing at the January renewals, depite the high level of rate increases.
“There was there was more supply than we had thought that there would be,” he said “I think most of the more difficult discussions on renewals were around cyber and communicable disease coverage. But pricing capacity itself was more plentiful than we had thought.”
Beazley reported 19% growth in gross premiums written to $3.56 billion for 2020, as it looked to take advantage of more favourable pricing dynamics.
“We remain in an elevated risk environment and our underwriting contemplates that,” Cox explained.
“The reason we are still growing is that we’re able to underwrite at a price that aligns with exposure for the bulk of our book,” he went on. “And new liability claims did slow down last year, I think that’s understandable. You know, there was a lot of reduced economic activity … But in our view, this is all temporary. The drivers of inflation that we talked about this time last year have not gone away, and we do expect claims to bounce back.”