Ratings firm AM Best has said the disputes over business interruption claims have highlighted the need for greater transparency within policies.
In a new commentary on the UK commercial lines sector the firm warns that the industry’s reputation has been damaged by the dispute over BI coverage and COVID claims adding it is clear there is a gap between the understanding of the client and the underwriter as to what the product was designed to do.
“Disputes around non-damage business interruption cover, which made 2020 a difficult year for UK commercial property insurers, should subside in 2021,” said AM Best. However, according to the commentary, “UK Commercial Property Insurers —Looking Beyond a Difficult 2020,” challenges remain for a sector that needs to rebuild its reputation among its small- to medium-sized enterprise (SME) clients.
AM Best added it is important that transparency is improved and that there is greater clarity as to what is covered in a BI policy so that insureds understand exactly what they are buying cover for.
“In response to January’s U.K. Supreme Court judgment, affected insurers are expected to increase their COVID-19-related BI loss estimates,” added the firm. “Most have presented their estimates net of reinsurance, indicating that they expect to make recoveries on their reinsurance programmes. Possible disputes with reinsurers loom and it will be some time before insurers realise the exact cost of the pandemic on their commercial property books.”
AM Best added: “Insurers have broadly welcomed the clarity that the Supreme Court’s decision brings. Disputes over BI cover are unfavourable for the reputation of affected insurers and the overall industry.
“More broadly, they have highlighted the potential for a gap between the insurer’s and the customer’s understanding of what is covered by the insurance contract when policy wording isn’t sufficiently clear.”
The commentary warns going forward, it is important that transparency is improved and that the industry ensures that there is greater clarity as to what is covered in a BI policy so that insureds understand exactly what they are buying cover for. In the short term, it is important that valid claims are paid as quickly as possible and a number of insurers affected by the FCA test case have already begun processing claims settlements.
According to the Association of British Insurers, the UK insurance industry expects to pay out more than £1.8 billion in COVID-19-related claims across a range of products, including BI policies. Despite the negative press coverage for disputed COVID-19-related BI claims, AM Best said it does not expect a significant impact on demand for BI extensions, as their primary purpose of indemnifying lost earnings arising from physical damage remains unchanged as a result of disputes over a small number of policies.
The commentary also warned that reinsurers will have a major part to play as many of the claims find their way into reinsurance programmes.
“The level of recoveries will depend on the structure of reinsurance programmes, and interpretations of reinsurance contract wordings, ‒such as the aggregation of COVID-19-related claims within and across different lines of business and geographies, ‒and the definition of the event or occurrence that triggers the reinsurance cover,” it explained. “As losses mount, reinsurers are likely to bear a higher proportion of claims due to companies exceeding their retentions. However, dispute risk between insurers and reinsurers is lower where quota share cover is written back to-back, with the reinsurer committed to following the fortunes of its cedent.”