Long ReadNov 14 2022

Insurers must improve customer outcomes or risk loss of confidence

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Insurers must improve customer outcomes or risk loss of confidence

But for an industry already rocked by a series of unprecedented crisis events, resulting in one of the toughest markets in insurance history, delivering on the promise to safeguard these organisations is proving challenging. 

These are problems that extend as far back as the last financial crisis where there was a huge shift in the shape of operational risk on a scale never seen before. This has now been deepened by Brexit, a global pandemic, the climate change crisis and cyber risk evolution.

Commercial insurance has been unable to grasp this impact; the industry has failed to respond to the continual pace of change over a decade and add value. 

Businesses still remain in the dark, exacerbated by policy U-turns and worrying forecasts. 

Russia's invasion of Ukraine and its global repercussions is unquestionably one of the major crises of our times. Nearly every business has felt the impact of rising energy prices, harmful inflation and seen significant increases in operating costs and severe disruptions to supply chains as a result of the war.  

Mactavish’s own business resilience survey found that 90 per cent of companies expect the Russia/Ukraine war to impact the resilience of their business, while 77 per cent of businesses have already been forced to make changes around their supply chain as a consequence of the conflict. 

Despite support for UK households in the former chancellor’s recent ill-fated "mini" Budget, businesses still remain in the dark, exacerbated by policy U-turns and worrying forecasts.

Around 5,600 company insolvencies were registered last quarter, 13 per cent higher than the first quarter of this year and 81 per cent higher than in Q2 2021. More will clearly follow unless there is additional support for businesses to assist them in the face of rapid changes to the global economy.   

Letters from the FCA  

In September the latest in a long line of Financial Conduct Authority statements criticising the industry has reiterated its expectations of insurers and called for more action to protect its customers.

The financial watchdog warned insurers to protect customers’ wellbeing during the cost of living squeeze from unnecessary products, add-ons or unfair penalties as fears emerged that customers may cut back on the insurance they need.   

It follows a letter in June sent to all market intermediaries by the regulator slamming market brokers for the “poor culture and poor value” for buyers in the market, sharing its concerns that the industry is not keeping pace with its calls for change.  

The FCA stated: “Our view of the general insurance intermediary sector overall is that there are significant risks of potential harm that both the market and individual firms need to address.” 

Insurers argued that pandemic impacts were not covered within their policies, even where wording suggested otherwise.

In a damning verdict of the industry, the regulator stated: “We continue to believe that the most significant risk of harm in the portfolio is through customers buying unsuitable or poor-value products.

"We frequently see examples of harm caused by mis-selling, where firms lack customer-centric cultures and where consumer outcomes have not been appropriately considered.  

"We want to see a market where customers are appropriately supported both in purchasing the right insurance products for their needs, and when they need to claim. We want to see products sold that offer fair value to consumers, and for there to be strong systems and controls within firms.” 

As this crisis deepens, within commercial insurance we are instead witnessing cover being withdrawn and businesses being priced out of critical covers – a problem that is being further exacerbated by broker conflicts of interest as rates rise and the main source of broker rises with them while policyholders suffer.

All these issues constitute major obstacles to business resilience in the UK.  

Business interruption insurance claims handling in the pandemic  

This cycle of behaviour was observed in the pandemic as many businesses faced unprecedented disruptions to their supply chain, business interruption losses due to forced closure, and then resistance from their insurers.  

Insurers argued that pandemic impacts were not anticipated or covered within their policies, even where wording suggested otherwise, and fought the FCA’s test case all the way through to the Supreme Court, until the decision went predominantly in the FCA’s favour.  

The FCA points to systemic failings in record-keeping, overly generic customer communications and a narrow management focus.

As a direct result of the test case, £1.5bn has now been paid out by the insurers involved to more than 36,000 small businesses.

Although this remains the tip of the Covid business interruption iceberg as it does not consider the amounts paid as a proportion of the losses suffered and omits those with policies outside of the FCA’s scope – as demonstrated by recent mixed judicial decisions on much larger claims by firms like Greggs and the Stonegate pub chain). 

This issue has a long way to run yet. Even within the FCA’s action, three years on from Covid the FCA has announced that even those policyholders whose claims were accepted are still facing delays due to these insurers’ ongoing failures in processing and handling claims.

The FCA points to systemic failings in the insurer policy record-keeping, overly generic customer communications and a narrow management focus on final financial outcome.   

Claims handling is a key part of the customer experience with insurers, and the FCA has said, where necessary it will use “all regulatory powers available to address the issues identified”. 

Past crisis events have exposed limitations, and current insurance practices are now rightfully under the microscope.

In its most recent statement published last week, the FCA added: “We are not complacent, and today’s report is clear that, while we have observed good practice, there are lessons to be learned for the handling of all claims. 

"As consumers and businesses across the country are affected by inflationary pressures and the rising cost of living, it is crucial that insurers are handling claims promptly and treating customer fairly."

The role of insurance in times of crisis  

The primary role of insurance is to provide protection against financial loss from unforeseeable or unlikely events. However, past crisis events have exposed the limitations of this model and current insurance practices are now rightfully under the microscope.

Commercial insurance pricing in the UK has continued along an alarming trend during 2022, with UK commercial premiums now having seen more than four years of uninterrupted price increases.

UK companies are on average paying premiums that are double what they were in 2019, and up to three to four times more in the most difficult areas of insurance such as financial lines and cyber, according to Marsh McLennan.   

Not only are companies paying much more for their insurance, it also provides much less protection.

The problem is that this comes at a time when companies are more exposed to risk and require more accessible support. Instead, the industry’s response has been characterised by a withdrawal of capacity.

There are more cover restrictions, more disputes and higher prices that are creating enduring hardship for policyholders, rather than building an understanding of clients’ risk and working together with them to manage and reduce it. 

Not only are companies paying much more for their insurance, it also provides much less protection.

At the root of this is an insurance system that has prioritised low transaction costs and over-standardised policies above risk understanding and reliable insurance policies. This approach is not fit for purpose and at odds with the environment we now find ourselves in.

Insurance can simply no longer be viewed as a commodity purchase, but as a key financial component of a company’s capital structure. One that has tremendous value, but one that requires attention to structure properly and reliably. 

The industry must therefore accelerate its transformation to propose adaptable solutions to increasingly volatile risks.

This testing time is instead risking an unprecedented loss in confidence in the insurance market as a whole.

It must demonstrate genuine understanding and create a partnership approach that helps protect against the unpredictable and reduces client risk over time, encouraging good risk management practices rather than a blanket withdrawal of coverage and indiscriminate price increases.

The more partnership-oriented brokers and insurers there are, the greater the opportunity for differentiation and the greater the challenge to the status quo, acknowledging the FCA’s request for an industry with client wellbeing at its core. 

The insurance industry is meant to be a bedrock, yet this testing time is instead risking an unprecedented loss in confidence in the insurance market as a whole, with those companies unable to pass on increases to consumers unlikely to be able to absorb a shortfall in insurance recovery if they suffer a major loss.

Any further loss of trust would be hugely damaging for British business.  

Bruce Hepburn is chief executive and founder of Mactavish