By LEN WILKINS
The long-awaited decision on whether COVID-19 business interruption losses are covered under policies written by Lloyd’s and London insurers was announced recently. While the good news for claimants is that the U.K. high court found in favor of the Financial Conduct Authority on a majority of the key issues, the bad news is the decision did not give them the immediate payments they sought.
As expected, insurers appealed the decision, but a left field play by the FCA was not expected. The appeal will go straight to the U.K.’s Supreme Court, instead of the Court of Appeal.
The FCA’s test case involved eight U.K. property insurers and 21 different policy wordings concerning the scope of cover for business interruption insurance. The argument made by insurers was that BI cover follows physical damage, while the 370,000 policyholders identified by the FCA claimed COVID-19 and the subsequent government restrictions prevented them from trading, which caused the business interruption claims.
Even though the court’s 162-page judgment appears to be broadly favorable for policyholders, it is not a triumphant victory. The fact is that both insurers and brokers have not paid sufficient attention to policy wordings recently, and both face paying the price. The court found problems with the construction of the various policy wordings and found that words in different clauses have different meanings. For example, the court gave one meaning to the word “vicinity” when used in a denial for access and a different meaning when used in a disease exclusion. Other clauses, such as causation and “trends,” were also considered problems.
The bottom line is that each claimant’s policy will need to be considered against the detailed judgment to work out what the judgment means for that particular policy. With 370,000 claimants, that’s a lot of work for the claims teams.
The decision of the court leaves the claimants frustrated because no money will be coming their way until after the appeal to the Supreme Court, assuming the decisions are not reversed. Even then their policies have to be scrutinized against the court’s detailed judgment to see if cover exists. The FCA is discussing some “important elements” of the judgment with the eight insurers involved in the case. The discussion centers on interpretation and which small businesses get paid and how much. The FCA hopes to get some claims paid, but insurers will be adamant that once a claim is paid, it’s difficult to get any overpayment back.
This isn’t one-way traffic for claimants because insurers too are unsure what their final costs will be. In any event, further legislation is expected over the application of the trends clause (the argument concerns whether or not the BI loss should be based on the claimant’s profits pre-COVID or post-COVID) and arguments with reinsurers on how the event clause and the accumulation clause in excess of loss wordings will be interpreted. All of which will keep the lawyers busy.
Initially, London worried about the possible effect of the case on some insurers’ solvency. The market was particularly worried about Lloyd’s managing agent Hiscox, but it seems the worries are unjustified. Hiscox believes the judgment will cost the group less than $130 million net of reinsurance because of additional COVID-19 claims. The overall effect is a reduction of $195 million from the upper end of Hiscox’s previously published risk scenario. A Hiscox press release stated that less than one-third of its 34,000 U.K. business interruption policies may now respond to claims, and coverage under these policies is essentially limited to those customers who were mandatorily closed by government orders and only in certain circumstances.
Of the other seven defendants, the QBE Insurance Group previously estimated its potential losses at $170 million before reinsurance. In a statement it said the court ruled in favor of QBE with respect to two out of three of QBE’s notifiable disease policy wordings that were examined and in favor of insurers generally with respect to denial of access policy wordings. QBE is considering an appeal against the decision in favor of policyholders on the other one-third of notifiable disease policy wordings. QBE believes that its catastrophe reinsurance program will limit its net losses to $70 million.
Zurich Insurance and Ecclesiastical Insurance issued separate statements that said the judgment confirmed that the wordings used by insurers in the test case do not provide cover for business interruption in relation to the COVID-19 outbreak.
The Royal Sun Alliance stated that some of its interpretations of coverage were upheld by the court, and some were not. The insurer estimates the additional financial impact to the company to be around $135 million on a gross basis. After reinsurance protection, it estimates the net cost of the judgment will be $110 million.
Meanwhile, Lloyd’s managing agents Arch, Agenta and MS Amlin said the judgment is complex, and loss estimates are subject to appeal. They have not issued revised loss estimates.
John Neil, Lloyd’s CEO, has written to the Lloyd’s market’s CEOs saying, “As you know, the outcome from the FCA BI test case ruled largely in favor of policyholders for the majority of issues covered. We will now take the time to carefully consider and respond to the implications of this complex judgment for our customers as well as its impact on the Lloyd’s market, which retains less than two percent of the overall U.K. property SME market.”
Lloyd’s will meet with all materially impacted managing agents to discuss their initial view of the impact of the case on claims and operational metrics. Neil stressed that Lloyd’s extremely strong capital position ensures it is well prepared to respond to the financial implications of the high court’s judgment and to support impacted customers.
With insurers partly off the hook, there could be court actions against brokers. At the moment the brokers argue that they have no liability, but perhaps one should watch this space. Their representative body for the London brokers, the London and International Insurance Brokers’ Association, argues that policies must give more clarity with no obscure language. The LIIBA says the industry’s reputation has been damaged by the debate over cover, and this needs to be redressed.
Over the years, brokers have used their own wording to gain competitive advantage, claiming their wording gives more cover than their rivals. How ironic that this case could see the move to the U.S. market model of standardized wording throughout.
As expected, the action groups representing claimants were pleased with the result, but not the outcome. While they have to wait for payment, they at least established cover exists. The group contends that claims should be payable for those who were forced to close by government action. Where closure occurred because of government advice, there is concern that this may not be strong enough to trigger cover.
$6 billion in premium moves
A total of $5.8 billion in premiums previously overseen by London insurers was moved to the EU when companies restructured for Brexit, according to the International Underwriting Association. These premiums previously were written in Europe, but managed by London market companies.
Dave Matcham, IUA’s chief executive, said, “Reorganization and the impending loss of financial services passporting rules has meant that a large amount of business written in Europe is no longer overseen and managed in the same way by London, but reported directly to operations located within the EU.”
Not only is the premium income lost, the restructuring has increased costs for IUA members, making them globally more inefficient and, ultimately, less able to offer a better deal for clients.
Looks like a hard renewal season
Oct. 1 marks the start of the 2020/2021 renewal season which looks like it will be one of the hardest in years. Lloyd’s allows the market to write new or renewal business for the following year up to three months in advance, and even though not a lot of major accounts are renewed early in the season, the more traditional risks may be. Usually the bigger risks are written toward the end of the calendar year with brokers hoping that by then insurers and reinsurers will be desperate for premium and will cut rates – that’s unlikely to happen this year.
The prediction of a hard market isn’t just for the January renewal season. Experts predict that rate rises will continue throughout 2021 as insurers claw back their COVID-19 and other losses. Even though COVID-19 losses have grabbed the headlines, an increase in natural catastrophe losses has begun to hurt insurers and reinsurers, and they will want to see price increases to cover these losses as well as their COVID-19 claims.
Reinsurers had an expensive August with hurricane and tropical storm losses as well as other severe weather claims. Some observers believe losses just for August will reach $13 billion. One thing for sure, there will be no cheap reinsurance deals this year. Lower interest rates and little investment return make underwriting returns more important, and underwriters will have to up their game and their rates.
The market has been hardening since early in 2018, not just in London but worldwide. Brokers providing information on rates have indicated annual increases of between 19 percent and 30 percent.
Usually talk of increased rates is met with howls of derision from buyers, but this time buyers remain quiet. They have had a good run for their money for the past two years. Risk managers are concerned, not just with rate increases, but with changes in cover. The recent BI court case will bring changes to how coverage is defined, and this will not be in buyers’ favor.
One result of the hard market may be the return of the captive insurer. In a weak market there is less demand for captives, but now risk managers are getting out their old files on captives and calculating captives’ advantages. One other decision buyers may make is to buy less cover with or without increased deductibles.
Fitch affirms Lloyd AA- rating
Fitch Ratings has reaffirmed Lloyd’s financial rating as AA- (very strong) and removed the negative watch it imposed by revising the market’s outlook to stable.
Neal commented on the announcement saying, “Fitch’s decision reflects several positive factors, including the work Lloyd’s has done to further strengthen its capital position through our recapitalization efforts to cover our $4.9 billion COVID-19 losses.”
Beazley updates COVID estimates
One of the more forward thinking Lloyd’s managing agents is Beazley, which recently announced its half-year figures, gave an update on its own COVID estimates and commented on the market’s trading conditions.
Beazley’s first COVID-19 estimate was made in April, at which time it believed its first-party business would incur $170 million net of reinsurance for COVID claims. To reach this figure Beazley made a number of assumptions, including one that the world would return to normal by September this year. Unfortunately this didn’t happen, which has hit Beazley’s contingency claims. With Beazley’s book of business being heavily weighted to the U.S. and U.K. and its main exposure being the conference industry, Beazley found its clients still cannot operate because of the worldwide restrictions on social distencing, travel and other limitations. At first, conferences were postponed, but time is running out, and those booked for early in the year are being canceled, so Beazley’s loss estimates are increasing, and the managing agent anticipates further claims based on its exposure for events in 2021. Beazley has doubled its total estimate for first party COVID-19 claims from $170 million to $340 million net of reinsurance, all due to further event cancellation losses. This new figure assumes life will return to normal in the second half of 2021. If not, Beazley will have to add another $50 million of claims, net reinsurance. Fortunately, the recent FCA judgment has no material impact on Beazley’s account.
Beazley was more upbeat on its future underwriting prospects, having seen an improvement in growth prospects across its portfolios of business. Rates continue to rise and grew by 13 percent at the end of August. Beazley estimates that if this trend continues, its overall growth percentage for 2020 will be in the mid-teens. Beazley sees no signs these rate improvements will not continue and plans for double-digit growth in 2021.
Lloyd’s Council given Diversity Policy
Whereas in the past Lloyd’s was often referred to as the last bastion of chauvinism, the modern Lloyd’s is renowned for its work on gender and ethnic equality. Lloyd’s published market-wide gender targets in July together with its commitment to set a similar target for ethnicity in Q2 2021. Recently, Lloyd’s set a Diversity Policy for the Lloyd’s Council.
Lloyd’s sees this move as an important part of its work to drive the cultural transformation across the Lloyd’s market. The new policy sets out that a minimum of 33 percent of the council should be female and/or from a non-white background by the end of 2023. By December 2023 a minimum of two of the six elected market representatives and two of the six independent nominated members of the council should be female, and at least one member of the council will be from a non-white background.