QBE, Australia’s biggest insurer in terms of premiums, has stated that its 2020 financial results will now include an additional $185m risk margin strengthening with respect to potential Australian business interruption claims.
Given an already material gross Australian business interruption claims provision, substantial risk margins and significant reinsurance protection (including a modest amount of remaining aggregate protection), the QBE Group believes it has allowed for potentially severe Australian business interruption scenarios. Following the risk margin strengthening, the Group’s total ultimate COVID-19 allowance is now $785m including total risk margins of $300m, with COVID-19 related costs now expected to be $655m for the financial year ended 31 December 2020.
Explaining the additional risk margin, QBE says that although the UK Supreme Court ruling on 15 January does not directly impact QBE’s net profit, the increase in gross UK insurance business interruption claims has the effect of utilising additional aggregate reinsurance limit thereby reducing downside protection with respect to potential Australian business interruption claims. The additional risk margin charge is largely offset by higher than anticipated investment income and other favourable movements.
On 15 January, the UK Supreme Court handed down its decision with respect to the appeal against the High Court’s September 2020 ruling in the UK Financial Conduct Authority (FCA) test case. The test case was undertaken by the FCA to resolve legal issues concerning the interpretation of common business interruption policy wordings, including some policy wordings of QBE’s UK operations, in the context of whether those policy wordings respond to COVID-19 and related government-mandated lockdowns.
In a ruling overturning established case law precedent, the Supreme Court upheld the High Court’s ruling in favour of insureds with respect to one of QBE’s notifiable disease policy wordings and reversed the ruling in favour of QBE with respect to the other two of QBE’s three notifiable disease policy wordings examined. All other insurers were unsuccessful on their main grounds of appeal while the FCA was successful on its grounds of appeal.
While the gross cost of UK insurance business interruption claims will increase as a result of the ruling, the net cost remains unchanged at $70m and was allowed for in the Group’s FY2020 financial results.