Last Friday, the UK’s Financial Conduct Authority (FCA) quietly made two announcements that barely got picked up by the media. Why? Although it was related to an industry they regulate, it is perceived by many as the least interesting and understood: insurance. Yet as a society, we simply cannot function without insurance.
Because of COVID-19, the grey man of the City has been thrust into the spotlight and the deluge of business interruption claims being made. The issue is down to the technical wording of their policies and when insurers should pay out to claims against business interruption policies. It is an industry reputation issue that is gathering speed.
The technical wording of insurance policies, the small print, is as complex as the range of activities for which individuals and organisations want cover. As the expression goes: ‘the devil is in the detail’.
The first time the technical wording of a policy had my full attention was in 2005 when I secured a contract with the UN in Kabul, Afghanistan, requiring that I purchase my own insurance. It was a field job involving travel to some fairly dodgy provinces, so once I had found a suitable policy via a specialist broker in the Lloyds market, I went through the wording line by line. This review task is normally conducted between the insurer/insurance broker and the insured client. To aid with this, many of the ‘insured’ (clients) rely on the experience and expertise of their brokers and have long-standing relationships, such are the levels of trust and understanding of their client business activities.
When is business interruption not business interruption?
The answer from an insurer would likely be ‘when an event is uninsured or uninsurable’. In the case of COVID-19, it could be a combination of both.
As we all know, insurance exists to enable society to function by effectively ‘outsourcing’ risk for the things that can go wrong. The level and complexity of risk are reflected in the policy schedule, and these can be customised to provide extra cover for additional risks, all reflected in the premium costs. A high-profile example of the pandemic being covered under business interruption is the All England Tennis Club: they have specific pandemic insurance. Ben Carey-Evans, Insurance Analyst at GlobalData commented recently:
“Wimbledon has shown it is one step ahead of most businesses by having insurance in place for current events. It has been paying around £1.5m per year in pandemic insurance since it took notice of the SARS outbreak in 2003. It has paid out roughly £25.5m over the 17-year period, and it is set to recover around £114m, making it a very sensible investment.”
Uninsured vs uninsurable?
With the Coronavirus pandemic, many businesses making a claim against their business interruption policy clause have had their claim declined, with any references to a pandemic virus defined as separate to contagion causing business interruption. Government lockdown direction and travel bans in response to the pandemic are also cited as not covered in the policy.
It’s been a hard and bitter blow for many businesses that thought for many years they were covered. Technically, they are being assessed as uninsured for a pandemic, as defined in the technical detail of their policies, and many brokers and loss adjusters are caught in the middle trying to find a way to help. Declined claims have left many businesses aggrieved and in financial distress. As a consequence, multiple cases are now being brought against various insurers and brokers, including market giants Hiscox and RSA. This is why the regulator is stepping in: to seek judgement in identifying any ambiguity in the wording and clarify what claims should be paid.
Complex products mean complex messages
As we know, the insurance business model works on the principle of a percentage of the premiums going into a claims pot, all regulated in the UK by the FCA. Insurance underwriters determine the risk against the cover and calculate the premium. The higher the risk, the higher the premium. I remember nearly dropping the phone when I was told the premium for Kabul. Many people take out standard cover, but only a few have issues and claim against the policy. There are also contingencies if there is a surge in claims, as we witnessed in 2017 with three Caribbean hurricanes, an earthquake in Mexico City and wildfires destroying Californian vineyards.
What we are bearing witness to today is such an overwhelming event impacting millions of businesses across the globe, the scale of losses puts it in the uninsurable category as part of standard cover. Higher risk cover can of course be bought, and the extra premiums paid go into a separate pot, to which the All England Tennis Club have access. It is very cold comfort to those businesses facing ruin if their business interruption claims are not paid. It is, however, a massive wake-up call for the insurance industry: they must do better at communicating these complex messages.
Industry reputation going forward
Insurance is one of the oldest business services known, so whatever the future holds, businesses and individuals will continue to buy insurance cover. We need to transfer the risk, for a price, to enable us to drive a car, run a manufacturing plant or, in my case in 2005, take up a UN job offer in Kabul. People and organisations need continuity to plan, invest and conduct day-to-day activities, and insurance provides this. It is a symbiotic relationship. What is threatening this symbiotic relationship is trust.
Historically, world trade, significant events, and huge losses have helped shape the industry today: The Great Fire of London, the San Francisco earthquake and, more recently, the advancement of AI and technology. Within the industry, leadership will be asking: how will this pandemic impact the industry reputation going forward in light of the business interruption claims issue, notwithstanding many are technically correct? The wider business community will be asking why this pandemic is not included in standard business interruption cover, given that they believed it was and have loyally paid their premiums for years? How do these parties come back together and move forward? This is why this announcement by the FCA is so significant.
Katherine Coates, Partner, Clifford Chance summed it up well last week on the Insurance Day London Market Webinar:
“Clearly it is important to maintain a good reputation in business and is key to a service business such as insurance. This however is an unprecedented crisis and it is important to maintain an appropriate balance and try to communicate the real requirement to do that.
It is a difficult balance and at the moment there has been mixed press and I think insurers are going to have to work hard to make sure they are not seen as the villains of the piece if they are turning down claims.”
At a granular level, a review how it communicates various add on policies and technical wordings must take place to avoid a recurrence of the current situation with business interruption claims The industry, both insurers and brokers, needs to ensure its technical wording is crystal clear; that clients fully understand what cover they are buying; confirm if it is suitable; and that it is exactly what they need. Responsibility is a joint effort, which includes clients taking responsibility to read the wordings carefully and flagging any coverage queries before making any claim. In an already highly regulated industry, the only remaining option is to enhance communication and understanding.
The industry is at a critical juncture if it wants to retain trusted relationships and its reliable, stable and steady reputation. It needs to step up and better explain the principles on which it operates, as well as advocating outside of the industry the often-underplayed role insurance plays in society in terms of stimulating and facilitating economic development.
Both parties are hanging their hopes on the outcome of the FCA review: for both, their business survival depends upon it. For all insurance providers, however, relying only on technical and legal correctness puts the insurance industry at a high risk of following in the unfortunate footsteps of the high street banks’ post-2008 financial crisis, where full public trust has never really recovered.
FCA announcements 1 May:
“FCA seeks legal clarity on business interruption insurance alongside package of measures to help consumers and small businesses”:
“FCA statement - insuring SMEs: business interruption”:
Wimbledon Foresight Noted by GlobalData. Can Pandemics Be Covered?