Despite the pandemic, U.S. property / casualty (P/C) insurers have broadly maintained capital strength, but although the performance of the sector in the year ahead is expected to improve, the business interruption (BI) issue lingers, says Fitch Ratings.
On the back of substantial commercial lines premium rate increases and lower COVID-19-related losses going forward, Fitch’s outlook on the U.S. P/C sector is improving.
The ratings agency states that in 2020, a group of 50 North American publicly traded insurance carriers reported more than $9 billion in pandemic-related losses.
Currently, this equates to approximately 26% of the $34.5 billion of publicly reported COVID-19 pandemic-related losses, IBNR reserves and estimates from global insurance and reinsurance companies.
To date, the large majority of losses continue to be IBNR, with a significant percentage of the total of claims incurred and paid relating to event cancellation and travel coverage.
With the vaccine rollout underway in many parts of the world, losses related to the pandemic are projected to fade for insurers from the heights of 2020.
“However, risk of an individual insurer incurring large losses or adverse reserve development relative to capital due to unique or loosely worded coverage terms or adverse litigation outcomes remains a possibility,” warns Fitch.
It’s been well documented that the coronavirus pandemic resulted in a huge volume of BI claims across the world. While in parts of Europe, such as the UK, unprecedented rulings have seen the courts side with insureds on a number of key issues, in the U.S., the belief that physical damage to property is required for a valid BI claim has largely held up in judicial rulings.
According to Fitch, this is particularly notable for policies with traditional language and terms and that have virus exclusions.
“Insurers indicate that a significant number of BI notices and claims have been withdrawn or closed without payment,” says Fitch.
As the ratings agency notes, estimating the ultimate level of BI claims is challenging as coverage is embedded within other commercial products, while BI premiums and losses are not disclosed in statutory filings.
So far, the outcomes of the majority of BI-related cases in the U.S. have favoured insurers, although litigation does remain subject to judicial interpretation of risk. On this point, Fitch highlights the ruling of Henderson Road Restaurant Services, Inc. v. Zurich American Insurance Company, in which the plaintiff successfully argued the government lockdown caused the BI loss rather than the virus itself.
“Questions remain as to whether any individual plaintiff victory with a particular vein of argument in a given jurisdiction will lead to a slew of larger insurer losses in similar cases,” says the ratings agency.
Considering the vast amount of BI general and professional liability claims and the resulting litigation, Fitch expects that it will take several years to determine the ultimate cost to the U.S. P/C sector.