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How the insurance market is responding to COVID-19

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Duncan Philpott , Joanne Cracknell and Paul Afteni | June 17, 2020

As the UK approaches the next phase of the coronavirus crisis (COVID-19) many questions are being asked.

The global economy faces massive challenges from coronavirus. The effects will be profound, and will be felt by millions of consumers and businesses (FCA)1

As the UK approaches the next phase of the coronavirus crisis (COVID-19) many questions are being asked about the impact the pandemic has had on the economy and financial markets and what the future may hold post COVID-19.

We have witnessed the significant disruption COVID-19 has caused to daily life over the last few weeks, resulting in severe financial difficulties for many individuals and businesses. However, the magnitude and duration of the pandemic remains uncertain.

Businesses have been turning to their insurers to assist them during the crisis but to date the response from the insurance industry, who has a key role to play in supporting its customers throughout the pandemic and beyond, has been limited.

Concerns facing the insurance industry

There has been uncertainty around coverage for losses arising from COVID-19. Until recently the need to insure against the risk of a pandemic, for some, was considered to be a non-essential business expense. The financial services regulators are working collaboratively with the Government to ensure firms are supported in order to protect consumers, businesses and the economy.

An area of concern has been the responses from insurers to the numerous business interruption claims. During the pandemic the insurance industry has seen a vast increase in the number of claims with the added expectation of responding to those claims positively and swiftly. However, some insurers have been issuing blanket declinatures in respect of business interruption policies rather than examining each claim on the facts of the case. This approach has resulted in criticism of the industry.

The Financial Conduct Authority (FCA) issued guidance2 to insurers setting out its expectations with respect to insurers’ conduct during the pandemic, especially in relation to business interruption insurance.

The Financial Ombudsman Service (FOS) understand that insurers are facing a unique situation and when considering the relevant policy terms they expected insurers to 

“think beyond a strict interpretation of the policy terms and consider carefully what’s fair and reasonable in each case, taking into account the unprecedented situation”3.

It is appreciated that insurers are finding themselves in uncharted territory, and in order to try and minimise the levels of uncertainty, the FCA confirmed that it will seek clarity from the courts on the extent to which business interruption insurance should be responding to losses suffered as a result of the virus4.

Given the number of claims, the approach being taken by the FCA may be the most sensible way to resolve the common issues given the length of time it takes to deal with litigation and the high level of costs involved, both of which are limited during the current climate and are likely to remain so for the foreseeable future. It is accepted that the outcome of the action being taken by the FCA will not resolve all the issues, but it will hopefully provide some certainty for all concerned.

The FCA Business Plan

The FCA published its Business Plan for 2020/20215 last month which sets out its plan for the next three years and part of that plan focuses on managing the threats of COVID-19 by ensuring that:-

  • Markets are functioning well
  • The most vulnerable are protected
  • The impact of firm failure is minimised
  • Scams are tackled
  • Consumers and small firms are treated fairly

In addition to the Business Plan the FCA has developed a dedicated COVID-19 section on its website6 for its regulated sector and consumers.

Other areas of concern

In addition to the issues around business interruption insurance, other areas of concern where the financial services sector may be at risk of complaint or claim arise from the following:-

Fraud and cybercrime

The FCA recognises the need to reduce financial crime, including money laundering and fraud such as investment fraud and insurance fraud, and the pandemic is likely to create opportunities for fraudsters.

The financial services sector may witness an increase in fraudulent claims, employee fraud, the use of third parties who have not been sufficiently vetted and screened, misappropriation of assets and duplicate and/or false invoicing for work not carried out as consequence of the new remote working environments, with business leaders focusing their resources on operational resilience rather than compliance.

Cybercriminals are also exploiting the COVID-19 pandemic and remote working. Both the FCA and FOS have issued information about the increase in pandemic related phishing attacks and scams for both its regulated community and consumers7.

Vulnerable clients

Firms need to be even more aware of the need to treat vulnerable consumers fairly which should already be embedded in their culture. Consumers previously not considered vulnerable may now fall within the FCA’s definition of a ‘vulnerable consumer’8 and are facing financial hardship as a result of COVID-19. Additional measures will be needed to protect consumers that have been affected by the virus to ensure that they are treated fairly and consistently.

Firms should be identifying consumers that may potentially be at risk of being a vulnerable consumer at an early stage, to make sure that they receive appropriate advice and are aware of the risks and options available to them. This will include ensuring that consumers are not becoming too indebted and are not being given credit that they cannot afford, and are not being exploited by excessive fees and charges.

Effective investment decisions in a volatile market

The economic impact of the pandemic is unpredictable, and this uncertainty has resulted in the financial markets globally becoming extremely volatile. Investors’ appetites may also vary during this period of uncertainty and severe global recession. It is essential that firms who are advising businesses and consumers about investment products continue to provide the best possible information, especially in relation to the risks of investing when markets are volatile. Firms need to ensure that the products they are advising upon continue to be appropriate for their consumers’ needs, delivers value for money and are marketed in a fair and non-misleading way to avoid the risk of any future complaint or claim about mis-selling.

Complaints and COVID-19

It is not surprising that in the current climate the level of COVID-19 related complaints have increased. FOS is currently dealing with complaints arising from the pandemic and they are expected to rise, especially complaints about insurers. However, complainants are being warned to expect delays in dealing with and responding to their complaints as a result of unprecedented working practices9.

In the event that these complaints are dealt with by FOS then the settlement awards will vary to the limits applicable at the time of the advice given, which will potentially have a significant impact on firms and their insurers both financially and reputationally.

The FCA has recently published guidance on handling complaints during the COVID-19 crisis and it is understood that this will be reviewed in three months time10.

The FCA expects firms to take all reasonable steps to continue handling and investigating complaints competently, diligently and impartially. They will take robust action against any firm seeking to take advantage of the pandemic and fail to meet the minimum requirements. Firms will need to ensure that policies and procedures are operationally resilient and adequately deal with the new challenges they face from the COVID-19 crisis and beyond.

For the financial year up to an including 31 March 2020 (just prior to lockdown) the level of fines imposed by the FCA was just over £224m11 and this figure could increase as a result of COVID-19. It may be that firms are not intentionally failing to meet the minimum standards because of working in such unprecedented times, but the evidencing of action taken and documenting the decisions made will be what determines whether enforcement action will be pursued or not.

Next steps

It was announced on 15 May 2020 that the FCA are now inviting policyholders and intermediaries to make submissions12 setting out their arguments why they consider business interruption cover should be made available. The deadline for these submissions is Wednesday 20 May 2020.

It would appear that the FCA are currently focusing on insurers rather than brokers for now, which provides some assurance from the intermediary perspective. However, we do not know what will happen next.

There is much uncertainty about what impact COVID-19 will have on the insurance industry and the financial services sector and what the post pandemic landscape will look like. For now we will have to wait and see what the court’s response will be to the FCA’s request for clarity in relation to the business interruption policy wording, and the outcome of the first wave of COVID-19 related complaints being dealt with by FOS to fully understand the true effect the pandemic has had and how to successfully minimise the risks and challenges going forward.

Footnotes

1. Financial Conduct Authority. (2020). Business Plan 2020/21. Retrieved from https://www.fca.org.uk/publication/business-plans/business-plan-2020-21.pdf

2. Financial Conduct Authority. (2020). Retrieved from https://www.fca.org.uk/publication/correspondence/dear-ceo-insuring-sme-business-interruption-coronavirus.pdf

3. Financial Ombudsman Service (2020). COVID-19 (coronavirus): information for financial businesses. Retrieved from https://www.financial-ombudsman.org.uk/businesses/complaints-deal/complaints/coronavirus-COVID-19-information-businesses

4. Financial Conduct Authority. (2020). FCA statement - insuring SMEs: business interruption. Retrieved from https://www.fca.org.uk/news/statements/insuring-smes-business-interruption

5. Financial Conduct Authority. (2020). Business Plan 2020/21. Retrieved from https://www.fca.org.uk/publication/business-plans/business-plan-2020-21.pdf

6. Financial Conduct Authority. (2020). Coronavirus (COVID-19). Retrieved from https://www.fca.org.uk/coronavirus

7. Financial Ombudsman Service. (2020). Avoiding fraud and scams: help from the ombudsman. Retrieved from https://www.financial-ombudsman.org.uk/data-insight/insight/avoiding-fraud-and-scams and Financial Conduct Authority. (2020). Avoid coronavirus scams. Retrieved from https://www.fca.org.uk/news/news-stories/avoid-coronavirus-scams

8. Financial Conduct Authority. (2019). Guidance for firms on the fair treatment of vulnerable customers. Retrieved from https://www.fca.org.uk/publication/guidance-consultation/gc19-03.pdf

9. Financial Ombudsman Service (2020). COVID-19 (coronavirus): information for consumers. Retrieved from https://www.financial-ombudsman.org.uk/coronavirus

10. Financial Conduct Authority. (2020). Firm handling of complaints during coronavirus. Retrieved from https://www.fca.org.uk/firms/firm-handling-complaints-during-coronavirus

11. Financial Conduct Authority. (2020). Business Plan 2020/21. Retrieved from https://www.fca.org.uk/publication/business-plans/business-plan-2020-21.pdf

12. Financial Conduct Authority. (2020). Business interruption insurance during the coronavirus pandemic - High Court test case. Retrieved from https://www.fca.org.uk/news/statements/business-interruption-insurance-during-coronavirus

Authors

Executive Director, Finex Global

Associate Director - Finex PI UK Legal Services

Head of Financial Services PI

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