At a glance:
This blog explores the implications for firms of the FCA’s recently announced package of measures to protect insurance customers affected by COVID-19. These include seeking, through a test case, legal clarity on business interruption (BI) cover; requiring firms to revisit the value of their products; and requiring firms to offer temporary financial relief to customers.
Key implications for firms:
The measures demonstrate the FCA’s willingness to take extraordinary measures to protect, and provide clarity to, customers in light of the conditions created by COVID-19 and represent a sharpening of its existing focus on customer outcomes and value for money.
Firms need to review existing BI and non-investment products to understand where they need to take action to deliver fair outcomes and good value, as well as offering temporary relief to customers experiencing financial distress.
Data analytics may enable more efficient analysis of customer circumstances and optimal allocation of firms’ scarce resources.
Firms need to ensure there is appropriate Senior Manager oversight of the product review process and prioritise putting in place appropriate data, MI and governance to monitor customer outcomes and manage any prudential strain on the business.
Who should read this blog?
Board members and senior executives of insurance firms, including but not limited to CEO, CRO, CCO and CUO
Reading time: 8 minutes
The FCA’s test case
The FCA is seeking a court declaration to resolve contractual uncertainty about BI insurance cover; it cites “widespread concerns about the lack of clarity and certainty for some customers making business interruption claims, and the basis on which some firms are making decisions in relation to claims”. The FCA is clear that “most SME insurance policies are focused on property damage […] so, at least in the majority of cases, insurers are unlikely to be obliged to pay out in relation to the coronavirus pandemic”. However, it recognises that some BI policies may provide cover for other causes, for example, notifiable diseases. There may also be instances where firms and customers disagree about the meaning and scope of policy wording and hence whether a policy provides cover.
The FCA has identified 19 sample policy wordings capturing the majority of the issues in dispute to be examined in the test case. The result of the test case “will be legally binding on the insurers that are parties to the test case in respect of the interpretation of the representative sample of policy wordings considered by the court”. For the rest of the industry, the FCA has published guidance requiring insurers to review their policy wordings against those it intends to test in order to identify any policies affected by the outcome of the case. Following the final resolution of the test case (including any appeals), firms will be expected to apply the judgment(s) in (re-)assessing all outstanding or rejected claims and complaints affected by the case.
The FCA’s actions are aimed at resolving contractual uncertainty, for both insurers and the insured, as quickly as possible; consequently, firms will need to consider carefully the implications should any of the judgements go against insurers. The FCA is proposing to give firms just three weeks to review which of their policies may be affected by the outcome of the test case, from the date its guidance came into effect. It intends to publish a list of all the relevant insurers and policies that may be affected in early July. Consequently, firms will need, as soon as possible, to identify which policies may be affected.
Firms should be particularly mindful of the FCA’s expectations that they appoint a senior manager to oversee the review and have clear documentation of their review available. Senior managers should document the steps they take to ensure the review is thorough and record the rationale behind, and governance around, key decisions taken as these may be subject to future supervisory scrutiny and review, particularly where they relate to customer outcomes. More detail on the steps senior managers can take to demonstrate that they have discharged their duties appropriately during COVID-19 can be found in our blog.
The FCA has highlighted the potential ambiguity in some BI contracts, leading to a potential gap between firms’ and customers’ understanding of what they thought was covered by a policy. In addition to monitoring complaints to understand the issues being raised, firms should consider further deep dive reviews of the sales process and product literature to confirm these met regulatory expectations and delivered expected customer outcomes.
The US example
In the US, both individual state and federal legislators are considering whether to amend laws to override exclusionary language on insurance policies, compelling insurers to cover COVID-19 related losses regardless of contractual liability. A number of US states, including New York, New Jersey and Pennsylvania, have put forward legislation that would require insurers to provide retrospective business interruption cover for COVID-19 related losses.
Such proposals have the potential to create considerable financial strain on insurers, particularly as many will not have priced for COVID-19 related losses. And, although the UK government has said it will not seek retrospectively to amend contracts, the US states’ bills could, if passed, create further pressure on firms, from a reputational standpoint, to pay out COVID-related BI claims. Insurers should therefore continue to monitor these developments closely in order to understand what, if any, reputational pressures they may create for BI claims pay-outs in the UK.
Product value in light of COVID-19
Consistent with its wider focus on value for money, the FCA has published guidance requiring insurers to assess whether their non-investment insurance products (including those offered as part of a packaged bank account) are still offering value in light of COVID-19, and take appropriate action, if not.
Where firms identify something that could materially affect the value of a product, the FCA expects them to consider the appropriate action to take. This may include changing how benefits are delivered and reducing or refunding premiums. Examples where there is a high risk of poor value include those products that cannot deliver a benefit or where there has been a reduction in the chance of the underlying insured events happening.
The FCA is giving insurers until 3 December 2020 to complete their assessments and decide on appropriate action. Whilst the assessment of value can be done at a product level, it will nevertheless, be a complex task as it will vary according to the product type and (changing) circumstances of the target market. It is likely to be a significant undertaking, particularly for firms that are exposed to different lines of business affected by COVID-19. Firms will need to develop (or adapt) a methodology and consider how they can leverage data and analytics to assess how the value of each relevant product has been affected by the pandemic before deciding on the appropriate action
The FCA has been clear that its priority in supervising its guidance will be to ensure that customers are getting the right outcomes. Accordingly, firms will need to ensure appropriate governance, including senior manager oversight, of the product review process as well as documenting the outcomes of the assessment and decision-making process.
Customers in temporary financial difficulty
The FCA has also issued guidance for firms aimed at protecting non-investment insurance customers who are in temporary financial difficulty as a result of COVID-19 and hence vulnerable. Where a firm has identified such customers, they need to consider what options they can offer. This may include re-assessing the risk profiles of customers and considering, for example, whether they could be offered lower premiums or whether there are other products that would better meet their needs and revising cover accordingly. In particular, to avoid cancellation of insurance cover due to financial distress, the FCA expects firms to offer payment deferrals for insurance premiums, where appropriate.
For many customers the measures provide much needed breathing space, but insurers, particularly those with low profit margins and small capital buffers, need to manage carefully the potential financial strain created by them. Furthermore, whilst the FCA has been clear that it only expects firms to offer temporary measures to those who contact them or miss payments (rather than all customers who may be vulnerable), identifying which options will be appropriate for individual customers, and communicating these effectively, will create some operational pressure on firms. Firms will need to prioritise ensuring they have robust data, MI, outcomes testing and governance in place to monitor the customer outcomes and to manage any prudential strain on the business. Where a claim is made on a policy during a deferral period or where other forbearance measures are in place, firms can deduct outstanding premium repayments from sums due.
The guidance will remain in force for 3 months from inception and we expect the FCA’s focus to turn to how firms treat their customers when temporary measures come to end, particularly where they may need ongoing support. For example, the challenges of re-assessing the changing risk profile of their customers and determining, and communicating, necessary changes to pricing and cover. To understand the scale of the challenge, and plan their resources accordingly, firms will need to understand whether analytics can help identify how customers circumstances have changed, for example, assessing the ratio of customers for whom policy changes/forbearance measures have been granted against those still paying full premiums.
The package of measures announced by the FCA is extensive and, whilst they mirror steps that the FCA has taken in other markets such as credit cards in light of COVID-19 (see our recent blog), they represent a sharpening of the focus the FCA has placed on customer outcomes and the value for money, in the general insurance sector.
The measures require firms to take immediate action to review their products and provide vulnerable customers with financial relief in light of COVID-19, and are likely to add to the financial and operational strain that insurers are currently experiencing as a result of the pandemic. To optimise their response to the measures, firms could consider the following actions:
Senior manager oversight- appoint a senior manager to take overall responsibility for product reviews generally, bearing in mind this is a clear regulatory expectation in relation to BI policies, and ensure that the review focuses on the achievement of fair customer outcomes, rather than adherence to processes alone.
Product and value for money assessments- consider what changes, if any, are necessary to product review process and value for money assessments, including governance and decision-making and training.
Data/MI and outcomes testing- review available data and MI to ensure they are able monitor changes to customers’ circumstances and that it is sufficient to confirm that customers are achieving fair outcomes.
Customer journey- leverage available data and analytics to understand how customers’ circumstances might change in the future and to plan their resources (e.g. call centre staff) accordingly.