The report, says the dispute between clients and insurers over Covid-19 claims highlights this growing problem, and how the industry is failing business.
Bruce Hepburn, CEO, Mactavish said: “Insurers refusal to cover Covid-I9 impacts – against the context of ambiguously-worded business interruption policies – echoes wide client experience across all complex insurance classes. Clients are being let down by policies that are not fit for purpose. In an age of growing complexity, rather than crafting highly-targeted wordings designed to meet clients’ unique requirements, brokers and insurers are increasingly developing one-size-fits-all approaches. Worse, the basis for those standardised policies is often unnecessarily complex and isn’t readily understood by the policyholder. With Covid-19 for example, many companies find they are covered against the unlikely event of bubonic plague but not against new diseases like coronavirus.”
“Too often, generic policies are not being adapted – partly due to a scarcity of sufficiently skilled underwriters and brokers – leaving policy wording ambiguous and with significant gaps in coverage. This enables different inferences to be drawn as to whether a provider should or shouldn’t pay out on claims – as seen with Covid-19 and many other complex claim disputes. This is the rule, not an exception.”
The report says Covid-19, tighter governance rules and regulations facing employers, more global trade barriers and growing business complexity are all increasing the need for more transparent, clear and targeted insurance cover – just as standardisation is becoming the industry norm.
Theoretically clients could point out policy flaws at the point of signing, but Mactavish says most clients – and the majority of brokers – can’t understand the wording of their policies because of the legal language used and their multiple – and far too often contradictory – endorsements, extensions, exclusions, definitions, conditions and ‘side letters’. Furthermore, a growing lack of investment in technical skills in both UK insurance broking and underwriting has made it much harder to amend policies to meet the specific needs of clients.
Mactavish warns that these generic policies are rolled out across vast distribution networks, and sold to clients, with little regard to their sector, size or individual characteristics. Such off-the-peg policies may cost less for brokers and insurers to produce but it says those savings do not translate into valuable insurance purchases for policyholders.
Bruce Hepburn added: “Counter-intuitively, standardisation does not necessarily lead to simpler and clearer policies. As the FCA’s High Court test case has shown, some of these standardised policies are so complex that the finest legal minds in the country can’t disentangle exactly what they mean in practice. The average D&O policy – one of the shortest contracts – is more than 20 pages long and will involve numerous endorsements and exclusions, all written in very insurance-specific legalese. Such additions are themselves often standardised, meaning the client is left to decipher an overlapping and contradictory set of documents – much of which may be inappropriate for the risks for which the policyholder is seeking protection, and commonly fail to dovetail as intended with other parts of the policy.
“When policyholders, brokers or underwriters do want to amend a wording it is often impossible to do so. Clients without a legal or technical background now often have no chance of deciphering their own policies. Faced with such complexity, even the most sophisticated buyers are out of their depth in a specialist legal area and are overly dependent on their broker. However, our research shows that many brokers are not used to completing this type of analysis, and their incentives can be allied with the insurer where joint underwriting schemes managed by brokers are common. This is a legal disgrace; exposing non-legal specialists to such a morass is unethical and abusive.
“Also, the side-lining of the technical skills base of both broking and underwriting means few in the industry now have the capability to understand over-complex policies or to adapt them to meet client needs.”
Mactavish says that to address the failings of the insurance industry, buyers must lead the demand for change.
Bruce Hepburn added: “The industry will not reform itself and the FCA will not insist on it. Flawed policies lead to disputes between insurers and clients, a breakdown in trust, and the further commoditisation of insurance. This negative cycle must be broken or, as rival centres gain ground, the London market will decline.
“The extent of this ‘serious problem’ means buyers must act. They need to challenge the insurance industry for selling it products that not only don’t meet their needs but are sold in an incomprehensible way that would be unacceptable for any other complex financial product. Only buyers, collectively, have the muscle to achieve the necessary change in practices and products.
“With recent corporate governance regulation meaning boards have a greater responsibility for managing risk, executive directors – rather than lower-level employees – are expected to take a bigger role in overseeing insurance. Their louder voice and greater clout might finally get brokers and insurers to sit up and listen – and pushing back on policy standardisation would be a great place to start applying pressure.”
Mactavish warns that Covid-19 could be the tipping point for the UK insurance’s position as a global market leader. It says as the UK returns to work in the shadow of a major recession, the insurance industry will face further challenges. Unprecedented business uncertainty, a huge anticipated spike in claims – particularly in D&O, Pension Trustee Liability, PI, PPL, and employers’ liability insurance – and diminished insurer reserves could lead to massively-reduced capacity across some classes and further erode the quality of available cover as prices rocket.
Bruce Hepburn said: “Coming in the wake of the major fracture in trust between the real economy and insurers around the Covid-19 dispute it’s essential that the industry puts its best foot forward. In the long-run, a high cost centre such as London cannot thrive on selling cheap, off the peg policies.”
A copy of Manufacturing confusion: The dangers of policy standardisation can be downloaded for free
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