Reinsurance: COVID-19 – where are we now?

At different stages in the COVID-19 pandemic, we have considered the impact on the reinsurance market. Most recently (see our Law-Now), we considered the likely implications of the “second wave”, a concern which has sadly moved from the realms of speculation to reality. The impact on the upcoming renewal season is likely to be significant, but fraught with uncertainty.

In the UK Property market, the first instance decision of the FCA’s test case on Business Interruption brought a degree of clarity, but uncertainty over appeals has led to inconsistency amongst cedants in their approach to notification of claims to reinsurers.

Exposures

Whilst many insurers and reinsurers scramble to impose pandemic exclusions for 1 January 2021 renewals, there nevertheless remain significant areas of cover that could still be impacted by the ongoing pandemic and increasingly stricter government restrictions seeking to supress the resurgence of the virus.

In the event cancellation market, further events are now being cancelled for Q4 2020 and Q1 and Q2 2021. For many of these events, cover was put in place before the March 2020 surge of COVID-19 in Europe and North America, and before COVID-19 exclusions became widespread. Some of those policies are multi-year covers including events due to take place in 2021 as well as 2020. This could leave some direct carriers with ‘losses occurring during’ excess of loss protections – likely to include COVID-19 exclusions from the 1 January 2021 renewal – unreinsured.

Meanwhile, direct carriers face ongoing exposure to BI losses on policies remaining in force through Q4 2020 and Q1 2021. Although many policies will now have renewed with COVID-19 exclusions, some policyholders will be fortunate enough to have renewed without COVID-19 exclusions shortly before the March 2020 surge, and will thus have cover in place for Q1 2021 as well as the rest of 2020.

The FCA test case

Businesses looking to the FCA test case for guidance as to available cover are likely to be confused. Although the case was ostensibly a victory for policyholders with cover under so-called ‘disease extensions’, it remains unclear how the policies with such extensions will respond for policyholders facing ongoing restrictions as part of the latest governmental responses.

First, the decision is subject to a fairly bewildering array of points of appeal. The timeline for appeals to the Supreme Court (if permitted) is uncertain, and the range of potential outcomes covers a broad spectrum of results.

Second, the decision was concerned primarily with the surge of cases in March 2020 and the governmental lockdown imposed on around 23 March 2020. The response to the second wave has been much less unified. Across the UK, there have been 4 different responses from the 4 devolved governments. On the other hand, the financial response to mitigate loss is centralised within HM Treasury.

Moreover, coverage under Disease Extensions, upheld by the first instance court in the FCA test case for businesses closed in the first wave of COVID-19, will not necessarily apply in the same way to second wave cases where business closure is less directly related to the spread of the disease and nationwide government action, and more likely to be attributable to localised government intervention. Even if the same perils are triggered, the unities of time and location that may be relevant to aggregation of claims will need to be considered independently in the context of the second wave.

In addition, there may be scope for businesses to argue that denial of access extensions – largely held by the court not to apply to national lockdown – may now come into play for the more localised closure of premises being imposed in certain cities due to the second wave. This will be fact sensitive and it was not an issue that the Court was specifically required to make a determination on in the Test Case.

Another particular difficulty for businesses is that many are suffering severe shortfalls in income whilst technically remaining open to customers. Pubs and restaurants subject to 10pm curfew are an obvious example. The FCA test case was concerned primarily with businesses obliged to close down by the government’s 23 March order. The availability of cover for businesses suffering ‘interference’ short of full closure is touched upon in the judgment but appears to vary from wording to wording.

Furthermore, the ability of businesses to access both government financial support and BI cover remains doubtful. On a strict application of their wordings, Insurers may be entitled to rely on policy terms requiring all income – including government grants - to be factored into loss of profits calculations.

On the other hand, the impact of a second full lockdown of businesses might free up the availability of BI cover for those businesses affected. Also, there is likely to be a direct inverse correlation between the generosity of the government financial support package and the claims by businesses on any remaining BI cover, for those businesses that are able to claim.

Impact on the reinsurance market

Our comments above relate to the UK market where the FCA test case has brought coverage issues to the fore more rapidly than in many other jurisdictions. Nevertheless, similar considerations are likely to apply in other jurisdictions where BI cases have been settled or coverage upheld following the initial surge.

However, taking into account the increased number of policies with COVID-19 exclusions, the impact for the reinsurance market in the second wave is potentially less severe than the first, even if the number of cases exceeds the initial spike, and even if restrictions are ongoing for much longer. It is certainly the case that the re-imposition of outright lockdowns, even for short periods, could have a greater impact than prolonged but less severe restrictions.

One of the reasons for this is that if a second full lockdown occurs – particularly if there is concerted action across the UK and potentially across Europe, it may be easier for cedants to seek to aggregate ‘second spike’ claims as a single ‘catastrophe’ or ‘event’.

Some cedants may seek to aggregate ongoing COVID-19 claims as part of the same ‘catastrophe’ or ‘event’ as the initial spike, but the passage of time makes that a potentially more difficult proposition, even if there is no limitation on ‘catastrophe’ or ‘event’ in the form of an ‘Hours’ clause.

1 January renewals

Whether or not reinsurers are substantially impacted by 2020 COVID-19 claims – which is likely to be dependent on a right to aggregate being upheld – the imposition of blanket exclusions (for COVID-19 specifically or epidemic generally) should mean that 2020 is a one-off. Reinsurers will nevertheless be looking for pay-back (even before some of the claims are presented).

One form of pay-back that may act to the benefit of both cedants and reinsurers is the imposition of greater control over policy wordings. The FCA test case has demonstrated that there are a huge variety of Property and BI wordings in the market with a vast range of non-damage extensions. Simply imposing a COVID-19 exclusion but leaving the rest of wording intact is a classic case of a sticking plaster to heal the wound. The market will surely need to standardise its wordings.

Whatever the impact on the 1 January 2021 renewal, the impact of COVID-19 will continue to be felt. The second wave of claims is unlikely to exceed the first, but the impact of the first wave will reverberate well beyond 1 January 2021.

Further reading: The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm).