Wordings
Starting with some immediate implications of the COVID-19 pandemic, recent claims experience will be leading many insurers to reconsider their policy terms and exclusions, particularly for event cancellation, trade credit and business interruption insurance.
UK insurers’ experience of the recent FCA business interruption test case litigation1 has pointed up the tension between the need for certainty (and the use of precise terminology) in policy wordings against the need for sufficient flexibility to accommodate unforeseen events and thus offer value to policyholders.
In France, the Autorité de Contrôle Prudentiel et de Résolution (ACPR) performed a survey to analyze the wording of a number of insurance policies including “business interruption” guarantees. This survey revealed that 93% of policies with such cover do not address the consequences of the COVID-19 pandemic and only 3% of policyholders would be entitled to receive compensation. The ACPR identified that for 4% of the policies it was insufficiently certain whether the contractual clauses provided coverage. In these cases, a court ruling would be needed to clarify the uncertainties. As a result, the ACPR urged insurers to review the wording of all unclear contractual clauses and seek the consent of policyholders to make appropriate changes to policies that are still in force and require amendment.
Much legal ink has been spilled determining the meaning and effect of specific non-damage business interruption extensions and whether they should respond to COVID-19 losses. In reality of course no draughtsman could have anticipated the events of the last year, nor the fact that Governments across the world would impose lockdowns and close economies in the battle against the pandemic.
Insurers across the globe will now be reviewing their wordings in light of legal rulings on policy coverage for COVID-19. Whilst exclusions may appear the clearest solution, there are issues to consider. For example, to what extent should new exclusions focus less on ‘pandemic’ risk and more on ‘government actions’? In one sense, commercial sector COVID-19 losses have been caused as much by Government response to the pandemic as by the pandemic itself. Now that ‘lockdowns’ (previously unthinkable) appear to be an accepted crisis response tool for Governments, what provision should insurers be making for this across different business lines?
Economic recovery and addressing the protection gap
Recent experience has highlighted the central role insurance plays in facilitating commercial activity through effective risk transfer and the insurance sector has a crucial role to play in the post-pandemic economic recovery and beyond.
Lloyd’s, the world’s leading specialist insurance and reinsurance market, recently published a number of ways the insurance industry could fast-track global economic and societal recovery from the far-reaching impacts of COVID-19.
The proposals include solutions for the reopening of businesses against the threat of further waves of COVID-19, building greater resilience across global supply chains as well as the digital economy, and preparation and protection for the next systemic catastrophic event.
However, to overcome the challenges of offering protection for systemic risks at scale, the insurance sector will need to work with Governments to combine (re)insurance capital with capital markets resource and sovereign funds to provide the necessary security and capacity to pay claims.
In the UK a number of possible solutions are under discussion, including ReStart (pooled insurance capacity to protect customers against a second wave of COVID-19); Recover Re (a Government-backed vehicle offering long term ‘after the event’ cover that could insure against COVID-19 as well as future pandemic risks); and Black Swan Re (a Government-backed vehicle to insure against future systemic risks).
In France, the Government had, at one time, considered implementing a compulsory insurance scheme (based on a public-private partnership covering the administrative closure of companies). This was inspired by existing schemes for the coverage of natural disasters or terrorist risk and the Government went so far as to prepare a draft bill. However, the project was shelved in December 2020. The French Government is now considering a scheme to encourage small and medium-sized companies whereby companies holding greater cash reserves would benefit from an advantageous tax regime. For large companies, the Government is considering encouraging the creation of captive insurance companies.
Accelerated change
Arguably, the last year has demonstrated the need for better understanding – both within business and in Government – of the nature of insurance, how it operates, what it covers and its limitations. Equally, there are lessons for insurers to learn about what customers expect of their insurance cover. Amongst small business policyholders there is, in the UK in particular, some reputational damage for insurers to repair.
At the same time the pandemic has been an accelerator of change both within the insurance sector and beyond. Increased digitalization, changing working patterns and supply-chain and cyber risk challenges, all prompted by COVID-19, are leading to changing demands amongst purchasers of insurance. This presents opportunities for the insurance sector. Parametric insurance, smart contracts and pay-to-play insurance are all likely to be growth areas.
COVID-19 has been an inflection point for the industry; yet despite the challenges of the last year, fresh opportunities abound.
Authored by Sébastien Gros and Lydia Savill.
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The Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others [2021] UKSC 1 on appeal from [2020] EWHC 2448 (Comm)
