The UK Supreme Court’s ruling on business interruption (BI) cover will hit profits at insurers in the short-term, but it is likely to bolster insurance penetration rates at SMEs in the longer run and is far less damaging than not paying out, GlobalData says.

UK insurers are expected to pay out more than £1.8 billion ($3.2 billion) in COVID-19 related claims following the Supreme Court test case judgment in favour of policyholders last month. It was the final avenue for appeal following a High Court ruling on a BI test case brought by the Financial Conduct Authority (FCA).

“While paying out much later and when forced to may not be a great look, it is far less damaging than had they not,” GlobalData analyst Ben Carey-Evans says.

“Paying out claims and showing that (insurance) can offer much needed financial support in times of crisis will show how essential it can be.”

After an initial kick to earnings, the legal decision may save the “collapsing reputation and trust” of insurers in the long term, the analysis says.

In Australia, the insurance industry lost a test case when the NSW Court of Appeal ruled insurers could not rely on pandemic exclusions in BI policies that referenced a now repealed Quarantine Act. The industry is seeking leave to appeal that decision in the High Court.

A GlobalData survey in the UK late last year found some damage had been done by the stories of insurers refusing to pay out and suggested that of those SMEs who had cancelled BI policies in 2020, a quarter did so because the policy did not provide the level of cover they thought it did and a further 23% had a coronavirus claim rejected by their provider.

That indicated almost half of those who had cancelled the policies did so as they felt they had insufficient coverage as SME customers and didn’t believe insurers would pay out.

Mr Carey-Evans says it is likely many more small businesses would have cancelled this year had the court allowed UK insurers to deny the payouts.

With the ruling in favour of policyholders, many businesses scarred by what happened in 2020 will look to make sure they are fully covered for anything preventing them from doing business in the future, he says, and that may see SME insurance penetration rates start to increase.

“This could be essential for insurers as the number of businesses and employees is likely to drop in 2021 due to the economic impact of the pandemic, so raising penetration rates could counter that,” he says.

The UK’s top five BI providers for SMEs in 2020 were AXA, Aviva, Zurich, Barclays and Allianz.