Lack of exclusions, poor wordings the Covid-19 BI threats to reinsurers & ILS

The majority of analysts and observers do not believe that the reinsurance and insurance-linked securities (ILS) industry faces a tidal wave of business interruption claims as a result of the coronavirus pandemic.

Ongoing legal action continues to push for claims to be honoured, but in the majority of cases adequate exclusions do exist and it is viewed as potentially fatal to the industry if these were overruled and a flood of claims forced through into property insurance policies.

Analysts largely agree on this as being increasingly unlikely, given the potential scale of the financial hit to global insurance and reinsurance markets which many see as potentially big enough to stop the industry in its tracks.

“Unconstitutional” is a word now being repeated by lawyers, analysts and those in industry lobby groups in the United States, as they highlight the fact that in the majority of cases insurance policies were never designed to cover the financial impacts to businesses of a virus outbreak.

With property damage (PD) still needed in most cases to activate a business interruption claim, legal experts also feel that claiming PD for the presence of the coronavirus in a property is tenuous and unlikely to win many cases where some kind of exclusion language exists.

But, where exclusions aren’t present or are particularly poorly worded some cases are likely to result in coverage being allowed, with losses flowing to the industry from these.

Analysts at Keefe, Bruyette & Woods explained that, “Some courts will probably rule that the presence of the coronavirus constitutes covered property damage – despite the virus’ inherent impermanence and the absence of actual structural damage – for policies without an explicit virus exclusion, implying some exposure to business interruption losses within commercial property lines (most frequently included within Commercial Multiple Peril – Non-Liability, Fire, and Allied Lines).”

The lack of an explicit or well-worded virus exclusion is likely to be the source of property related business interruption claims that fall to the reinsurance and insurance-linked securities (ILS) market.

There will certainly be some claims for BI that leak into the ILS market, largely to collateralised reinsurance layers covering reinsurance programs that support insurers that had no exclusions, or poorly-worded ones.

In addition there is an expectation that some reinsurance sidecar investment vehicles will also face some level of claims, given they follow the fortunes of a reinsurer on a pro-rata basis and so could be exposed to any coronavirus related business interruption claims.

So too may private ILS quota shares, which could find themselves again taking a share of claims from their sponsoring re/insurers, if they are exposed to virus related claims.

The chances of a bulk forcing of BI claims into the re/insurance industry is seen as increasingly slim, given the damage this would cause to the sector and the fact it would likely need bailing out afterwards.

KBW’s analyst team said, “We believe efforts to retroactively undo unambiguous and approved “virus exclusions” will ultimately fail as unconstitutional, with potential economic destruction going well beyond the P&C industry.”

Individual cases continue to be processed though and some will likely succeed, but again this is likely to come down to the wordings used, whether exclusions have been robustly written and the like.

In the property catastrophe reinsurance world it will likely come down to wordings as well, plus whether the protection buyer has itself honoured pandemic related claims as a result of the coronavirus.

Insurers that are honouring pandemic related business interruption claims on their property insurance policies, are likely to seek to claim support from their reinsurance panel in some way.

This could actually be interesting to watch, as in some cases it will come down to the willingness of reinsurers to support their client when there is no explicit exclusionary language included in the reinsurance treaty.

That is another source of potential claims for the ILS market, but it is likely to be smaller than claims that emerge through poor wordings or total lack of exclusions in property insurance policies, it seems.

In the end the volume of claims faced by reinsurance and ILS markets is largely going to be driven bu the robustness of contract language used, or the absent of relevant contract language.

The industry is likely to revisit its language at the upcoming reinsurance renewals, as was also seen in Japan in April.

It’s clear there have been some gaps and these do risk some virus claims falling into property reinsurance arrangements, as they were never really intended to.

That’s not likely to be particularly significant, in terms of overall volume alone, but in some cases it may be enough to concern certain investors behind ILS structures and it remains to be seen how this plays out longer-term for the industry.

The overall industry loss from the pandemic will be a significant figure in at least the double-digit billions of dollars. How much of that falls through property reinsurance programs is as yet uncertain, but has the potential to be defining for some ILS strategies it seems.