For those of us who work in the insurance sector, we know and passionately believe in the social good it delivers to society by protecting those at their time of greatest vulnerability. We are also acutely aware that for many, it is a grudge purchase. The current environment has shone a spotlight on the industry and highlighted the lack of understanding customers have about the insurance products they have purchased and what cover they actually provide. It has created a clear expectation mismatch. The long-lasting economic and societal changes that are likely to arise as a consequence of the Covid-19 pandemic may result in significant adjustments to insurance requirements and the expectations of corporate and individual customers, as well as the regulator. These changes will create challenges but also new opportunities for those insurers and brokers that can respond to them effectively.
At the latest count the Association of British Insurers (ABI) was forecasting £900m in business disruption claims, £275m in travel claims and £25m for events cancellation. Whilst some insurers will be hit hard by the pandemic, others are seeing significant short-term improvements to the profitability of their business as motor and home claims reduce. It would be very easy, and glib, to say that there will be both “winners” and “losers” when the reality is the whole industry is in the firing line. Good news stories of donations to the NHS and small policy refunds are absolutely well intentioned but are getting lost in the broader negative press.
The ‘small print’
Many business interruption policies are unlikely to cover the impacts of Covid-19 and it is these policies and the insurers or brokers that have sold them that are receiving the vast majority of the bad press. The insurers rightly point out that, in many cases, pandemics are excluded from their policies but when you resort to the “small print” of a policy, the argument is already half lost. Even for those firms that don’t write business interruption insurance, that don’t have clients who are facing the loss of their own business, it undermines confidence in them and in an industry that is supposed to be there to provide protection when a customer needs it most.
Insurance is not a ‘silver bullet’ for systemic risk
Thankfully the industry is significantly better capitalised than it was 10 years ago, but it is not and should not be there to provide retrospective cover for events that far exceed the scale of combined balance sheets. This is where industry and government need to come together, as a public/private partnership, to find creative solutions to systemic risks. This will take time.
In the short-term insurers must look to pay claims, where valid, quickly. Where there is dispute, firms must look for quick legal resolution so that precedent can be set and customers can either be suitably compensated, or can be told why they won’t be. Consistency of decisions and levels of communication by insurers, regulators and government will be a crucial factor in how much confidence remains in the sector. In addition, there is likely to be increased scrutiny of sales controls and processes. Brokers in particular may be exposed to miss-selling claims on the basis that they led businesses to believe that they would be covered for pandemic related losses. Regardless of how these legal cases play out, the workload for internal customer servicing and complaints teams and for the Financial Ombudsman Service has increased. Organisations need to find a way to deal with the backlog and deliver answers to customers clearly and efficiently.
The future is simpler products
Those working in enterprise risk, underwriting and product development will have spent countless hours trawling through product documentation and wordings to understand their exposure, especially with legacy products where wordings may not be as tight as they’d currently like. It’s a cliché but hindsight really is a wonderful thing. Those insurers that have led with product rationalisation over the last few years will be thankful for having taken the time to rationalise the hundreds, if not thousands, of variations they had. Those with large legacy back-books may well have significant exposures they don’t yet know about just because of the sheer volume of variations, only time will tell. Covid-19 has exposed what we have known for a long time: insurance products need to be simpler, clearer and better aligned to customer needs, for both the customers’ benefit and for the benefit of those trying to administer them.
As well as rationalising products, insurers will need to review and adjust their products to meet short and longer term societal, behavioural and economic changes. This will include:
removing or adjusting products that no longer meet customer needs
removing or adjusting products that insurers can no longer afford
designing new products to cater for new or accelerating requirements.
For example, a shift to home working is likely to lead to insurers redesigning their home insurance offerings to reflect the changes in risk. Although risks such as ‘Escape of Water’ and burglary should be lower, there is likely to be an increased need for home business cover.
This is going to hurt
The economic impact of Covid-19 has the potential to lead to a deep recession reducing the number of SMEs in business and the spending power of individuals. In turn this will likely reduce demand and create a downward pressure on rates. The impact on revenue combined with challenging equity market conditions will almost certainly reduce the amount of money available to invest in product development and operational improvement.
Over the last few years, insurers have had to balance spend on regulatory compliance with the need to modernise operations. There has already been a decade of insufficient budgets or capabilities to deliver everything that is required. It is unlikely to change in the next few years. It is clear that money will need to be spent more effectively than ever before to deliver some big changes:
insurers will need to take cost out of operations, sustainably
product complexity will need to be reduced
there must be a renewed focus and investment on the basic disciplines of underwriting and claims management
increased clarity of product cover, not at a level that is understood by an underwriter or broker, but by the end customer must be delivered
the industry must move toward greater and faster digitisation and automation of internal operations and downstream processes
a significant makeover of the data and analytical models upon which insurers so heavily rely is required.
As lockdown eases, the next set of challenges begin for insurers. It is crucial that the industry learns from the last few months and invests for change appropriately. Insurers must work to increase customer confidence in the product and services that they offer. If the industry can increase engagement levels and customer trust, it has a fantastic opportunity to finally move from selling products that are bought as a grudge purchase to providing a suite of services that customers see true value in.
Please contact Alex Gurr or Al Mathie for more information on Baringa’s insurance capabilities and how we can help your organisation.
About the authors:
Al Mathie is a Director in Baringa’s Insurance Practice and Alan Coleman is a Senior Manager in Baringa’s Insurance Practice.
The authors would like to thank Alex Gurr for his contribution to this article.