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Billions at stake ahead of FCA court ruling: Deutsche Bank

10th September 2020 - Author: Matt Sheehan

Commentary from Deutsche Bank highlights that billions of pounds in potential insurance claims are at stake ahead of the imminent court judgement on the FCA’s business interruption (BI) case.

financial-conduct-authority-logoThe re/insurance industry is anxiously awaiting a verdict from the UK courts in the coming days about whether insurers will ultimately be liable for BI losses related to the COVID-19 pandemic.

The FCA has mentioned that 370,000 small businesses could be affected by the outcome of the court case, potentially with BI claims each in the tens of thousands.

Assuming an average claim of £10,000 to £20,000 per case, analysts at Deutsche Bank estimate that there are between £3.7 billion and £7.4 billion of possible insurance claims on the line.

However, they added that it may initially be difficult to assess whether the overall outcome is a net positive or negative for insurers, given that there are 20 samples of different policy wordings being ruled on. Additionally, the court judgement will not necessarily mark the final conclusion, as any judgements may end up subject to appeal.

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Applying the £3.7 billion to £7.4 billion potential loss range to some of the most directly exposed companies, Deutsche Bank believes the costs could imply pre-tax losses (gross of reinsurance) for Aviva of £550 million to £1.1 billion. For RSA, meanwhile, analysts estimate that costs would be slightly lower at between £300 million and £600 million.

But it is reinsurers that are potentially more vulnerable to the outcome of the FCA’s court case, Deutsche Bank warned. Specifically, it noted that both Aviva and RSA have effectively reported loss estimates that are up to the thresholds of their reinsurance cover.

In Aviva’s case, the group is quite clear about this, having provided up to £150 million (its reinsurance excess) for UK BI claims. And RSA has it has formally estimated £47 million for such claims, but has also set aside a further £25 million of margin, taking its total provision to £72 million – compared with its reinsurance cover which starts at £75 million.

Deutsche Bank thus concludes that a ruling against insurers should actually be quite minimal for many primary companies, provided that reinsurers pay out.

According to analysts, Swiss Re had provisioned $973 million for BI-related losses as at H1, while SCOR had provisioned €100 million, Hannover Re €240 million and Munich Re €350 million. However, Deutsche Bank believes that very little of these provisions relate to the outcome of the FCA rulings.

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