Major European Reinsurers' Ratings Likely Unaffected by UK BI Ruling

The ratings of the four major European reinsurers will likely not be affected by a recent UK Supreme Court ruling on the validity of COVID-19 pandemic-related business interruption (BI) claims against UK primary insurers, according to Fitch Ratings.

The January 15 ruling went largely against primary insurers, Fitch noted, but the resulting extra claims costs should not translate into reinsurance claims large enough to materially affect the credit quality of Hannover Re, Munich Re, SCOR, or Swiss Re.

According to the rating agency, before the UK ruling, all four reinsurers were reserving sufficient amounts for BI claims. In each case, at least two-thirds of their business interruption claims reserves at the end of 2020's third quarter were incurred but not reported, Fitch said. That may already give them capacity to cover not only late-reported claims but also extra business interruption claims resulting from the UK ruling.

In addition, the impact of extra business interruption reinsurance claims is mitigated both by the reinsurers' diversified business mix—with BI representing just a moderate amount of their overall risk exposures—and by their exclusion of coverage for losses linked to communicable diseases in annual BI contracts written or renewed from January 1, 2021, Fitch said.

"A key uncertainty is the extent to which cedants will be able to aggregate multiple business interruption claims into single large claims to trigger excess-of-loss reinsurance payouts on the basis that the individual claims were all caused by the same event—the pandemic," a Fitch statement said. "We expect reinsurers to contest this, arguing that claims were caused by separate events, with different businesses interrupted by different sets of restrictions."

Ultimately, the outcome will depend on the wording of each reinsurance treaty, Fitch said, possibly leading to litigation in some cases. Even with widespread aggregation, however, the rating agency said it doesn't expect resulting excess-of-loss payouts to materially weaken the reinsurers' earnings or capital.