Carriers expect reinsurance cover on BI claims from FCA test case judgement

Insurance carriers potentially affected by today’s judgement in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case, are suggesting their reinsurance, including catastrophe covers, will provide support.

The judgement came through from the High Court this morning and has found largely in favour of insurance policyholders in the FCA’s business interruption insurance test case.

As a result, insurers may be facing higher COVID-19 business interruption claims as payouts for the pandemic go to a wider swathe of UK businesses for which cover had previously been denied by the industry, depending on appeals of course.

Hiscox Group, the insurance, reinsurance and third-party capital backed underwriter headquartered in Bermuda, was first to make a statement.

Hiscox said that it might now face an additional UK £100 million of business interruption claims from the pandemic.

That figure is given net of reinsurance, suggesting Hiscox is expecting its reinsurance program to respond to the claims that could flow down to it due to this court ruling.

“This encompasses claims from all divisions including Hiscox Re and is a reduction of £150 million from the upper end of the Group’s previously published risk scenario,” Hiscox further explained.

Providing a little more clarity on its reinsurance coverage expectations was UK insurer RSA, who also put out a statement following the High Court ruling.

“RSA estimates the additional financial impact to RSA of today’s judgment to be approximately £104m on a gross basis across its portfolio of relevant business interruption policies.

“After the application of our catastrophe reinsurance protection, RSA estimates the impact of this judgment to be around £85m which is in turn expected to reduce further through qualifying as a loss covered by the group-wide aggregate reinsurance programme,” RSA explained.

So RSA expects its catastrophe reinsurance program to shoulder around UK £19 million of its business interruption claims, while its aggregate reinsurance counterparties could take some more.

RSA also noted the chance of this all taking sometime to play out, as well as the fact the impacts could potentially worsen, or improve.

The company continued, explaining that its reinsurance is there for supporting any escalation from this issue, “The court judgment is complex given the breadth of questions posed across the different policy wordings considered. If there are appeals, further legal actions, or other relevant rulings on these or other policy wordings not yet considered, they may impact our assessment of the estimated gross figure upwards or downwards, potentially materially.

“This, alongside the inherent complexity of business interruption claims more generally, means the financial impact of the judgment will not be fully resolved for some time but, as above, reinsurance protection is expected to apply should the figures increase.”

These two insurers were participating in the FCA’s business interruption insurance test case alongside six others, that included: Arch Insurance (UK) Limited; Argenta Syndicate Management Limited; Ecclesiastical Insurance Office plc; MS Amlin Underwriting Limited; QBE UK Ltd; and Zurich Insurance plc.

Dominic Simpson, a Vice President and Senior Credit Officer at Moody’s Investors Service, commented on the ruling saying, “The result of the FCA’s business interruption test case is broadly credit negative for UK insurers and reinsurers as policies that cover business interruption from disease and, to some extent, denial of access should pay out. Despite the outcome, the financial impact on individual insurers should be manageable, net of reinsurance. More positively for insurers, most SME business interruption policies are designed primarily to protect property damage interruption, and do not cover pandemic-related claims.”