Analysts at Moody’s have reported that the recent business interruption ruling by the UK Supreme Court is a credit negative for re/insurers, although the financial impact on individual companies will be manageable, net of reinsurance protection.
Additionally, the clarity provided by the judgement should ultimately benefit the industry by ending damaging disputes with clients.
“A positive aspect of the judgment for insurers is that the clarity provided will help end damaging disputes with clients,” Moody’s said.
“There has clearly been a mismatch between policyholder and insurer expectations regarding BI coverage. To avoid further reputational damage to the industry, we foresee clearer policy wording and more explicit explanation of SME insurance policy coverage limits.”
Last week, the Supreme Court decided to uphold the ruling on the BI test case first brought forward by the Financial Regulation Authority (FCA) in May 2020.
The court case, which aimed to provide legal clarity on whether insurers were obligated to pay out on pandemic BI claims, largely ruled in favour of policyholders.
After the UK High Court passed judgement on the test case in September 2020, the UK Supreme Court granted permission for the FCA and a group of insurance and reinsurance companies to appeal its ruling.
It’s believed that some 370,000 small businesses may have been affected by the outcome of the case, with analysts estimating that between £3.7 billion and £7.4 billion of claims are on the line.
QBE and RSA are among those to warn of increased losses as a result of the ruling, but both insurers have confirmed that the additional costs will be absorbed by their reinsurance protection.
But Moody’s notes that the decision could also set a precednet for widening the scope for increased claims in the future, with business interruption policies potentially more likely to respond to other types of ‘wide area damage’ such as storms or floods.
