Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Australia COVID BI test case result can release some trapped ILS capital

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The second test case in the High Court of Australia regarding the interpretation of policy wordings in business interruption policies after the COVID-19 pandemic, has been resolved in favour of insurers after appeals were denied, a move that has positive implications for the release of some trapped ILS capital, we’re told.

covid-business-interruptionIt was announced this morning that the High Court has decided to deny special leave to appeal a judgment made back in February in the Full Court of the Federal Court of Australia, which found in favour of insurers on the interpretation of policy wordings in business interruption policies.

The Insurance Council of Australia (ICA) said earlier that, while there is one case that could go back before the Federal Court, “the High Court’s rulings on these matters draws to a close the formal test case process concerning Covid-19 related business interruption matters.”

Insurers and reinsurers should now apply the principles of the court’s rulings to all of their COVID-19 pandemic related business interruption claims.

It means that both insurance and reinsurance carriers will likely have to look at any reserving undertaken for potential COVID BI losses, as to how the appeal being denied and the upholding of the Full Court’s decision applies to policies and the quantum of their possible payouts and losses.

According to our sources, this appeal decision has ramifications for some trapped capital deployed by insurance-linked securities (ILS) operators.

Given the uncertainty over the eventual industry loss related to the pandemic, how claims would fall to property programs, as well as what actually constitutes and was covered under business interruption policies, a relatively significant amount of ILS collateral was trapped around the world due to COVID-19.

A good deal of that has already been released we’re told, while a small amount was lost, we understand, but more has remained held as courts decided how to treat pandemic BI in particular countries, or while cedents waited for development.

We understand this Australia test case was deemed one relevant and still ongoing legal process that, given the denial of the right to appeal, can now move some reserve amounts, with positive implications for some ILS capital.

In particular, this is related to retrocessional reinsurance arrangements, the type of worldwide and aggregate structures that reinsurers have been able to trap some collateral from.

Sources said this appeal result is likely to free some trapped collateral, related to specific exposed retro arrangements.

We don’t know how much, but for the managers in question the certainty this BI test case appeal decision brings will be very welcome, if it delivers some of their long-trapped collateral back, which will be very helpful for both their results and for putting back to work, or returning to investors.

Importantly, the decision not to allow the appeals also provides certainty for insurers, reinsurers and policyholders on a range of outstanding claims, which will ultimately also have positive effects in lowering the reinsurance industries overall pandemic claims burden.

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