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CFO: Swiss Re may have to rethink BI loss estimate if insurers lose test cases

Swiss Re AG may have to increase the sums it has set aside to pay coronavirus-related business interruption claims if insurers lose test cases, the reinsurer's CFO, John Dacey, has said.

Swiss Re took a $2.54 billion charge in the first half to pay for coronavirus claims, of which 72% is for claims that the company is expecting but that clients have not yet filed, known as incurred but not reported, or IBNR, claims. The biggest single element of the charge was $973 million for non-damage business interruption claims. The charge pushed Swiss Re to a $1.14 billion loss for the half year.

The charge is for claims emanating for the first half of the year, but Swiss Re expects it to make up the majority of its ultimate coronavirus claims.

Speaking to journalists July 31, Dacey said that if there were "a series of judgments which are systematically against the insurance industry" from the test cases, he expected increased business interruption losses to emerge in subsequent quarters, "and maybe a reevaluation of what the business interruption number in particular might look like as we digest this."

Swiss Re's current expectations do not assume all decisions will go in insurers' favor, Dacey said, but that the reinsurer did expect "rational behavior and contract language to actually matter as decisions are made." Given the IBNR element of Swiss Re's first-half business interruption provision, Dacey said there was "some room to absorb adverse judgments up to a point," but that the company would have to reevaluate reserves if the judgments are "radically adverse to the industry."

Such an eventuality could also mean that the $50 billion low end of Swiss Re's estimated $50 billion to $80 billion loss range for industrywide coronavirus claims "might not be relevant going forward," Dacey said.

The hearing for the U.K.'s coronavirus business interruption test case, initiated by the country's Financial Conduct Authority to resolve non-damage business interruption claims disputes, drew to a close on July 30, with a draft judgment possible in mid-September. Other countries, such as Australia, have launched similar test cases.

Standing out

Swiss Re's $2.5 billion coronavirus claims bill for the first half appears larger than what its peers have reported so far. Larger rival Munich Re, for example, has booked roughly €1.5 billion of coronavirus claims and provisions in the half — €800 million in the first quarter and an expected €700 million in the second, although the second-quarter amount only includes Munich Re's reinsurance business. Munich Re said it is expecting "a lower impact" than the €700 million in life and health and other property and casualty business in the second quarter.

Swiss Re CEO Christian Mumenthaler told journalists that the business interruption element of its coronavirus claims bill "seems to be, from what we see at this stage, the one that sets us apart most from our competitors," and that this reflected "a very high uncertainty that exists around this particular bucket" of losses.

But he added that Swiss Re had not "come across anything that would set us apart ultimately from our competitors" and that over time the views of reinsurers about the claims amount would converge.

"Only time will tell whether we have been too conservative here or not," he said.

Mumenthaler also said a claims burden of the size Swiss Re has estimated for coronavirus "is to be expected" given its industrywide loss estimate of between $50 billion and $80 billion. He added that the bill "reflects a normal market share of Swiss Re of such a loss" and that "I don't think we are particularly exposed compared to others in some of these segments."

One possible exception, he said, was event cancellation, where Swiss Re is "not the market leader but we have a slightly higher share."