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:
- Action against Insurers: Hiscox are arguably at the forefront of this issue as the Hiscox Action Group Gears up to take Hiscox to Court. But they are by no means alone. For example in a separate case, RSA faces legal action in BI dispute. As a final example,QBE latest provider facing legal action after denying BI claims. There will undoubtedly be more.
- Response from the Insurers: This issue received a global response as Insurers warn on forced pay-outs for uncovered coronavirus losses. But on a more individual basis, Hiscox has responded to business interruption criticism.
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.
- Supporting Policy Holders: The FCA approach to this issue is summed up by MoneySavingExpert in their article Payment holidays and premium refunds proposed for insurance customers. The FCA have released two draft guidance documents. The first is Product value and coronavirus: draft guidance for insurance firms. Comments need to be submitted by Friday 15th May. The second is draft guidance for Customers in temporary financial difficulty. Again comments are welcome, with a deadline of Tuesday 5th May.
- Clarifying legitimate Business Interruption claims: In a Statement dated 1st May 2020, The FCA set out their intention to seek legal clarity on business interruption (BI) insurance to resolve doubt for businesses who are facing uncertainty on their claims.
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
- Sprout AI: This London Insurtech company secured $2.5 million. They plan to build their team and expand into the US.
- Ethos Broking: The company has not deviated from the strategy of acquisition, despite these challenging times. Latest purchase is the brokerage Hughes & King
- Honcho: Honcho secured £1.2 million in recent funding round. The Durham based InsurTech plans to use the additional funds to expand into new insurance markets.
- Global Risk Partners (GRP): Greens acquire RT Williams and NIB Insurance. Green Insurance Group are the South Eastern hub business for GRP.
- Hiro – an ‘insurance challenger brand’: Hiro creates Home Insurance that rewards you for owning smart home devices. Good to see new concepts come to market despite all the challenges of the lock-down.
- New broker launch: Two industry heavy weights have launched a new broker Partners& Ex Jelf boss Phil Barton and former Bluefin CEOStuart Reid have teamed up to combine 5 existing broking businesses, with a resulting single team of 140 people.
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.