Coronavirus (COVID-19)—retroactive cover poses existential threat to reinsurance

Coronavirus (COVID-19)—retroactive cover poses existential threat to reinsurance

Law360, London: on 23 April 2020, Willis Re has warned that business interruption claims arising from the coronavirus (COVID-19) lockdown could pose an ‘existential threat’ to the insurance industry if regulators force insurers to provide cover retrospectively.

The estimated US$800bn in capital reserves held by insurers would be depleted ‘within days’ by compensating US businesses for losses incurred during government-imposed lockdowns, the reinsurance arm of Willis Towers Watson said.

The warning comes after lawmakers in several US states proposed that all standard policies for business interruption should be retrospectively amended to provide cover for small companies forced to close as a result of the pandemic.

‘Passing such legislation would shatter the industry, pushing into insolvency the very insurers compelled to pay the COVID-19 claims’, Wills Re said in a report.

‘This action represents an existential threat to the entire industry, never mind the consequences of unilaterally changing contract law’.

Reinsurers will still face pressure from both sides from elevated claims and volatility in the investment markets even if the proposals are not taken up, Willis Re said. ‘With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely’, James Kent, global chief executive for Willis Re, said.

European reinsurer Swiss Re said last month it faced a US$250m loss from the cancellation of the Tokyo Olympics and ‘mid-three-digit’ exposures from other cancelled events.

However, Willis Re said that reinsurance claims are likely to be manageable, barring a ‘worst case scenario’. Even if the most claims for event cancellation had to be picked up by reinsurers it would equate to only 1% of the global capital base, equivalent to a midsized hurricane.

Willis Re cautioned that the impact on the industry would depend on the length and severity of the pandemic and its effect on the global economy. They said at the start of the month that many reinsurers had introduced exclusions in respect of coronavirus at April renewals, a measure that was ‘by no means universally accepted’ by insurers.

This content is based on an article first published by Law360, a LexisNexis® company, on 23 April 2020 and is published with permission.

Further information can be found at: https://www.law360.com/insurance-uk (subscription required).

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