May 1, 2020

The Insurance Market in lockdown

The insurance market has responded to a multitude of challenges as the UK completes a full month under lockdown.

Two central issues have emerged. The first focuses on both the affordability and value of existing policies. The second is more complex. This issue centres on Business Interruption cover and involves the fundamental question of what risks are covered under the policy.

Central issues for the Insurance Market

Fundamentally, the insurance market as a whole has two overall responsibilities, both of equal importance. On the one hand the market exists to protect the interests of all their policy holders. Customers need to trust in the peace of mind offered when they buy an insurance policy.  On the other hand, legally the market has to maintain a strong financial footing. There is a commercial responsibility on Insurers to meet their robust solvency capital requirements. Meeting this responsibility relies on tight risk management and cover definitions.

Supporting policy holders

Life as we know it changed fundamentally during the month-long lockdown of April 2020. Although this may be true, Insurers were expected to respond instantly. As the month unfolded, there were more and more examples of Insurers reacting to these changed circumstances:

  • Unoccupied property exclusion reviews: Early in the month there was news that Insurers Lift Unoccupied Property Exclusions. Relaxation of the rules came after the government ordered non-essential businesses, particularly those in the hospitality sector, to close from March 24.
  • Motor policy refunds: Motor insurance was another area under scrutiny. There was little question that most people were doing much less driving, given the Government directive to ‘stay at home’. So, should significantly less driving result in lower premiums? In Ireland the answer was pretty universally ‘yes’ as Most motor Insurers agree to give refunds or discount premiums. In the UK, Admiral offers a flat refund of £25, whilst LV= have responded with a scale of refunds, proportionate to the premiums paid. Other Insurers have yet to follow suit.
  • Affordability: Affordability has become a huge issue amidst news of record numbers of applications for universal credit. Insurance premiums are often the first outlay that gets cancelled. The Insurance market has responded, recognising the need to support their policy holders during these unprecedented times. One such example is AIG Life who introduced premium flexibility to support their policy holders during a time of financial difficulty.

Clarifying legitimate Business Interruption claims

Tom Powell articulated this issue admirably in his blog, Why the government need to back the insurance industry. This blog acknowledges that many UK businesses are unable to claim from the insurance providers, “…due to confusing and sometimes outdated policy wordings and exclusions.” However, Tom’s argument is that the Government needs to support the fundamental principle of the Insurance Market. Namely that ‘the premiums of the many pay for the losses of the few’.

But this is an emotive issue on both sides. Policy Holders are fighting for the financial support to maintain a viable business and Insurers are fighting to maintain the required levels of liquidity for the future. Press coverage has proliferated on both sides of the argument. Here are just a few examples:

In a nutshell, Insurers simply cannot afford to pay out on claims that are not valid. In itself, this statement is difficult to dispute. The complexity comes from the “confusing and sometimes outdated policy wordings and exclusions” identified by Tom Powell. The question around the validity of a claim does not appear to be clear cut. Enter the Regulator.

Response from the Financial Conduct Authority

Our report last month, Covid-19 and the Insurance Market – Special Edition  outlined the expectations of the FCA, namely that firms carefully consider the needs of their customers and show flexibility in their approach. Given the ongoing issues, the FCA have now felt the need to take more proactive action in both the two identified central issues above.

This controversy around Business Interruption cover, should not diminish the fact that thousands of claims will be paid. Indeed, the Association of British Insurers has already released initial coronavirus pay-out estimates. Some frighteningly large figures.

The two key issues discussed above underline the uncharted waters that the Insurance Industry are now having to navigate. That they are responding to these challenges whilst managing ‘business as usual’ should be applauded. As a reminder, here are just a few examples of a market looking to the future amidst the crisis of Covid-19:

Building for the future

Insurance investment

New Activities

This month of lock-down has thrown up unprecedented challenges and yet the resilience of the Insurance Market shone through. This insurance industry was born from the Great Fire of London in 1666 and will continue long into the future, albeit with potentially a few changes. After all, the industry has existed for well over 300 years through resilience, innovation and a passion to provide peace of mind for all their policy holders.