Hannover unit E+S Rück backs ‘Bavarian model’ to settle disputed COVID claims

E+S Rück, Hannover Re’s subsidiary responsible for the group’s German business, has said it supports a move by some insurers to settle disputed COVID-19 claims in a way consistent with the so-called Bavarian model.

In the German state of Bavaria, insurers have agreed to provide voluntary compensation for 10 to 15 percent of the normal daily cost of business interruption to policyholders in the hospitality sector.

That was one of the takeaways from a virtual press conference held by the reinsurer yesterday (Monday October 19) in lieu of the annual Baden-Baden Reinsurance Conference, which has been cancelled due to COVID-19.

The event was presented by Michael Pickel, E+S Rück chief executive and member of the executive board at Hannover Re, and Jonas Krotzek, managing director–Germany, Austria, Switzerland and Italy, Hannover Re.

They said that, against a backdrop of great uncertainty over the extent to which things like business interruption claims would be covered when caused by COVID-19, the model devised in Bavaria seems a fair one which they support.

“There are many phrases and variants of terms and conditions in the market, making it very difficult,” Pickel said.

A number of court cases are ongoing across Germany where claimants are seeking full payouts under business interruption policies. There has been no clear precedent set on these as yet.

They estimated there will be an insured market loss (composite) in Germany of between €1.25 and €1.75 billion. They said they expect commercial property lines to be hit by high claims expenditure due to business closure insurance and delayed premium income. Industrial property will be hit by a reduction in premium income in the current year.

Liability lines will be hit by a reduction in premium income in commercial/industrial business (payroll- or turnover-based policies) while there is also the potential for losses in inter alia hospital liability and D&O insurance.

In terms of legal protection, they said it would be another year of heavy loss expenditure due to increased legal protection queries relating to COVID-19.

They noted that the private motor segment will be hit by a significant reduction in claims expenditure due to sharply lower accident numbers with fewer miles being driven. The commercial motor segment will be hit by decreases in fleet business due to vehicles being mothballed.

Joint solution
The two executives spelled out the extent of the impact of COVID-19 on the German market in more detail. They said they expect a market loss of between €750 million and €1.25 billion caused by business closures alone. They noted that the hotel and catering sectors have been the hardest hit and that some businesses have now taken out business closure policies to complement property insurance and business interruption insurance.

They added that Hannover Re supports the view of the German Insurance Association, which is that the risks associated with a pandemic cannot be handled by the insurance industry and supports the creation of a joint solution based on a public/private partnership.

“We think that a pandemic cannot be covered by the insurance industry; we are prepared to help clients but in a limited way. We cannot cover it comprehensively,” Krotzek said.

He noted that the COVID-19 situation will have an impact on the renewal. He said it will mean rising demand for quality reinsurance, hardening rates, partly driven by lower investment returns and reduced capacity globally, and an increased demand for structured reinsurance solutions, driven in part by Solvency II.

The executives stated that they expect prices to rise and conditions in the property and casualty (P&C) reinsurance market to improve in 2021 as COVID-19-related losses and low interest rates push prices up.

According to E+S Rück chief executive Pickel, pandemic-related losses and intensification of the low interest rate environment have made price increases in primary insurance and reinsurance “absolutely essential”.

For the coming year, the firm expects to see growing demand for reinsurance coverage from financially robust providers, as well as price adjustments in commercial and industrial lines, especially under loss-affected programmes. The reinsurer foresees “attractive business opportunities” in the German market.

“The COVID-19 pandemic and legal disputes arising in this connection are again leading to substantial claims expenditures under legal protection insurance,” said Pickel.

“The trend towards an uptick in demand for reinsurance covers—which could already be discerned in the previous year—is therefore likely to be sustained.

“Along with the direct impacts of the pandemic, the renewed decline in interest rates is taking a toll on insurance industry profits.

“Price increases at primary insurers are absolutely essential and adjustments are needed on the reinsurance side as well,” he concluded.