Briefing: Hiscox’s brand is hurting, so why doesn’t it pay the claims?

Briefing by Saxon East 

Hiscox,which last week faced yet another law firm promising action on its BI claims, has had some brilliant marketing and advertising campaigns.

One of their most well-remembered adverts urged growing businesses to ‘become a bigger fish, without getting fried’.

Ironically, this is exactly where Hiscox now finds itself. Once a Lloyd’s player focused on catastrophe and reinsurance, Hiscox has grown substantially over the last decade. From nothing 20 years ago, retail is now the biggest proportion of its business (see graph).

Now Hiscox has fallen victim to the oft-spoken industry truism: fast growth frequently leads to big problems. 

While it was claims and fraud that nearly downed the once great Lloyd’s syndicate Equity Red Star following its ill-timed foray into price comparison sites and direct selling, it is weak policy wording that is causing Hiscox trouble. 

Hiscox has put out some initial estimates of BI claims exposure, which give an idea of the initial size of the challenge.  

Hiscox could argue, with some justification, that other UK insurers are facing exposure to business interruption claims and receiving less attention. 

The distinguishing factor here is that they are generally larger insurers more equipped to absorb the cost, and secondly, they have not spent so much brand capital on building a reputation for paying claims. 

This strikes at the heart of the issue for Hiscox: with its brand equity draining away by the day, why doesn’t it just pay all the the disputed claims? 

FOS tough 

Hiscox is well-equipped for volatility and designed to take large loss hits from catastrophes. 

The longer this goes on, the more costly it could potentially become. 

If Hiscox customers fold while waiting for a pay out, then it is possible Hiscox could face even greater claims.

Other claimants may take their case to the Financial Ombudsman Service (FOS) for adjudication, and as one senior executive with a lot of experience told me recently, generally speaking, that is not where you want to be.

The FOS will side with the customer unless the insurer can prove its reasons for declination are clear and proportionate. 

The counter to all this is that Hiscox believes its arguments are sound: its policies do not provide cover for this pandemic. 

The final process - whether it is the FCA, courts or even FOS arbitration will uphold their arguments. 

Damage to its brand equity is the price it will have to pay. 

Large final payouts

But maybe there is another issue at stake here - could the final pay out, for all insurers including Hiscox, prove to be significantly more costly than we realise? 

The excellent Willis Towers Watson report, sizing up the potential insurance costs, cites that the UK is exposed to a maximum of $13.9bn. 

Even its moderate assumption of losses are pegged at $7bn. 

The sums are vast. To put that in context, the 2007 flood insured losses in the UK were £3bn.

So where are all these losses coming from exactly? The reported exposure of UK insurers outside of Lloyd’s has been quite small so far. 

But if the final judgement process on the Covid-related BI claims turns out in favour of the customer, then UK insurers could face immense claims losses. 

Time will tell whether Hiscox ends up being one of those fish getting fried or not.