(April 10, 2020) - While insurance companies provide coverage to individuals and other businesses, they themselves are insured by reinsurance contracts. These contracts reimburse insurers for claims they pay, but only if the underlying claims are covered in the contract.
The coronavirus pandemic may create challenges for reinsurers similar to ones they faced after 9/11 or particularly destructive hurricanes, Larry Schiffer of Squire Patton Boggs LLP says. The companies are likely creating coronavirus task forces to evaluate exposure, he says.
He also notes that the claims impact may be relatively limited because of the way the underlying policies are written. For example, business-interruption coverage is generally not triggered unless the insureds can show direct physical damage.
However, in the last few weeks, legislators in several states, including New York and Ohio, have introduced bills to force insurers to cover claims for business interruption due to the coronavirus. Passage of these laws would place primary insurers in the unwelcome position of having to pay out claims that may not be reimbursed.
If the reinsurance policies do not cover these claims that would not normally be paid, insurers could take a big hit without guaranteed reimbursement.
This could lead to disputes between the insurers and the reinsurers, Eric Sauter of Wilson Elser Moskowitz Edelman & Dicker LLP says, noting that such legislation could create a conflict between the terms of a reinsurance contract, which may contain both a virus exclusion and a follow-the-fortunes clause. The latter clause binds a reinsurer to the insurer’s claims decisions.
”Based on the uncertainty of state action, reinsurers may increase rates and/or pull back from reinsuring business interruption policies,” Sauter adds.
”Insurers are going to look to maximize their recoveries under their reinsurance treaties as policyholders will aggressively pursue claims,” Ivan Dolowich of Dolowich Kaufman Voluch LLP predicts.
”This is going to be a significant ‘clash’ exposure for the reinsurance industry and will impact multiple lines of coverage,” he says, referring to coverage that insurers purchase to bridge the reinsurance gap when a catastrophe generates multiple claims.
Tom Morante, also of Dolowich Kaufman, notes, “Ratings for the reinsurance sector in light of COVID-19 and capital market volatility have been impacted. In this context Fitch Ratings Inc. for the reinsurance industry have gone from stable to negative.”
According to Schiffer, one concern reinsurers do not have is capitalization.
”They absolutely can afford an influx of covered claims,” he says.
But Ronnie Johnson of McGlinchey Stafford PLLC says it may be important to consider whether the value of the reinsurer’s investments has been diminished by current events and whether there is still liquidity to operate and pay claims.