COVID-19 business interruption claims to last until 2021, warns Fitch

The credit quality of some UK non-life insurers could be affected by court rulings on the validity of business interruption (BI) claims arising from the coronavirus pandemic, says Fitch Ratings in a new report.

BI insurance is designed to cover losses from business interruption due to property damage. Other causes such as infectious diseases are typically excluded. However, policy wording is crucial and courts may rule in favour of claims in cases where policy wording is loose.

According to the report, BI claims could add to claims for event cancellation as the main cost for the UK non-life sector from the pandemic. Most BI cover in the UK is provided by London market insurers, including Lloyd's of London.

The agency stated that the impact of potential liability exposure, particularly in relation to event cancellation and BI claims, will affect underwriting results through 2020, and some claims, particularly where litigation is involved, may not peak until 2021.

Fitch noted that most insurers in the UK non-life sector have conservative investment portfolios, focused on short-duration investment-grade government and corporate bonds, with limited exposure to equities and below-investment-grade bonds.

The agency reviewed UK non-life insurers' ratings in light of the pandemic in March and April, certain outlooks were revised to negative or ratings were placed on rating watch negative or downgraded. The majority of the negative actions were taken on London market insurers, with Lloyd’s of London placed on RWN and both Beazley and Hiscox’s ratings being affirmed, initially with a negative outlook.

Hiscox and Beazley's outlooks were revised back to stable following their capital raise of 20 percent and 15 percent, respectively, through the issuance of new ordinary shares.

The sector outlook for the London market was revised to negative in March 2020, reflecting increased concerns over pandemic-related disruption. The sector outlook on the company market was already negative as the sector faces high claims inflation and a weak pricing environment in both the home and motor markets, as well as heightened regulatory scrutiny.