Comment: Investment interrupted?

15 September 2020

The UK high Court has ruled largely in favour of policyholders in the test-case on pandemic-related business interruption (BI), which could have enormous ramifications for insurers' chief investment officers (CIOs).

The ruling was never going to impact the general accounts of UK non-life insurers directly, but indirectly it could put CIOs' plans on ice!

European re/insurers by and large expected pandemic claims paid or reserved for in H1 2020 would see off most of COVID-19's underwriting costs, but that was commonly without accounting for all possible BI claims. The ruling against insurers and the likely appeals process will inject more uncertainty into how much BI insurers should be keeping in cash.

For other COVID-related claims, insurers hoped for the best, but many reasoned it was still better to sit on cash in Q1 than run out of it as pandemic claims mounted. CEOs likely instructed CIOs to follow that maxim.

That caused palpable hesitancy at Q1 results to dive into less liquid asset classes, regardless of the pick-up in yield available in pockets of the market. What if more insured events got cancelled? More trade contracts soured? More mortgage borrowers or renters went delinquent? The threat of valid BI claims throws yet more uncertainty in front of non-life insurers – in what was already a year of uncertainty sans pareil.

The FCA has called the judgement "a significant step in resolving the uncertainty being faced by [370,000] policyholders", though it added the test case "was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and 'causation' issues to provide clarity for policyholders and insurers".

Insurers will appeal, dragging out the uncertainty a little while longer, and the FCA acknowledges each policy of the eight defendant insurers still needs consideration against the court's 150-page detailed judgment, to discover what it means for that policy.

That will likely put some investment plans on ice, especially into illiquids for which some UK non-life firms are gaining a taste.

In truth, though, the sector is an increasingly sophisticated investor. Research by Insurance Risk Data last year - being repeated this year - uncovered 75 non-life and composite insurers, apart from Lloyd's syndicates, that picked specialist managers to find them returns. That trend will continue.