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Insurers estimate additional COVID-19 BI costs after UK High Court judgement

15th September 2020 - Author: Luke Gallin

Global re/insurers have responded to the UK’s High Court ruling in favour of policyholders on the majority of key issues, providing estimates for additional COVID-19 business interruption (BI) claims.

coronavirus-covid-19-pandemicEarlier today, the UK court passed its judgement on the Financial Conduct Authority’s (FCA) BI insurance test case, ruling in favour of policyholders on most of the issues.

According to reports, 370,000 small businesses will be affected by the outcome of the court case, while analysts have estimated that between £3.7 billion and £7.4 billion of claims could be on the line.

In light of the judgement, global carriers Hiscox and RSA, two of the eight insurers directly involved in the court hearings, have responded and provided estimates for additional BI losses related to the pandemic.

Starting with Hiscox, and the group says that as a result of the judgement, it estimates additional COVID-19 claims arising from BI to be under £100 million (USD 129 million), net of reinsurance. So, it’s clear that Hiscox is expecting to call on its reinsurance protection to respond to additional claims as a result of the judgement.

The company notes that this includes claims from all divisions including Hiscox Re, and is actually a reduction on the £150 million (USD 194 million) from the upper end of its previously announced risk scenario.

Hiscox explains that the judgement comprises over 160 pages of legal analysis by the Court addressing important points of insurance law. The ruling clarifies that less than one third of Hiscox’s 34,000 UK BI policies may respond.

“Coverage under these policies is essentially limited to those customers who were mandatorily closed by Government orders, and then only in certain circumstances,” says Hiscox.

Adding: “Hiscox is assessing the Judgment in detail to ascertain how the Court’s conclusions should be applied to the claims and circumstances of individual Hiscox policyholders. Any issues not addressed by the Judgment will be assessed on a case-by-case basis as part of the normal insurance loss adjustment process for claims.”

Insurer RSA participated as defendant in relation to five of the policy wordings across three schemes, and states that while some provisions impacting the firm were upheld by the UK’s High Court, some were not.

Based on an initial review, RSA has estimated that the judgement will result in additional BI claims of £104 million (USD 134 million) on a gross basis across its portfolio. However, net reinsurance, this figure drops to roughly £85 million (USD 110 million), which is in turn expected to decline through qualifying as a loss covered by the group-wide aggregate reinsurance programme it has in place.

“The court judgment is complex given the breadth of questions posed across the different policy wordings considered,” says RSA.

Both companies note the possibility for appeals, of which the outcome could impact loss estimates. At the same time, BI claims are inherently very complex, meaning that the ultimate financial impact of the judgement will not be fully understood for quite some time.

Although, as noted by RSA, reinsurance protection is expected to apply should the figures trend upwards.

“Should there be any substantive changes to RSA’s position, we will communicate them at the time. RSA will also continue to communicate regularly with our customers to update them on the status of individual claims, including those impacted by the court case, and is committed to paying claims as quickly as possible as and when legal processes relevant to them are concluded,” says RSA.

While Hiscox states: “Hiscox recognises these are extremely difficult times for businesses and regrets any contract dispute with customers, which is why it is committed to seeking an expedited resolution through this Industry Test Case. In line with FCA Guidance, Hiscox will communicate an update on the Industry Test Case to relevant policyholders through the appropriate channels.”

Alongside the relevant insurers and reinsurers, numerous industry commentators have responded to the judgement, including Dominic Simpson, a Vice President and Senior Credit Officer at ratings agency Moody’s.

The result of the FCA’s business interruption test case is broadly credit negative for UK insurers and reinsurers as policies that cover business interruption from disease and, to some extent, denial of access should pay out. Despite the outcome, the financial impact on individual insurers should be manageable, net of reinsurance. More positively for insurers, most SME business interruption policies are designed primarily to protect property damage interruption, and do not cover pandemic-related claims,” said Simpson. 

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