Hiscox warns FCA’s Covid-19 BI test case could drive reinsurance losses

During its earnings call this morning, senior executives from specialist insurance and reinsurance underwriter Hiscox Group warned that the eventual findings of the UK Financial Conduct Authority’s (FCA) business interruption test case could drive additional Covid-19 losses to its reinsurance book.

In addition, the company also said that it has exposure to some business interruption in Europe through its Hiscox Re & ILS portfolio as well.

But mitigating all of this, the company said that it is underweight in Europe and the UK and its property business is well reinsured, with only a modest amount of the risk retained, so Hiscox would not expect any losses that flow to its reinsurance book to be particularly significant.

Hiscox this morning disclosed an increase in its Covid-19 pandemic loss provisions to $232 million, but there is a risk that the FCA’s business interruption case could drive losses through to its reinsurance segment as well.

Whichever way the business interruption test case turns out Hiscox said that “we do not consider this to be a covered loss.”

However, the company said that “we will of course abide by the final outcome,” even if it results in driving further claims to the company.

If the outcome of the BI test case results in insurers being pushed to honour their claims, even when they feel they aren’t valid, Hiscox warned that, “The outcome of the FCA test case may also have an impact on our inwards reinsurance portfolio written by Hiscox Re & ILS, as some of its clients are primary insurers operating in the UK market which may be impacted by this Judgment.”

However, the uncertainty surrounding this is significant, Hiscox’s executives explained today and “we are currently unable to accurately estimate the quantum of any potential liabilities.”

It’s not clear whether any of those losses would be shared with the Hiscox ILS portfolios and their investors.

The ramifications of the business interruption issue are clear. If judgements go against the insurance industry, the reinsurance sector will bear an increased level of losses from the Covid-19 pandemic.

Hiscox would expect to take its share, albeit minimal. But its warning of this will be noted by other reinsurers with exposure to the UK market, as well as to other European markets where there is a chance of more business interruption claims being honoured as well.