While most of the COVID-related problems that plagued U.K. commercial property insurers will abate after the March anniversary of lockdowns, battles with reinsurers and damaged reputations are lingering impacts, AM Best said.

In a commentary report, “UK Commercial Property Insurers—Looking Beyond a Difficult 2020,” published Friday in the wake of the UK Supreme Court’s ruling in a test case brought by the Financial Conduct Authority, AM Best analysts mainly described the financial impact. The rating agency does not expect the level of reserve strengthening required following the UK Supreme Court’s Jan. 15 ruling on the non-damage business interruption case to have a material effect on the capital or earnings of companies impacted by findings for policyholders.

The majority of those losses had already been booked in September, AM Best reports.

Still, the report says, “It is important for the insurance industry’s reputation that transparency is improved and there is greater clarity as to what is covered in a BI [business interruption] policy,” pointing to the challenge facing this industry to rebuild its reputation with small business customers.

“It is important for the insurance industry’s reputation that transparency is improved and there is greater clarity as to what is covered in a BI policy.
That work is already underway, the report said, noting that uncertainty regarding claims development and negative press around BI issues forced UK commercial property insurers to amend policy wordings, clearly defining the scope of coverage and specifically excluding pandemic cover. As a result, the impact of further lockdowns in late 2020 and early 2021 that could potentially have given rise to more claims will be muted. In addition, the majority of exposures from 2020 will run off soon after the anniversary of initial lockdowns in March.

Insurers may, however, still face battles with reinsurers, the report suggests, noting that while reinsurers are committed to follow the cedents’ fortunes on quota-share contracts, non-proportional agreements may have some issues. Specifically, the report calls out the prospect of different interpretations of the aggregation of COVID-related claims within and across different lines and geographies, and the definition of event or occurrence that triggers reinsurance coverage.

The report also gives a description of the gap between insurer’s and customer’s understanding of what was covered in the policy language at issue in the FCA test case. While UK BI endorsements usually only cover loss of earnings in relation to physical damage, a limited number of policies cover BI from causes like infectious disease. Best says the intent there was “to cover closure of a property owing to a local outbreak of a notifiable disease on a specified site,” adding that insurers were surprised by the idea that these policies should respond to lockdown measures—an exposure that they hadn’t priced into their policies.

The Supreme Court’s January 2021 ruling, expands a September 2020 High Court ruling on appeal, a broader interpretation of what can be claimed for partial closures and providing guidance on reference earnings for loss of earnings calculations, according to the Best report. The rating agency believes, however, that resulting increases in claim liabilities were largely booked back in September.