Briefing: Reinsurers still facing ‘big issue’ over BI (despite clarity for direct market)

By Insurance Times Editor Katie Scott

Attending the Rendez-Vous de Septembre conference in Monte Carlo this month was a really useful exercise – it helped me to join the dots between our usual UKGI patch and the wider world of reinsurance, an area I hadn’t previously delved into with much detail.

One topic I found particularly interesting arose through a conversion with Stephen Netherway, a partner in the commercial litigation team at law firm Devonshires.

He told me that although the UK’s High Court and Supreme Court had tied a neat bow around previously confusing and conflicting Covid-related business interruption (BI) claims issues, thanks to judgments published in September 2020 and January 2021 respectively, the reinsurance market was still battling with “a big issue” around aggregation.

Outlining the problem, Netherway explained that within treaty reinsurance, which covers entire books or a portfolio of business run by an insurer, individual claims are unlikely to be triggered due to their small size. However, if all the claims within a treaty are considered as one and the costs are amalgamated, then reinsurance policies could be triggered.

This aggregation uncertainty forms the crux of current reinsurance debates around COVID linked BI claims.

Netherway said the reinsurance industry is still quizzing whether treaty BI claims connected to the pandemic should be aggregated and, if so, how should they be aggregated? By lockdown? Based on a specific government announcement or date? Per jurisdiction or location?

Alongside this fundamental confusion around how these claims should be treated, Netherway added that there is also “no visibility” on possible solutions because aggregation issues are primarily being dealt with via private arbitration, rather than mirroring the incredibly public test case that was used for the primary insurance market, brought by the FCA.

“Unlike the direct carrier issues, where the court [provided] a judgment and framework, the reinsurance issues are predominantly going to be arbitrated, which means confidential hearings between two parties,” Netherway told me.

“The arbitration has no precedent and if we have no visibility or obvious framework with legal precedent, how [should] the market sort this out?”

By comparison, “direct insurers got told by the court what they would have to pay and when, who to and how much. So, they’ve really discharged their burden”, Netherway added.

Waiting for clarity

In contrast to the slowly clearing backlog of COVID-related BI claims that the primary insurance market is dealing with, Netherway believes the reinsurance market still has an 18 to 24 month wait “to get that legal clarity” around aggregation.

He argued that the direct insurance market achieved its required level of clarity within a year thanks to the FCA’s test case.

“That’s a big difference between direct carriers and the reinsurers. The regulator won’t really get involved because all the regulator is primarily concerned about is consumers being treated fairly. [It has] overseen that with the FCA test case,” he continued.

“It could take a while for this to unwind and for everyone to get some clarity. That’s why I think a lot of reinsurance disputes will rumble on for some time.”

Netherway added that although these BI cases could result in capital consequences for reinsurers, because it is a B2B concern rather than a pressing consumer-based issue, the regulator would simply expect firms to fix any problems themselves.

However, at some point in the future, Netherway believes “one of these awards is going to go into the commercial court” - the reinsurance industry could then “begin to get a definitive framework on how the market should treat aggregation”.

“Until that happens, it’s all not really happening in a visible way,” he said.

“The COVID aggregation is such a big issue that [it] affects everyone and [is associated with] significant monies, therefore underwriting performance turns on it and that’s why it’s such a big issue.

“It is a big issue involving many parties, many individual disputes, which primarily [are] being conducted without visibility – [that is] just a function of it being held in arbitration and with no court test case being convened to sort it out.”

Blueprint for the future

For Netherway, the FCA’s test case has provided a “playbook” for the regulator to use in order to get legal frameworks from the court system around generic coverage issues.

He explained: “What the FCA test case has shown is a template for how big issues, whatever they may be that arise in the future, that affect policyholders can be sorted and will be sorted out quickly to get clarity.

“The insurance market is quite sophisticated and the one thing that is very important sometimes [is to] get an early determination. For better or for worse, and early determination can make a big difference.

“If you know what you have to do early enough, you don’t spend years fighting about it. At the end of the day, you know what you’ve got to do.”

He added that the insurance industry participated constructively in the FCA’s test case and that it should be commended for its involvement.

Following the publication of the Supreme Court’s judgment back in 2021, Covid linked BI as a topic of industry discussion has been slowly dwindling as firms just cracked on with ploughing through their backlogs.

Even the FCA has given up publishing the claims data monthly – the last figures it published were back in March 2022. This showed that as of 7 March 2022, 34,276 BI policyholders out of the 42,340 insureds who had claims accepted had received at least an interim payment.

At this point, the aggregate value of agreed claims settlements across 31,478 BI claims was £1,046,446,929.

It appears that the reinsurance industry needs widespread clarity just as much as the primary market did, however Netherway’s view seems to suggest that the FCA is much less willing to get involved without the ruckus of outraged policyholders on its back – despite the financial implications for the firms involved.

I hope for the reinsurers’ sake that arbitration arrangements can enjoy some of the fast track speed that the UK’s legal system applied to the initial test case action.