Incurred pandemic losses for U.S. property/casualty insurers increased only modestly in fourth quarter of 2020 from earlier quarters in the year. Still, the amount of ultimate losses remains unclear and will take several years to determine in business interruption, general and professional liability and other lines due to litigation, Fitch Ratings says.
Fitch said its rated P/C insurers broadly maintained capital strength over the past year, and pandemic-related adverse ratings actions have been very limited. However, uncertainty remains regarding the full financial consequences and total insured losses from the pandemic.
Fitch’s U.S. P/C sector outlook is improving as 2021 performance is anticipated to benefit from substantial increases in commercial lines premium rates, as well as fewer pandemic-related losses, including the outsized storm-related catastrophic losses seen in last year’s first quarter.
However, according to Fitch, risk of an individual insurer incurring large losses or adverse reserve development relative to capital due to unique or loosely worded coverage terms or adverse litigation outcomes remains a possibility.
2020 Pandemic Losses
A group of 50 North American publicly traded insurers reported more than $9 billion in coronavirus-related losses in 2020. Including Lloyd’s of London and major global (re)insurers, the total approximates $30 billion. Losses related to event cancellation and travel coverage represent a significant portion of claims incurred and paid to date. The majority of all losses continue to be carried as incurred but not reported by insurers, Fitch said.
The 2020 economic lockdown spurred thousands of BI claims. Insurers’ assertions that physical damage to property is required for a valid BI claim have largely held in judicial rulings to date, particularly for policies with traditional language and terms and that have virus exclusions. Insurers indicate that a significant number of BI notices and claims have been withdrawn or closed without payment.
Fitch notes that estimating magnitude of BI losses is difficult as coverage is embedded within other commercial products. BI premiums and losses are not disclosed in statutory filings. A substantial volume of litigation remains unresolved, creating vulnerability to adverse judicial actions in BI and other segments.
Class action filings may still emerge in BI and other liability coverages including directors and officers, errors and omissions, and employment practices and their extent may depend on strength of the economic recovery.
The outcomes of BI cases have largely been favorable for insurers, with a more consistent record in federal court relative to the various state courts. Federal courts have largely accepted BI policy language specifying physical damage to property. In addition, federal courts have upheld exclusions for viruses in the contract language of insurers’ BI policies.
Individual cases of adverse rulings to insurers are leading to escalation to higher or appellate courts rather than full settlements currently.
BI litigation remains subject to judicial interpretation risk, evidenced in the recent federal ruling of Henderson Road Restaurant Services, Inc. v. Zurich American Insurance Co. The plaintiff successfully argued the government shutdown response to coronavirus caused the BI loss rather than the virus itself. Questions remain as to whether any individual plaintiff victory with a particular vein of argument in a given jurisdiction will lead to a slew of larger insurer losses in similar cases.
Fitch’s recent Insurance Sector Update detailed the transitioning of analysis from coronavirus stress tests toward surveillance mode, highlighting concerns including BI exposures. Consequently, analysis of BI and longer-tail exposures is shifting from a macro perspective to more company-specific issues, such as products where policy language and terms differ with industry norms, claims and litigation settlement experience and open litigation in jurisdictions with instances of rulings unfavorable to insurers.
Reviews with management will also consider risk mitigation efforts in changes to policy limits, insertion of sub limits and virus exclusions and other coverage changes to limit exposure to future events.
This article originally appeared as a post on the Fitch Wire credit market commentary page at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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