17 September 2020Insurance

Rating agencies react to UK BI ruling on COVID-19 claims

The dispute over COVID-19 business interruption (BI) claims has been closely monitored by the major insurer rating agencies who have offered a mixed reaction to the UK High Court's decision on the Financial Conduct Authority’s (FCA) test case.

Following the ruling, which largely favours the insureds, AM Best expects "COVID-19-related BI claims to have a material impact" on UK commercial property insurers’ 2020 earnings, but the aggregate solvency of the UK non-life insurance sector is expected to remain robust. At the same time, it highlights the uncertainty that remains around the volume and severity of valid claims.

"The judgment provides policyholders with increased clarity as to whether they will receive payment from their insurers (a process that may otherwise have been lengthy and more costly)," the agency said, adding that "the test case does not directly address how resulting claims payments will be calculated".

In its new report titled 'UK COVID-19 Business Interruption Court Ruling Brings Greater Clarity but Questions Remain', Best estimates that commercial property premiums account for approximately £7.5 billion of the $50 billion gross premiums written by U.K.-domiciled non-life insurers, and that approximately 10 percent of commercial property premiums relate to business interruption extensions. The FCA estimates that 370,000 policies will be affected by the test case judgment.

According to Fitch, BI claims are likely to be one of the main costs from the pandemic for the UK non-life sector, along with claims for event cancellation. They will affect underwriting results for the rest of the year and may not peak until 2021, particularly where litigation is involved.

However, it noted that the ratings of UK non-life insurers are likely to be unaffected by the verdict as the case focused on a narrow set of policy wordings linked to the applicability of BI coverage.

Fitch argued that even though insurers will now have to pay BI claims originally rejected on the grounds of policy wording, they appear to be within the range already disclosed by the affected insurers and considered by Fitch in its ratings sensitivities.

Meanwhile, S&P Global Ratings said that the court's decision will not change its assessment of RSA and Hiscox, two of the eight insurers involved in the FCA's test case.

According to the agency, RSA Insurance Group will contain the additional costs of BI claims following the judgment comfortably within its earnings in 2020.

"RSA's half-year 2020 results were more robust than those of some of its peers, such as Lloyd's and Hiscox, which recorded losses due to the COVID-19 pandemic," S&P said. "We believe that RSA will continue to record solid earnings for the remainder of 2020 despite the additional costs arising from the court decision. We believe the group will be able to maintain capital close to, or in excess of, our 'A' benchmark throughout the next two years."

However, it noted that the additional claims may dent Hiscox's earnings at year-end 2020, but not its capital position.

"We expect the group to be able to manage losses within this range, given its current credit quality. It recently raised equity of approximately $465 million, which provides an additional capital buffer," S&P said. "We also anticipate that it will maintain its strong competitive position."

Overall, the rating agencies said that they will continue to monitor how the dispute evolves and the potential implications for insurers in the coming months.

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