Australian insurers bolster solvency position over B1 case

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Australian insurers are looking to reinforce their claims provisions and execute capital-raising actions to bolster their solvency positions following the recent business interruption (BI) test case, according to AM Best.

The case considered the application of certain infectious disease exclusions in BI policies. The unanimous ruling by the New South Wales Court of Appeal against the arguments made by the insurers brings into sharp focus the potential downside risk for the industry, said Best. The ratings agency said it expects the question of pandemic BI coverage to remain a significant source of uncertainty for Australian commercial insurers.

According to Best: “The re-evaluation and refinement of loss provisions for potential Covid-19-related business interruption exposures are expected to lead to an adverse impact on commercial insurers’ operating earnings. The extent to which this affects capital positions remains to be seen, although Best views companies with strong financial flexibility and a track record of accessing capital markets as being best placed to contend with adverse capital implications. Some smaller insurers exhibit limited financial flexibility due to their ownership structures and therefore may have less ability to raise significant additional capital if required.”

Myles Gould, director, analytics, AM Best, said: “Another key factor relevant when determining the financial impact of potential business interruption exposures for insurers is with regard to their ability to make recoveries from reinsurance programmes. Loss triggers may be a source of dispute with reinsurers, such as in the event of non-alignment of policy exclusions in primary wordings and reinsurance contracts.”

Alex Rafferty, associate director, analytics, AM Best, added: “This test case outcome remains only one piece of a much larger puzzle, with a number of other business interruption contract triggers yet to be evaluated ahead of understanding the full liability for insurers. Additionally, this test case decision could be appealed.”

Separately, S&P Global Ratings said that potential payouts for BI claims will be manageable: “We expect the additional claims cost as a result of the test case ruling will vary by insurer and depend on specific policy cover. Payouts may also be subject to further legal avenues. Our expectation is that while there will be a hit to current-year earnings, the impact on ratings is negated by conservative reserving, reinsurance protection and maintenance of robust capital buffers.”

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