RSA Trading Update; Car Claims, Refunds, Travel, Weddings & More

RSA have issued a trading statement on the opening quarter of 2020, seeing a 55% drop in motor claims, but predicting a £25m payout on travel claims thanks to Covid-19. Much is still unknown of course, but insurers almost certinaly face more claims on business closures, travel, cancelled weddings, income protection etc ahead.

Here are the highlights from RSA;

Insurance market conditions were largely unchanged in Q1 with little time for a COVID-19 effect. The markets were competitive overall, although accommodating underwriting actions in those portfolios responding to industry losses.

Financial markets were heavily impacted by COVID-19 in March. All asset classes saw impacts broadly associated with increasing risk premiums.

Premiums

• Group net written premiums of £1,521m were down 1%² exits vs Q1 2019 (down 2%² inc. exits) and in line with our plans – areas of profitable growth were offset by planned underwriting effects in portfolios being remediated, with this process nearing its conclusion.
• In Scandinavia premiums of £610m were down 3%² reflecting portfolio actions in Danish Commercial Lines, partly offset by Personal Lines growth.
• In Canada premiums increased 8%² to £303m driven by pricing increases and volume growth in direct Personal Lines, while our broker intermediated businesses saw volume contraction reflecting underwriting actions.
• In UK & International premiums were down 5%² to £572m ex. exits (6%² exits), better than our plan, and reflected the impact of underwriting actions in 2018 and 2019. Key areas targeted for expansion such as our Regions commercial business, and UK household saw positive volume growth.

Profitability

• The Group business operating profit for Q1 was up by double digit percentages, both including and excluding exit portfolios, with an improved combined ratio and slightly lower investment income (as guided). COVID-19 affected the balance sheet but not our operating profit materially given the timing of lockdowns late in the quarter. Each of our three regions performed on or ahead of our plans. There were also strong underlying signs of loss ratio improvements in those commercial lines areas that performed less well in 2019.
• Underwriting profit components (excluding exits):
  • Group weather costs were 3.7% of net earned premiums (3.7% inc. exits; Q1 2019: 3.2%), a little better than our expectations for the quarter though worse than prior year. Weather costs were better in Canada and worse for the UK & International division due to February flooding in UK.
  • The large loss ratio was 8.9% (9.5% inc. exits; Q1 2019: 8.5%) with improvements in Canada offsetting a higher ratio in UK & International.
  • The attritional loss ratio improved overall, and in each region.
  • The written controllable expense ratio increased slightly overall (though absolute costs were down 1% in real terms).
  • Prior year development was positive and better than Q1 last year which was flat. It included a £12m precautionary reserve for PY inflation effects of COVID-19.
• Investment income was within the range guided at our 2019 Full Year Results.
• Exit portfolios (while now largely run off), generated a loss in the period principally from a single large claim.

COVID-19 impacts

While it is too early to quantify with any precision the impacts of COVID-19 on RSA for 2020, we discuss the principal areas affected below with some indicative data for the period to end April, focused on the six weeks or so impacted by COVID-19 lockdowns:

• Our priority is to sustain good service to customers through these testing times. RSA is working hard to settle claims promptly and fairly and where relevant to offer interim payment to support customers, as well as sustaining supply chains through prompt and interim payments. We are also providing a wide range of customer relief measures across our different territories, ranging from coverage adjustments and waivers, payment timing relief and discount or price capping of rates. We are participating fully in a range of industry initiatives including exploring future pandemic coverage options and voluntary relief funds.
• The cost of claims will be complex to interpret as patterns are distorted by the impact of lockdowns. It is still too early to be confident of trends or to know the timing and pattern of pandemic impacts, government actions and their economic effects. Encouragingly some of our territories have begun a gradual normalisation though it is still too early to know how this will play out.
• For the month of April claims frequency was down vs. prior year in a range 20-55% across our three regions, mostly reflecting COVID-19 impacts on activity levels. Scandinavia frequency decline was at the lower end of this range reflecting milder lockdown impacts. In general, motor accident lines were most affected, though most business lines saw meaningful declines. It is not yet possible to assess how much of this data reflects delayed timing of claims or what the impact will be on claims severity of disrupted supply chains and other factors. These elements will reduce the loss ratio effect. However, it is likely that frequency effects overall will provide an offset to areas of negative COVID-19 impact on premiums and claims.
• Specific COVID-19 related claims are arising in travel insurance (which benefit from substantial reinsurance protection), wedding cancellation insurance (UK impacts) and for commercial lines business interruption and related policies. The great majority of business interruption claims are not expected to be eligible under their coverage terms for COVID-19. However, there are a number of areas where claims are being paid, mostly in certain specialist schemes and programmes.
• For the period since inception of COVID-19 claims in March to end April, RSA estimates receiving a total of c.25,000 COVID-19 related claims (of which c.23,000 are travel claims) that have coverage and will pay out, at an estimated cost of c.£25m net of reinsurance. This includes travel claims with estimated costs of £16m gross of reinsurance, claims for wedding cancellation with an estimated reserve of £7m, and claims under certain business interruption and related coverages with an estimated claims reserve of c.£17m. The great majority of the non-travel claims relate to our UK&I division.
• Claims backlogs at month end were within normal tolerances overall and include COVID-19 related claims that have not yet been validated or where information has not yet been provided to establish likely claims value.
• Aside from the reinsurance coverage on travel claims, we expect most other COVID-19 related claims can be aggregated by week and applied against the Group’s GVC programme if over £10m, and against the Group’s cat programmes (described in the Group’s full year results) if reaching higher levels. This is expected to provide substantial protection in relation to downside claims scenarios.
• Our assessment of claims is based on contract terms, detailed analysis of specific wordings and relevant legal advice. As always, it is expected that some cases will be challenged and may have outcomes the same or different to our expectations. The rate of receipt of new COVID-19 related claims has slowed materially in the most recent weeks.
• RSA is also expecting a COVID-19 effect on written premium income for 2020, as some customers reduce their coverage reflecting changed needs, and various rate adjustment and other programmes impact. There will likely be an increase in bad debt from customers, and we are actively working with those in most need on payment spreading plans. In the period to end April bad debt impacts were not substantial.