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UK business interruption ruling pushes QBE further into reinsurance cover

18th January 2021 - Author: Matt Sheehan

Australia-based re/insurer QBE has said that the UK Supreme Court’s verdict on business interruption (BI) cases linked to the pandemic will push it further into its aggregate reinsurance protection.

QBELast week, the Supreme Court decided to uphold the ruling on the BI test case first brought forward by the Financial Regulation Authority (FCA) in May 2020.

The court case, which aimed to provide legal clarity on whether insurers were obligated to pay out on pandemic BI claims, largely ruled in favour of policyholders.

After the UK High Court passed judgement on the test case in September 2020, the UK Supreme Court granted permission for the FCA and a group of insurance and reinsurance companies to appeal its ruling.

It’s believed that some 370,000 small businesses may have been affected by the outcome of the case, with analysts estimating that between £3.7 billion and £7.4 billion of claims are on the line.

For QBE, the Supreme Court’s decision will increase the gross cost of its UK BI claims, but the additional expense will be absorbed by its reinsurance cover, meaning the company’s net cost will remain unchanged at $70 million.

“Although the UK Supreme Court ruling does not directly impact QBE’s net profit, the increase in gross UK insurance business interruption claims has the effect of utilising additional aggregate reinsurance limit thereby reducing downside protection with respect to potential Australian business interruption claims,” QBE explained.

The Supreme Court upheld the High Court’s ruling in favour of insureds with respect to one of QBE’s notifiable disease policy wordings and reversed the ruling in favour of QBE with respect to the other two of QBE’s three notifiable disease policy wordings examined. All other insurers were unsuccessful on their main grounds of appeal while the FCA was successful on its grounds of appeal.

To restore downside protection and to add additional buffer, QBE’s FY20 result will now include an additional $185 million risk margin strengthening with respect to potential Australian business interruption claims.

The group believes this should allow for a potentially severe Australian BI scenario, when combined with its existing claims provision, risk margins and reinsurance protection, which includes a modest amount of remaining aggregate protection.

Following the risk margin strengthening, QBE’s total ultimate COVID-19 allowance is now $785 million including total risk margins of $300 million, with pandemic costs in 2020 now expected to be $655 million.

In December, QBE forecast that it would incur an overall loss of $1.5 billion in 2020, and this result is not expected to be changed significantly following recent developments.

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