
The ratings of UK non-Life insurers are unlikely to be affected by the Supreme Court ruling on the validity of business interruption (BI) claims related to COVID-19, according to Fitch Ratings. The ruling largely went in favour of policyholders, but the ultimate claims costs should still be within Fitch's rating sensitivities for the insurers affected.
In a note, Fitch said that updated claims estimates published by insurers in response to the ruling suggest modest increases to previous estimates. Hiscox has said it will add $48m of reserves (net of reinsurance) to the $130m it had in place at end-3Q for BI claims. Its total BI reserves, net of reinsurance, will now equate to 7% of its total end-2020 equity of $2.4bn.
The Court’s overturning of a ruling that insurers had relied on in the test case, could have far-reaching ramifications, Fitch believes. The 2010 ruling after Hurricane Katrina was that Orient-Express Hotels should only be compensated for lost business up to the amount of business it could have expected with lower post-storm visitor levels, rather than up to the amount it would expect with normal visitor levels.
Insurers have relied on this decision for the past 10 years to reduce payouts for BI claims and they believed that COVID-19 BI compensation should be reduced to reflect the lower trading activity rather than being based on pre-pandemic business levels.
UK non-life insurers could face a substantial increase in BI claims costs – and not just those related to the pandemic – following the Court's decision to overturn the 2010 ruling, unless their contract wording specifically defines the reference point against which to assess losses.
The ruling had other bad news for insurers, Fitch said. Under the original judgement, cover for BI losses due to business closures during lockdown would have been based on a strict definition of lockdown, when closures were mandatory. The Court decided that this interpretation was too narrow and that cover should include closure instructions from a public authority, even if not backed by the force of law.
Fitch said that since the onset of the pandemic, insurers have amended policy wordings to exclude pandemic cover. Exposure is therefore gradually running off as annual policies are renewed, and insurers have much lower BI and event cancellation exposure to the current UK lockdown than to the first one in spring 2020.
This story originally appeared in Reactions.