The recent ruling from the UK Supreme Court, that found largely in favour of insurance policyholders in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case appeals, is not expected to drive significant additional losses through to reinsurance, Fitch Ratings has said.
While some reinsurance panels will definitely be affected, the overall impact is not expected to be a significant hit to any particular company, with reinsurance programs well-diversified across traditional and also alternative capital.
Fitch focuses its comments on the European big four reinsurance firms, saying that the resulting extra claims costs from the business interruption ruling should not translate into reinsurance claims large enough to materially affect the credit quality of major players Hannover Re, Munich Re, SCOR or Swiss Re.
Which likely reads across to most of the reinsurance and also ILS market, as any additional claims costs are likely to be well-spread across the marketplace, as is the design of syndicated reinsurance programs.
For the big four European reinsurers, their largely IBNR reserves already set may be sufficient to account for any additional claims burden, Fitch believes.
However, there is still uncertainty and also the potential for disputes, it seems.
Fitch says, “A key uncertainty is the extent to which cedants will be able to aggregate multiple BI claims into single large claims to trigger excess-of-loss reinsurance payouts on the basis that the individual claims were all caused by the same event – the pandemic. We expect reinsurers to contest this, arguing that claims were caused by separate events, with different businesses interrupted by different sets of restrictions. The outcome will depend on the wording of each reinsurance treaty and in some cases may involve litigation.”
This has the potential to drive additional reinsurance losses in some cases, perhaps hitting some ILS funds or structures as well.
In addition, the quota share specialists must be considered, as they will be taking shares of losses anyway and some do also allocate capital to excess of loss as well, which has the potential to see some doubling up if aggregation becomes a serious concern.
“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,” Fitch notes.
Fitch also highlights that the implications from business interruption are lower in Europe in its view, as coverage is generally smaller.
However, there are already cases of European business interruption claims driving recoveries on catastrophe reinsurance programs, something that may continue over the coming months as exposure runs off and greater visibility of aggregate claims emerges.