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Ratings of Europe’s major reinsurers unaffected by UK BI judgement, says Fitch

28th January 2021 - Author: Luke Gallin

Despite the UK Supreme Court upholding the judgement on the Financial Conduct Authority’s (FCA) business interruption (BI) insurance test case, the amount that flows through to reinsurers is expected to be immaterial and have no impact on the ratings of Europe’s big four, according to Fitch Ratings.

The much-discussed UK BI insurance test case came to a close on January 15th at the appeal stage as the Court ruled largely in favour of insureds.

While it’s been said that some 370,000 small businesses may have been affected by the outcome of the ruling, with analysts estimating that between £3.7 billion and £7.4 billion of claims are on the line, Fitch said previously that the ratings of UK insurers are likely to be unaffected.

Following the judgement, a number of insurers released updated loss estimates for their pandemic-related BI exposure, and it’s become clear that carriers expect reinsurance protection to come into play.

But while the ruling mostly went against the primary insurers, “the resulting extra claims costs should not translate into reinsurance claims large enough to materially affect the credit quality of Hannover Re, Munich Re, SCOR or Swiss Re,” says Fitch.

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The ratings agency continues to note that prior to the ruling, the four major European reinsurers were reserving significant amounts for BI claims. Furthermore, at least two-thirds of the firms’ Q3 2020 global BI reserves were incurred but not reported (IBNR).

“This may already give them capacity to cover not just late-reported claims, but also extra claims resulting from the UK ruling. Moreover, the impact of extra BI reinsurance claims is mitigated both by the companies’ diversified business mix – with BI representing only a moderate part of their overall risk exposure – and by the exclusion of cover for losses linked to communicable diseases in annual BI contracts written or renewed from 1 January 2021,” Fitch continues.

One potential issue for reinsurers, according to Fitch, relates to uncertainty surrounding the ability of cedents to aggregate multiple BI claims into large single claims to trigger excess-of-loss reinsurance arrangements.

However, the ratings agency expects reinsurance companies to contest efforts here by arguing that claims were driven by separate events, with different businesses interrupted by different sets of restrictions.

“However, even with widespread aggregation, we do not expect that the resulting excess-of-loss payouts would materially weaken the four major European reinsurers’ earnings or capital,” adds Fitch.

In response to the ruling, we polled our industry contacts and had 270 responses on whether or not they agreed with the outcome.

Despite a slight majority siding with the decision to uphold the original ruling, responses showed a clear mix, with 34% stating that they were ultimately unsure over the matter.

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