What now for general insurance products?
Brought to you by ICAEW Financial Services, journalist Jonathan Minter asks whether coronavirus volatility has changed the landscape for general insurance products.
In May, reinsurance market Lloyd’s of London revealed it expected the impact of Covid-19 to result in pay-outs of between $3bn to $4.3bn. This would put losses on a par with historic events such as the 9/11 terrorist attacks and the combined impacts of hurricanes Harvey, Ima and Maria in 2017.
However, the impact could be even greater, as Lloyd’s noted the industry had seen falls in investment portfolios of an estimated $96bn between the start of the crises and May.
In other words, Covid-19 has provided a historic, unique challenge for the insurance industry. Given Covid-19 rates in the US are continuing to rise, and localised second waves continue to crop up globally, it is clear the disease will continue to be a threat for some time.
Mark Shepherd, Assistant Director, Head of General Insurance Policy at the Association of British Insurers (ABI) described it as: “an insurance event that we have never seen in modern times – it is not restricted by geography or by time.”
The Financial Conduct Authority (FCA) has intervened, and in May instructed insurers to help customers who were struggling due to the pandemic with their general and protection insurance policies, for example by reducing monthly premiums or waving late payment fees.
As the UK moves out of its initial national lockdown, the wider economic affects will continue to create a challenging environment for many insurers. Historically, there has been a close correlation between GDP and premiums and with economic experts widely expecting a recession in the near future, insurers can expect increasing pressure on this front.
Mark Patterson, global general insurance leader at Deloitte explains: “There is going to be a material pressure on premiums. If you look at classes of businesses which have lower claims experience like aviation, anything tourism or recreation, energy and entertainment, any small business is likely to have downward pressure on premiums moving forward.”
David Rush, EMEA insurance sector leader at Deloitte added: “Despite the lower claims experience for certain classes of business, the Covid-19 pandemic will have weakened the balance sheets and solvency ratios for many insurers. One of the first results of the Covid-19 pandemic was a huge drop in equity markets, but we also saw a decline in short-term and long-term interest rates reducing both the valuation and return on assets or investments. On the liability side, for longer tail risk classes and the life and pension players, with guaranteed annuities in particular, an unhedged fall in the discount rates increases liabilities. We might also expect pension deficits to increase significantly.”
He notes that insurers face a host of other challenges as a result of Covid-19. One example is an increase in the likelihood of insurance fraud that insurers tend to face in tougher economic environments. “In a significant recession, moral hazard increases and with that you might expect an increase in the incidence of fraudulent claims for highly valued insured assets such as yachts which catch fire, or are dashed against the rocks,” Rush adds.
Different types of insurers have faced different challenges. In the UK, months of lockdown, and an at least temporary shift to working from home among much of the population, have left thousands of cars off the road. These cars have still needed to be insured, but claims have fallen dramatically as a result of fewer people driving.
Companies have taken different approaches to managing the reduction in claims. Admiral, for example, have opted to pass part of the saving back to its customers by giving every one of their car insurance policy holders a £25 refund, while Direct Line have allowed customers to lower the expected mileage on their policies, resulting in lower premiums.
With regards to home insurance, some providers have reported seeing an increase in the number of claims for accidental damage due to people spending more time at home. At the same time, people being at home more often reduces the risk of break-ins.
Of course, home and contents insurance are optional for consumers, and there is a risk that people may consider cancelling or not renewing their insurance if they feel premiums are too high.
Steve Devine, chairman of the Protect Association, notes that 14% of homeowners are considering cancelling their contents cover because they feel there is a lower risk of burglary, and a further 11% are considering cancelling for financial reasons. This may result in pressure to lower premiums.
According to Patterson, Deloitte expects home insurance theft claims to be down approximately 30% for the year and motor claims down 18%.
Other types of insurance will have seen a temporary fall in the number of claims, but these may surge as the country begins to open up again. One example is private medical insurance where claims have fallen considerably during lockdown.
For example, Rush points out: “If you have a dodgy knee, or a hip that needed replacing in March or April, you'll probably see that claim emerge in July or August when things loosen up, so there might be pent up demand there.”
At the other end of the scale, according to ABI figures, travel insurers have had to pay out an estimated £275m in claims since the crisis began. In GlobalData’s 2019 UK Insurance Consumer Survey, holidays were identified as the most common reason for purchasing travel insurance, and in May, insurance publication Insurtech reported that just over half (51%) of respondents said they had either cancelled or changed upcoming international travel plans.
Unfortunately, not everyone who had to amend their travel would have had the correct insurance cover. Devine notes that, in general, those who bought cheaper policies would have been hit hardest.
Some insurers have introduced Covid specific cover for customers – for example around the need to self-isolate.
Business Interruption claims
Business Interruption (BI) insurance claims are expected to far exceed travel insurance claims, however. The ABI expects its members to end up paying out over £900m in BI claims.
While this is an enormous figure, many SMEs have been told that their BI policies didn’t cover the current situation.
Shepherd said: “The industry’s initial message – that the majority of firms were unlikely to be covered for business interruption – was never going to be easy or popular. We all understand just how difficult a time this has been for businesses, especially SMEs. We moved quickly to explain the situation because, in any crisis, clear, factual and timely information is essential.”
BI insurance is typically designed to cover property-based problems, such as floods or fire. In the majority of cases, it was not designed to cover needing to close a business due to a global pandemic, and insurers have pointed to the small print in policy wordings as proof that claims were often not valid.
However, SMEs, many facing ruin, have in many instances disputed this. For example, at the start of June, the Hiscox Action Group, representing 600 SMEs that had seen their BI claims denied by insurer Hiscox, launched legal action for £52m against the insurer.
BI court test case
The FCA has launched court action to review the policy wording of 17 sample policies to provide clarity and certainty in the various BI disputes arising across the country. Although samples do not cover every insurer offering BI, the FCA has made clear that: “we expect the test case to provide guidance for the interpretation of many other BI policies that are not in the representative sample.”
It is important to note that in April the FCA said it understood most policies did not cover the Covid-19 pandemic, a position it reiterated in June. The test case is focussed on policies that could be argued to include cover.
The case will be heard in the second half of July and, if the court comes down on the side of the policy holders, there may well be a wave of claims from SMEs who had previously been turned down.
Regardless of the result, the current situation has shown the insurance industry that it needs to work on its public image. Shepherd acknowledged: “There is no question that the industry’s reputation has taken a knock during this unprecedented crisis, primarily as a result of issues associated with business interruption cover which was never designed to provide cover for pandemics.”
Devine adds: “Insurers aren't always very good at communicating, and there is a basic mistrust. It's a constant battle to convince people it is all above board, and the customer is at the heart of the journey.”
Overall, there is widespread acknowledgement that the pandemic has highlighted a need for the industry to reflect on how it communicates the terms and conditions of policies to customers.
Justin Elks, managing director for the Crowe consulting practice notes: “Insurers are having to consider their financial, strategic and operational resilience as well as how they manage their reputations. They are having to re-calibrate the balance between resilience and efficiency in their operations.”
Elks also points to insurers having to look at new operational challenges which could emerge out of the pandemic – for example people rethinking their work-life balance, and how this may affect society.
The lingering presence of Covid-19 could introduce entirely new risks that insurers will have to account for. Examples given by Patterson include: “You could start considering who is going to be liable if you go to the pub this weekend, and you catch Covid-19 because a certain control wasn't in place.”
There are however good examples of the industry looking to adapt and evolve. For example, on 14 July insurance consultancy Ninety and Protect Association are jointly hosting a webinar focussing on innovation in the industry. Meanwhile the ABI has released principles for handling BI claims related to Covid-19.
As the world looks to move on from its initial reaction to the pandemic, it is clear the insurance industry understands it will need to evolve to meet client needs under the ‘new normal’. Thankfully the industry appears willing to meet this challenge head on.
About the author
As well as freelance work, Jonathan Minter is senior editor at Intelligent Partnerships. He was formerly group editor of The Accountant and International Accounting Bulletin, as well as car finance title Motor Finance.