Trust, transparency, clarity are crucial on claims - ABI's Dalton

The focus for UK insurers should be to support their customers through the swift payment of valid claims, making interim payments, and providing clear and prompt answers to customer questions, James Dalton, director of general insurance, Association of British Insurers, has said.

Dalton underlined three themes as important for the insurance sector, risk managers and claims handlers, in a speech entitled “Covid-19 - The New Risk Landscape” at Commercial Risk’s recent claims management conference.

The first is a theme was “trust, transparency and product clarity”, in the context of the test case on business interruption insurance (BI) between several UK insurers the Financial Conduct Authority (FCA).

“I know business interruption litigation in the context of the pandemic is taking place in a number of jurisdictions and that what has been happening here in the UK has been watched closely around the world,” said Dalton.

He noted that the BI test case “could easily have taken two to three years to obtain a final judgment” from the Supreme Court, but that this took eight months.

This, he highlighted, was indicative of the insurance industry’s own desire for clarity, rather than simply a court case to be won or lost between the insurance industry and its regulator.

“Despite the headlines saying that the FCA was taking insurers to court, this was a process that the industry supported and worked with the FCA to enable,” said Dalton.

“After nearly 400 pages of legal rulings from the High Court and Supreme Court, it was decided that, of the 21 wordings, seven did not provide cover and 14 provide either some or complete cover in certain circumstances. In reaching this view, the Supreme Court quashed a previous ruling that had been the basis of insurance contract law for the last decade,” he continued.

“The focus now is for insurers to support their customers - through the swift payment of valid claims, making interim payments, and providing clear and prompt answers to customer questions,” Dalton added.

Overall, the ABI estimates some £2bn will be paid in Covid-19 related BI claims. Brokers will provide a vital service to what happens next in the claims process, he emphasised, while the FCA is busy collecting and publishing data on insurers’ responses.

The number of accepted claims had increased from around 21,000 to around 35,000 as of mid-April 2021, according to the FCA. An interim or final payment has been made in 39% of accepted claims, according to the regulator, with more than £600m paid out already.

He offered three lessons from the episode, from an insurance industry perspective.

“Firstly, for an industry that had a problem with consumer trust before the pandemic, this episode has made things worse. Despite the fact that an average of £17 billion of claims are settled each year, there continues to be a deeply-held customer perception that insurers always try to wriggle out of paying. It is often said that claims are the shop window of the insurance industry, so it is essential that we redouble our efforts as a sector to pay valid claims quickly and with a simple customer journey,” said Dalton.

“Secondly, we must address the expectation gap between what a customer thinks an insurance product provides for and what the insurer intends to cover,” he continued.

Dalton noted the work of the Chartered Insurance Institute’s Transparency Forum, which has already made recommendations to the industry about how to better meet customer expectations.

“Thirdly, we must redouble our efforts to engage in solutions to help tackle the hardest elements of risk to cover. In a time of crisis, the public understand that not everything can be insured. But they expect insurers to lean into the challenges posed and to work to develop solutions,” he added.

Managing pandemic risk

Moving on from the BI case and its ramifications, his second theme focused on the role of the insurance industry in the future management of pandemic risk and catastrophe protection.

He listed some of the insurance industry’s collaborations with government during the Covid-19 pandemic, such as contributing to negotiations with private healthcare to increase NHS beds capacity, and helping arrange the government’s £10bn reinsurance backstop for trade credit insurance.

He cast doubt on the workability of creating a “Pandemic Re” reinsurance backstop similar to those UK public-private risk-sharing initiatives that exist for reinsuring floods and terrorism, Flood Re and Pool Re, respectively. Such public-private partnerships have many pros and cons, he emphasised.

“The bar to establishing such a scheme to address a public policy problem should, in our view, be a high one. There should be a genuine market failure, where no other public policy intervention could solve the underlying problem,” he said.

“Establishing such schemes is a complex and lengthy process and, it is important to remember, they are based on a cross-subsidy between consumers – one group of people pay more for their insurance so that another group can pay less. Such an arrangement comes with inherent public policy challenges and trade-offs, requires clear political will and a demonstrable and long-term benefit,” Dalton continued.

“So the key question in considering whether a reinsurance arrangement should be put in place is to consider whether Government intervention after the event is preferable to establishing a Government-backed scheme before the event which builds up huge reserves and is potentially unused for years, if not decades.

“There is unlikely to be a clear-cut answer to this question and government decision making, potentially decades from now, cannot be predicted with any degree of certainty. But, were another pandemic to strike of the type that we continue to live through, it seems inevitable that governments will, once again, be forced to make significant economic interventions,” he added.

Climate risk claims

His third theme looked at the challenges associated with climate change and sustainability from a commercial claims perspective. He noted that the pandemic should not dominate thinking, and that the UK’s role as Cop-26 President for this year’s Glasgow summit has sharpened the focus of business and wider society on the issues of climate change.

The risk profession and insurance sector will play a role in managing climate change’s physical risks, and also the “adaptation risks” as companies and the economy moves inexorably towards a “net zero” future.

“Insurers and risk managers will play a key role in managing the transition and that will range from large scale adaptation, such as the decommissioning of carbon-intensive industries to small-scale changes, for example, decommissioning the millions of petrol vehicles on the road or replacing or recycling household devices,” he said.

Dalton also emphasised the “not yet fully understood” risks that will need to be managed not just from climate change itself but also from the solutions being proposed by government and industry to curb it.

“Solar panels, electric vehicles and sustainable timber can all reduce carbon emissions, but we know from past experience that unforeseen issues around the installation and use of new technologies can have significant consequences,” he said.

Dalton added: “As the switch to using many of these new technologies is viewed as both an opportunity to drive economic growth whilst reducing emissions, there is likely to be an onus on risk managers and insurers not to stifle their adoption and rollout. So, it will be important for risk managers and insurers to continue to emphasise that a new technology is not sustainable unless it is safe.”

The full transcript of the ABI speech at the event is available on the ABI website