Australia BI test case “raises more questions than answers”

Following the outcome of an Australian legal test case that considered the application of certain infectious disease exclusions in business interruption policies going against the insurance industry, some insurers are looking to reinforce their claims provisions and execute capital raising actions to bolster their solvency positions. This is according to rating agency AM Best.

The judgment handed down by the New South Wales Court of Appeal brings into sharp focus the potential downside risk for the insurance industry, it notes. With a unanimous ruling against the arguments made by the insurers on this test case, AM Best expects the question of pandemic business interruption coverage to remain a significant source of uncertainty for Australian commercial insurers.  

The rating agency states that the re-evaluation and refinement of loss provisions for potential COVID-19-related business interruption exposures are expected to lead to an adverse impact on commercial insurers’ operating earnings.

Some smaller insurers exhibit limited financial flexibility due to their ownership structures and therefore may have less ability to raise significant additional capital, if required.

 “Another key factor relevant when determining the financial impact of potential business interruption exposures for insurers is with regard to their ability to make recoveries from reinsurance programmes,” said Myles Gould, director, analytics, AM Best. “Loss triggers may be a source of dispute with reinsurers, such as in the event of non-alignment of policy exclusions in primary wordings and reinsurance contracts.”

“As the commentary notes, this test case outcome remains only one piece of a much larger puzzle, with a number of other business interruption contract triggers yet to be evaluated ahead of understanding the full liability for insurers,” said Alex Rafferty, associate director, analytics, AM Best. “Additionally, this test case decision could be appealed.”