Australia | Sep 16 2020
This story features QBE INSURANCE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: QBE
The UK has taken the first step in clarifying insurance coverage for businesses interrupted by the pandemic. What are the implications for Australia's insurers?
-Projected losses for UK insurers appear to be lower than worst-case expectations
-UK insurers reclaiming on reinsurance for pandemic-related business interruption claims
-QBE Insurance domestic business interruption cover incorporated in its global aggregate
By Eva Brocklehurst
A business interruption test case against insurers, brought by the UK Financial Conduct Authority (FCA), has been found largely in favour of policyholder arguments. While different legal debates have occurred in the UK compared with Australia, the UK High Court judgement has raised concerns.
Macquarie points out this is just the first step in clarifying insurance coverage for business interruption policies globally and, although the findings do not have international jurisdiction, they could be relied on for interpreting Australian policies with similar wording.
Initially, Ord Minnett notes QBE Insurance ((QBE)) appears to have suffered adverse findings for one policy type and more favourable findings for two others. The FCA test case covered 21 sample policies across eight insurers, including QBE Insurance.
QBE's UK business insurance claims are capped at $75m net of reinsurance, although as a result higher FY21 reinsurance costs are likely next year, UBS points out. Across the UK industry, around 370,000 policies will be affected and estimates of aggregate claims costs are in excess of GBP4bn.
Still, Ord Minnett points out UK insurer share prices have reacted reasonably well despite the findings, as projected losses appear to be lower than worst-case scenarios.
Macquarie assesses the ruling is not as bad as headlines would suggest, as interpretations of “denial of access” have been found broadly in favour of insurers, and should result in losses that are lower than provisioned.
Moreover, QBE was identified as having stronger wording than its peers in a number of circumstances. The company's radius clauses were interpreted as contemplating specific localised outcomes and, therefore, considered less likely to incur claims.
Certain other UK policies with denial of access clauses could still provide cover but the wording was less clear and these are likely to be dependent on how each business was affected by the government response.
The main interpretation, in Ord Minnett's view, is that other insurers in the UK are claiming on reinsurance, which should limit concerns about any special treatment for QBE from reinsurers.
UBS also points out that the company's domestic business interruption claims exposure is insulated under its global catastrophe aggregate program, and overall Covid-19 claims costs of US$650m have been well flagged.
Although there could be similarities between business interruption issues in the UK and Australia, such as access to property, the concern locally is whether a reference to the Quarantine Act (no longer in effect) would allow extension to the Biosecurity Act. The latter is the recent enactment (2016) which encapsulates all powers to declare a disease quarantinable and to take steps to ensure public health and safety.
In this instance individual policy wordings are likely to be crucial, Ord Minnett suggests. The first Australian test case will be heard in the NSW Court of Appeal on October 2.
UBS notes the view of insurers is that pandemic exclusions referencing the Quarantine Act are enforceable, and any negative outcome on this issue would mean Insurance Australia Group ((IAG)) is most exposed relative to Suncorp ((SUN)).
While both businesses may have limited scope for catastrophe reinsurance recovery the benefits from lower motor vehicle frequency pay-out could temper the impact, the broker adds.
The intention of the UK FCA was to clarify contract uncertainty stemming from business interruption policies where the coverage included notifiable diseases and denial of access clauses.
Key findings: diseases clauses could be triggered from a national response to a widespread outbreak, with cover not limited to outbreaks within a policy area because of the widespread nature of the infectious disease; prevention of access clauses could be deemed more restrictive, with government action being required in response to a local outbreak as well as a delineation between government advice and the imposition of mandatory restrictions; and a requirement to put an insured in the same position as they would have been had the particular instance not occurred.
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