Fitch has said that the ratings of UK non-life insurers are likely to be unaffected by last week’s Supreme Court judgement on the validity of business interruption (BI) claims related to the ongoing COVID-19 pandemic.
The UK Supreme Court upheld the judgement on the Financial Conduct Authority’s (FCA) BI insurance test case on Friday Jan 15th, ruling largely in favour of insureds.
While the ruling could have far-reaching ramifications, Fitch still expects the ultimate claims costs to fall within its rating sensitivities for the insurers affected.
Following the judgement, insurer and reinsurer Hiscox added a further $48 million, net of reinsurance, to its 2020 estimate for COVID-19 BI losses, while RSA said that it expects reinsurance to apply. At the same time, QBE raised its ultimate COVID-19 allowance to $785 million, with full-year 2020 pandemic-related costs now expected to reach $655 million.
But while the additional BI costs are expected to be modest, Fitch warns that the fact the Court overturned a ruling from 2010, which insurers often rely on to reduce BI payouts, could have far-reaching consequences.
The 2010 ruling concerned a dispute between Generali and Orient-Express Hotels, and related to a BI claim for damage to a hotel in New Orleans caused by Hurricanes Katrina and Rita. The Court ruled that Orient-Express Hotels should only receive compensation for lost business up to the amount of business it could have expected with lower post-storm visitor levels.
According to Fitch, the Court’s decision to overturn this ruling could be significant for the insurance industry.
“UK non-life insurers could face a substantial increase in BI claims costs – and not just those related to the pandemic – following the Court’s decision to overturn the 2010 ruling, unless their contract wording specifically defines the reference point against which to assess losses,” explains the ratings agency.
Adding: “BI claims are likely to be one of the main costs from the pandemic for the UK non-life sector, along with claims for event cancellation. Since the onset of the pandemic, insurers have amended policy wordings to exclude pandemic cover. Exposure is therefore gradually running off as annual policies are renewed, and insurers have much lower BI and event cancellation exposure to the current UK lockdown than to the first one in spring 2020.”
