Win or lose, the FCA test case on BI claims will not be good for insurers

When the FCA announced it was taking a test case to the High Court to provide clarity on the confusion around business interruption claims in the wake of the Covid-19 pandemic, insurers were worried, with one broker describing the regulator’s stance as “damaging and bizarre”.

These concerns were not just because the case could place insurers on the hook for millions of pounds of claims that the industry hadn’t underwritten or collected premiums for when considering the risks, but also because of the reputational havoc it would wreak on an industry already suffering from a low standing among customers.

PR consultant Mark Bishop said that while the case may help with the underlying issue of determining whether or not claims should be paid, the legal case would do nothing to help the reputation of insurers.

“The reputation of the industry has always been fragile, and the furore over business interruption claims means any goodwill that did exist has been severely challenged by what customers have heard and seen in the media,” he said.

“It is hard to imagine a time when the reputation of the industry has been at a lower ebb than it is right now.

“The FCA stepping in to try and bring some legal clarity to the situation may help with the underlying problem, but it really only shows the wider world that the industry needs a regulator to get it to do the right thing.”

Despite the test case being scheduled for next month, legal challenges are likely to be ongoing for some time, with appeals likely from either side should they lose this first battle.

“Legal cases against some of the industry’s biggest brands are likely to go on for some time, and that attracts more negative media coverage,” Bishop added.

“And even if the industry goes on to win these cases and potentially save millions in claims, it will do nothing positive for the perception of the industry.”

RSA group chief executive Stephen Hester has already said that the industry “did not intend to underwrite pandemics” in business interruption policies, but Bishop said insurers had shot themselves in the foot with some of the terms used in selling the policies to businesses.

“Clearly, business interruption policies are not designed to pay claims arising out of a pandemic, and the regulator has said as much,” Bishop said.

“The sheer cost [of paying these claims] would have presented the industry with a significant solvency problem, but clearly the term business interruption affects customer expectations that their claims should be paid.”

To address this misunderstanding between the expectations of what a policy does and doesn’t cover, Bishop said the industry needs to go “back to basics” and look at the principles that underpin the meaning of insurance.

“The contract with the customer is based on the principle of utmost good faith, and that cuts both ways,” he said.

“I’d like insurers to look at what that principle really means in the culture of their own organisation and how it should shape their behaviour and communication with customers going forward.

“It is not new for questions to be asked about the wordings in insurance policies. The words small print are absolutely synonymous with the insurance industry, rightly or wrongly, so clearly that is another area where insurers should be looking to make sure they have done as much as they can to make what are pretty complex documents as clear and as easily understood as possible.”

And it is here that Bishop believes brokers can help both customers and the insurance industry as a whole.

“Brokers have a huge role to play in this, in that, especially in commercial insurance, because they are the touchpoint with the customer,” he said.

“So the more they can do to explain what is and what isn’t covered, then hopefully we won’t see situations arise where there is mass confusion, with customers thinking they are covered and insurers saying that’s not what these policies are meant to cover at all.”

In the consumer market, the storm has not hit as hard, and Consumer Intelligence chief executive Ian Hughes said that, for now, the industry’s reputation with personal lines customers has remained steady during the pandemic.

“Levels of trust in insurance from a consumer perspective have stayed relatively constant throughout this crisis,” he said.

“The Admiral effect of giving people money back on their car insurance has helped a bit, and we’ve seen people like LV= with their blue hearts for the NHS on a Thursday.”

But that does not mean that personal lines insurers do not need to worry about the state of their reputation, and Hughes said that it had still been interesting to see how what customers want and what insurers are doing are “not necessarily aligned”.

As an example, Hughes said that 42% of customers were in favour of premium refunds on motor insurance during lockdown, but that 52% of people want their insurer to refrain from hiking their prices up at renewal.

“You can see that while people would like to get a refund, what they really would like is to have their price not go up at renewal,” he said.

“So repuationally, the story is yet to be written in the consumer market, because what happens at renewal will really take a toll from a reputation perspective.”

And Sicsic Advisory associate director Rhiannon Harfoot said the pandemic had exposed the insurance industry for its lack of customer centricity and an over-reliance on historical data, meaning that the needs of customers often fell by the wayside as insurers responded to the early days of the crisis.

“It is during a crisis that you see the true cultural colours of an organisation,” she said.

“It really exposes that culture and what is driving their decision making, and what we have seen during the coronavirus crisis is that the default position is for insurers to fall back and be guided by the numbers, rather than looking at what they can do to create the best outcome for their customers.

“While we have seen organisations putting in place some very key actions to demonstrate that customers are font of mind, that will only go so far.

”It is critical that an organisation is authentic in its customer-centricity, because delivery of the odd action here and there will be seen through for what it is, by both customers and, critically, staff.”

Time to Listen

Consumer Intelligence’s Catherine Carey said insurers needed to make sure they were listening to their policyholders in order not to make an already bad situation worse.

“If insurers are not listening to their customers then they are really going to struggle to get things right,” she said.

“And from a reputation perspective it is all about how people feel. So if they feel they are listened to, that they are respected and their needs are being responded to, then the perception of the insurance industry will only improve.

“But what I feel we are seeing from insurers at the moment is what they want to give customers, rather than what their customers are telling them they want.”

Hughes agrees, and said that the problem has been exacerbated by a race to the bottom on price.

“Most insurance companies for the last decade or so have focused almost exclusively on trying to take as much cost out of the product in order to get the price to the lowest possible point,” he said.

“And in taking those costs out they have also taken service out, and they have reduced the number of contact points.

“But what that means is that when it came to creating communications for their customers, they didn’t really know what to do, where to go and what their tone of voice should be.”

To change this, insurers need to get to know their customers better and improve the communication they have with their customers.

“What our research has found is that insurers that do engage with their customers have higher levels of loyalty, higher levels of retention and higher levels of reputation with their customers,” Hughes said.

“That’s because they have that tone of voice right and can communicate with their insurers with authority.”

But regardless of what message an insurer decides to put out to market, Harfoot said it is essential that it coincides with the purpose of the business, and that it is backed up by real, tangible actions.

“Insurers need to have a clear purpose strategy and to support a culture that is truly focused on delivering the right experience to customers and the right outcomes,” she said.

“Any effort to rebuild the industry’s reputation needs to start with having a genuine purpose that says this is what we do and why we do it, and that needs to be about more than a strong commercial performance.

“That then needs to be backed up by the way the company acts and by the way its people behave.”

Ultimately, Bishop hopes that regardless of business line, the coronavirus crisis can serve as a wake-up call that things need to change. Sadly for the insurance industry, however, there is not going to be an easy solution to this age-old problem.

“I hope the crisis will be a tipping point that brings all parts of the industry together at the most senior level, with a determination to find ways to reconnect with customers,” Bishop said.

“But it’s not going to be easy, and there is no silver bullet solution for this.

“It is much easier to see the problem and much harder to come up with a tangible solution to fix it.”