Covid BI treaty negotiations may smooth ground for retro cases
Some of the battles over potential Covid BI exposure that we have already covered in the retro markets are now also being played out at a reinsurance level.
As sister title Insurance Insider has covered, Munich Re and Swiss Re are taking a lead on pressing the case that contract terms will militate against successful Covid-19 BI claims on many excess-of-loss (XoL) cat treaties.
To the extent that XoL claims are successfully pushed back by reinsurers, this will be a positive for the retro market, but the bigger problem for this sector has always been the short-term obstacle of trapped capital, not whether significant BI losses would hurt the ultimate outcome for 2020, which was already perceived as a low risk.
So the question will be whether the reinsurance negotiations underway can support the case of retro carriers in time to help fend off trapping ahead of 1 January.
One common theme is the issue of natural perils coverage, which sources have said is among the barriers that Munich Re and Swiss Re are raising to claims.
One reinsurance arbitration between Covea and Swiss Re is already underway. Sources suggested that various issues are at stake including peril definition, along with the question of whether the cedant can aggregate claims across different countries, which will form the basis for a hearing.
But Munich Re has also taken a particularly strong line in informal discussions with the marketplace around how Covid-19-related BI claims would be treated under cat XoL deals, sources have said. Swiss Re has also set out a position that emphasises the potential roadblocks to recoveries in many cases, it is understood.
Both carriers told Insurance Insider that they would take a "case by case" approach to claims.
Similarly, Scor is lining up with a similar stance that various contractual terms will limit XoL recoveries.
In a statement, Munich Re said a range of factors relating to policy wording would bear upon coverage, but it would pay what it owes and “not question any valid claims”.
Meanwhile, Swiss Re said it “takes seriously its commitments to help [its] clients shoulder the burden of losses”.
It further noted that its case-by-case approach ensured that it gave “full consideration” to the facts and circumstances around a claim, which include a range of factors in addition to the terms and conditions of the reinsurance agreement.
Scor also said that it would ensure contract wordings were enforced and respected, adding that the firm did not view Covid-19 as a natural peril.
“As a reliable and trusted reinsurer, Scor respects the terms of all of the contracts with its clients – all the contracts, nothing but the contracts,” the statement read. “We look at claims on a case-by-case basis. Scor always engages in an open dialogue with its clients to ensure its positions are fully explained and understood.”
It is important to note that reinsurers commonly set out robust stances in September as renewal negotiations begin, and that this is particularly true when the market is embroiled in handling a major loss such as Covid-19.
But as negotiations proceed, these initial reinsurer postures can soften as cedants press their case – and sources suggested the two have already accepted some XoL claims, providing prima facie evidence that a case-by-case approach is being taken.
Given overall pressure for rate increases in January, negotiations will also consider commercial pragmatism in terms of balancing rate demands with loss experience, as well as technical questions of eligibility as the renewal nears.
A senior broking source said most other reinsurers have taken a more accommodating position than Swiss Re and Munich Re.
However, as the leading carriers in Europe, where most BI loss activity is likely to be focused due to insurance wordings being less stringent than in the US, the stance taken by the pair will be critical in influencing how claims are ultimately dealt with.
Battlegrounds: Hours clauses and aggregation
Both Munich Re and Swiss Re are said to have confirmed coverage on quota share treaties, which would still result in them providing cedants with substantial reinsurance recoveries.
However, on XoL covers, there are two major obstacles and points of contention that will apply to settling claims, and mean that many payments may be negotiated on an ex-gratia basis.
These two questions are (1) the definition of an event and (2) how claims can be aggregated – issues with which the whole market is currently grappling.
Any underlying ex-gratia payouts that insurers have made are also likely to be scrutinised if reinsurers believe carriers have paid out on policies that did not provide affirmative cover.
But the principal tension surrounds whether the pandemic itself is an insured loss event, or whether local lockdowns are the events that trigger coverage.
The latter classification would create a series of multiple smaller losses rather than a major unified loss – which would reduce reinsurance recoveries. It is also a definition that reinsurers believe is supported by some of the findings in the Financial Conduct Authority (FCA) test case.
It is understood that Munich Re and Swiss Re have pushed back on describing the pandemic itself as the qualifying event.
The reinsurers also question whether cedants’ pandemic losses have a common cause – an important factor in determining whether it can be counted an insured event under a catastrophe cover.
In some cases, treaties that provide natural peril coverage or which create a distinction between natural peril and manmade losses are also likely to be debated – in the same way that natural perils “including but not limited to” language is being scrutinised in the retro markets.
The interpretation of hours clauses is also a key question in the negotiations that will make aggregating claims to XoL thresholds more challenging. Sources said reinsurers have put forward a strict interpretation of hours clauses, allowing recoveries only for losses within the defined period rather than for the extended lockdown periods behind many claims.
Typically, the generic hours clauses that would apply to a loss without a specific narrower limitation allows for 168 hours, or seven days to compound claims.
There are also intense negotiations over whether cedants may aggregate losses in different geographies or across different industries.
Impact of FCA BI test case
While there is a chance of appeal, the initial High Court decision in the FCA test case fell mainly in policyholders' favour, but with some opinions emerging that may favour reinsurers and be used as a defence against XoL recoveries when it comes to defining an event.
During the FCA case, Hiscox’s QC Jonathan Gaisman argued that during Axa Reinsurance vs Field in 1995, a judge ruled that “in ordinary speech, an event is something which happens at a particular time, at a particular place, in a particular way”, and that the pandemic cannot be described this way.
Judges in the FCA case accepted that this description should be upheld in relation to the Hiscox wording and argued that the inclusion of a one-mile radius in the contract supported this interpretation.
The judges said it was a “misuse of language” to describe the pandemic as an incident because it was “too geographically dispersed, variegated, prolonged and non-specific”.
This could be used to support the lockdown definition of a BI loss under treaties.
The case gave local insurers more certainty over their exposures and a number of carriers affirmed loss estimates accompanied by projections of reinsurance recoveries following the decision.
However, senior broking sources noted that negotiations over these recoveries are ongoing.
Hiscox estimated that its net UK BI loss would be £100mn ($128.5mn). It had previously published a loss range of £10mn-£250mn net of reinsurance.
Autonomous analyst Andrew Ritchie has previously estimated Hiscox’s ground-up BI loss for Covid-19 at around £500mn. The insurer’s main treaty provides £160mn of cover excess £10mn, and its other covers including a major commercial lines quota share.
QBE estimated its net losses at $70mn following the judgment, with a further $100mn to be picked up by reinsurers from its $170mn gross estimate.
RSA said its losses would amount to £104mn, but added that the bulk of this would be passed on to reinsurers.
A spokesperson for Munich Re said: “In respect of Covid-19 BI claims under excess-of-loss cat treaties, the combination of features such as coverage definition, exclusionary language, loss occurrence definitions, etc – both under primary policies as well as under reinsurance contracts – will determine whether there are valid claims and how aggregation is possible."
A spokesperson for Swiss Re said that it would not comment on individual claims matters or the coverage positions it may take.
“[Our case-by-case] approach ensures that we give full consideration to the specific facts and circumstances of the underlying claims, the particular terms and conditions of the reinsurance agreement and any relevant legal precedents, before taking informed claims coverage decisions."