The extent to which insurers will be able to aggregate COVID-19-related claims will have the biggest bearing on the extent to which they will claim on their reinsurance policies. But this may well be agreed behind closed doors as part of a wider negotiation process, as opposed to being settled in court.
This was one of the main points from an interview with Wendy Kriz, senior consulting actuary at professional services consultancy Barnett Waddingham, which discussed what claims reinsurers might expect as clarity starts to emerge around the extent to which insurers will need to pay out. The interview took place on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are available on demand.
The UK Supreme Court in January upheld a judgment that ruled that insurers were in large part (with some nuance around policy wordings) liable to pay business interruption (BI) claims relating to COVID-19. That offered some clarity for insurers, but it remains unclear exactly how this will translate into claims for reinsurers.
Kriz said much will depend on the unique relationships between individual insurers and reinsurers.
“Differences in policy wording will play an important role in the way the industry moves forward,” she said, “but relationships between insurers and reinsurers are critical. While litigation is unlikely, it can never be ruled out completely.
“I think insurers and reinsurers would rather settle things themselves than go to court. That said, it could be many years before we know for certain.”
A complicated picture
Kriz noted that the issue of whether multiple claims can be aggregated would be key, as this could allow cedants to trigger excess of loss contracts. If any test case were to happen, it would likely be around this issue.
She noted that while the Supreme Court noted in the test case that pandemic claims could not be considered as one event this was specifically in the context of direct claims. A court could take a different view if asked to decide on this issue in a reinsurance context, especially given the fact there are no policyholders to protect.
She explained that for an insurer to aggregate multiple BI claims would depend on the individual wordings of policies.
“But then things get even more complicated if you look at catastrophe wordings because there is no standard definition of catastrophes,” said Kriz.
“You then have things such as the hours clause, which often imposes a 72 hours limit on claims.”
Asked about reserves, Kriz said it is difficult to say at this stage whether they would be adequate.
“Reinsurers may or may not have enough reserves. It will take time to see if they are adequate,” she said.
“It depends on three things: where the pandemic ends up, the contract wordings and the potential for any liability claims. If some of those setbacks occur, it could influence that.” She noted that large directors’ & officers’ claims would almost certainly have a bearing on the market.
“Insurers and reinsurers would rather settle things themselves than go to court.”
Wendy Kriz, Barnett Waddingham
The UK Supreme Court ruling applied only to the UK market. Kriz added that test cases are developing in other parts of the world, such as the US and Europe, which may have completely different outcomes.
“It’s very much an unknown at the moment, but if you were going to other Commonwealth countries, I would expect the UK test case to have some bearing on those judgments, although it does depend on local market prices and the local legislation,” she explained.
“There may remain a lack of clarity in some of the less developed countries.”
On the wider implications for the reinsurance market, Kriz said that there could be opportunities.
“There could be wider implications for the industry. Anything that is going to increase volatility is going to encourage the buying of more reinsurance and I think that there are opportunities here for reinsurers to drive pandemic cover in the future.”
She noted that such coverage has been available in the past with little take-up. That could now change although she suggested great care would be taken over the nature of the terms and conditions.
She added that as prices increase for both insurers and reinsurance, reinsurers could benefit from greater demand.
“Other new products and opportunities may come to the fore as a direct result of the pandemic, including unique types of reinsurance that might come into play,” she said.
“There are products that don’t have the same legacy issues, such as index-linked securities, but it is early days because we still don’t understand the full impact of the pandemic.”
There may be more repercussions for the reinsurance sector over time and COVID-19 is going to be a feature of the re/insurance markets for many years to come, Kriz noted. It is going to take time for claims to work their way through the system, she stressed.
“The UK Financial Conduct Authority (FCA), for example, is currently requiring firms to submit returns detailing BI claims. Even though there may not have been a significant impact on the reinsurance market, things could change over time,” she said.
“We can continue to expect close scrutiny from the FCA, and if it finds that insurance firms have incorrectly utilised cover, there could be a significant impact on reinsurance.”
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