With the impacts of the UK lockdown in response to the COVID-19 pandemic starting to set in after one full week in force, the financial services industry is starting to see the commercial repercussions of the virus.
The insurance industry in particular, is being put under huge pressure by the government and public to pay out to policyholders, in an effort to support the wider economy from the consequences of this pandemic.
Will insurance cover the government funding gap?
As business closures and restrictions on movement have set in, policyholders have been looking to their insurance to tide them over until the funding from the government kicks in. Some policyholders will be covered for the effects of this pandemic. However, most choose not to pay the higher premiums for cover for such unusual events and, where that is the case, policyholders will be uninsured
Insurers most likely to be affected by this are those who cover: business interruption, permanent health, directors and officers’ liability, product liability and/or travel. Those who insure weddings and/or events may also be affected.
Paying out to policyholders when their policies were not drawn up and costed to pay out in a pandemic such as COVID-19, could place the insurance industry in jeopardy.
Consequences of insurance market flexibility
Last week, the Treasury Select Committee asked the Association of British Insurers to find out whether its members would be flexible in their response to business interruption claims related to the virus. However, as the chairman of Lloyd’s pointed out, the aggregate value of virus-related claims could amount to a large loss event for the market. If it does, we would not expect the market have much room for flexibility when most policyholders have not paid for this level of cover.
If insurers decide not to pay policyholders whose policies do not cover losses caused by the virus, there could be serious reputational risk and potentially further pressure from government to pay out in any event. If well capitalised insurers choose to absorb the loss and pay anyway, less well capitalised insurers will come greater pressure and, if they give in to that pressure, that might fail.
The FCA has made it clear that it expects insurers to be flexible; and that it would not expect to see policyholder claims rejected because their circumstances changed temporarily as a result of the virus or lockdown. Some insurers, for example motor and home insurers may see a change in behaviour of policyholders, as more people use their vehicle for business and use their home as their main work location. The FCA has specifically stated that any claims that arise due to a policyholder’s understandable temporary change in behaviour in response to Government advice, should not not cause insurers to reject claims.
Insurers at this time should make clear to policyholders what their insurance policy covers and whether there are any policy exclusions that may impact the cover and use of the policy. This applies to both new sales and changes to existing policies.
Treasury Select Committee questions for ABI members
In its letter to the Association of British Insurers, the TSC noted that it was a concerning time for the insurance market and policyholders, and that many policyholders will be looking for flexibility and assurances from their insurers. The TSC has asked the ABI:
- How many of its members have stopped offering a product since the outset of the virus and how many have changed the terms of a product in response to the virus;
- How insurers have communicated these changes to policyholders;
- How much ABI members are expecting to pay out for business disruption due to the virus; and
- What approach ABI members are taking to business interruption, when businesses have been obliged to close on government advice.
The message to insurers appears to be: assist policyholders during this time irrespective of the cost. However, insurers reserve against their potential liabilities by reference to the depth and breadth of the cover they have agreed to provide, and they use the premiums charged to help them do this. A sudden and unexpected increase in liabilities will materially increase insurers’ regulatory capital obligations, and will not be able to meet their new obligations. That could easily lead to the closure of some insurers, and/or a significant increase in future premiums, effectively on a populist whim.
If the FCA expects insurers to be flexible paying out from their policies, firms may look to the PRA for flexibility around such requirements during this time.
We are already discussing these issues (and others) with our insurer and reinsurer clients. If you would like advice on them too, please contact MMacGregor@FoxWilliams.com or CFinney@FoxWilliams.com.
Articles and commentary by our legal experts on the impact of COVID-19 are all available here.