Analysts at AM Best have warned that reinsurers are likely to bear a higher proportion of business interruption (BI) claims as COVID losses continue to mount and insurers exceed their retentions.
In the UK, the Supreme Court’s recent ruling on pandemic BI claims brought greater clarity to the sector, but the decision will increase COVID losses for many UK insurers.
At the same time, AM Best notes that the industry will have considerable work to do in order to repair its reputation after the damaging legal dispute.
But while many insurers have confirmed their COVID losses will be affected by the Supreme Court ruling, many also expect to make significant recoveries through their reinsurance programs.
However, according to AM Best analysts, these recoveries could be subject to potential disputes, meaning it may be some time before insurers realise the exact cost of the pandemic on their commercial property books.
Additionally, he level of recoveries will depend on the structure of reinsurance programmes, the rating agency says, as well as interpretations of reinsurance contract wordings, such as the aggregation of COVID-19-related claims, and the definition of the event or occurrence that triggers the reinsurance cover.
As losses continue, reinsurers will begin to assume more of the claims burden, AM Best believes, although dispute risk between insurers and reinsurers is lower where quota share cover is written back-to-back.
Settlements related to COVID-19 BI claims are expected to continue through 2021 but analysts believe overall performance in the commercial property sector this year is likely to be driven by more typical losses such as physical damage caused by fire and flood.
And there are signs that rates will continue to rise in response to loss experience, having built some momentum in 2020.
The UK property market produced a five-year average combined ratio of around 102% between 2015 and 2019 and, following COVID-19 losses, is expected to report a combined ratio well in excess of 100% for 2020.
With investment income under pressure from historically low interest rates, AM Best asserted that underwriting discipline and adequate pricing is crucial for the UK commercial property segment to achieve overall profits.