Insurance Product Value: An Opportunity for Redemption?
The COVID-19 pandemic has had a significant impact on the business community across the globe. Due to lockdown measures imposed to control the spread of the virus, a significant number of businesses have lost revenue due to closure, a lack of consumer demand or staff unable to attend work.
Many of these businesses were expecting to rely on Business Interruption (BI) insurance in order to mitigate their financial losses. Indeed, the volume of claims has been seismic; Lloyds of London is expecting to pay out up to $4.3 billion to its global customers as a result of the pandemic[1]. Much to claimants’ dismay, however, many insurers have refused to pay out BI claims based on policy wordings – and are now facing legal action, with a £52 million legal claim launched against Hiscox alone[2].
The Financial Conduct Authority (FCA), the UK’s financial conduct regulator, has been playing an active role in bringing clarity to the interpretation of policy wordings written by regulated UK insurers. After approaching 56 insurers and reviewing more than 500 disputed policy wordings, the FCA has narrowed its investigation down to a sample of 17 policy wordings whose coverage will be assessed in a High Court test case from July 2020.
But as the legal debate over BI coverage rages on, insurers face the immediate concern of how to mend relationships with their customers. Even policyholders that have not submitted claims are arguably getting less value out their insurance policies due to their decreased exposure thanks to lockdown measures.
On 3rd June 2020, the FCA issued a call-to-action to the insurance industry to demonstrate fair product value in light of the coronavirus outbreak[3]. Could this be an opportunity for insurers to redeem themselves in the eyes of their consumers?
What does “product value” mean?
Product value refers both to the coverage and the benefits stipulated in a policy wording. If the insured event becomes materially less likely or a benefit is no longer realisable, then arguably that insurance product’s value diminishes.
Under the lockdown measures announced by the UK government in March 2020, both the coverage and the benefits of BI insurance policies have demonstrated less value for policyholders. For instance, hotels will have had minimal chance of incurring liability for guests or employees due to the enforced closure of hospitality venues as part of lockdown procedures.
What does this mean for the insurance industry?
This latest expectation outlined by the FCA will have far-reaching implications for the insurance industry. By 3rd December 2020, all firms carrying out regulated activities concerning insurance products, both commercial and retail (excluding reinsurance), will be required to complete a review of their product lines, assess the value of their products and develop an appropriate action plan, which may include the issue of premium refunds.
While the FCA is not expecting insurers to assess each policy individually, this will be a significant undertaking. Assessments will need to be carried out across all insurance product lines, and action plans will need to incorporate different remediation approaches for customers throughout the product lifecycle. Firms will also need to demonstrate their approach to the assessment of product utility and evidence that their action plan complies with insurance conduct business rules, in particular ICOBS 2.5-1R, and Treating Customers Fairly (TCF) consumer outcomes.
Moreover, while firms are not expected to assess the longer-term impacts of COVID-19 on their product offerings (for example, BI policy wordings) as part of this exercise, it is likely that the FCA will expect insurers to do so in the near future.
What do insurers need to do?
Even under normal circumstances, a review of this kind would be a tall order. Faced with a combination of staff working remotely to accommodate lockdown measures, ongoing complex claims disputes and shrinking revenues, insurers may struggle to address the new FCA guidance within the allotted time. They must therefore act quickly to mobilise the review whilst ensuring to maintain a robust approach to product value assessment.
We have identified 5 recommendations that firms should consider as they define this approach:
- Define a structured assessment approach that can be deployed for each product line and that allows for differentiation by product lifecycle stage to ensure consistency.
- Secure appropriate representation from Underwriting, Claims and Marketing functions so that policy wordings are accurately assessed.
- Use an Impact Assessment Framework to understand the implications of proposed action plans on premium income, operational expenses and claims costs so that firms can ensure action plans are appropriate and proportional.
- Mobilise appropriate governance forums to maintain oversight of and approve proposed assessments and action plans to facilitate rapid decision-making and clear audit trails.
- Review and update the firm’s Conduct Risk Framework in the context of the COVID-19 outbreak to identify areas that require urgent remediation and to ensure effective management of SMCR responsibilities.
The insurance industry’s efforts to consider fair product value will be keenly watched, not only by the FCA, but also by the significant customer base disillusioned by the BI policy disputes they have experienced during the COVID-19 pandemic. Insurers should seize this opportunity to act conscientiously in order to win back trust and forge even stronger relationships with their customers for years to come.
[1] https://www.lloyds.com/news-and-risk-insight/press-releases/2020/05/covid19-will-see-historic-losses-across-the-global-insurance-industry
[2] https://www.postonline.co.uk/commercial/7554816/hag-issues-ps52m-claim-against-hiscox-as-its-lawyers-draw-up-dentists-claim-against-qbe
[3] https://www.fca.org.uk/news/press-releases/fca-confirms-guidance-insurance-firms-assessing-product-value