Ambiguity in BI policy wordings is ‘natural’ following ‘black swan’ Covid outbreak

The ambiguity in business interruption (BI) policy wordings related to Covid-19-based claims is “natural”, however this debate should be used as a catalyst for the insurance sector to proactively review contract small print in order to eliminate unclear phrasings that may prove problematic for insurers if applied to future “black swan events”, says Max Richter, managing director for general insurance at professional services firm Accenture.

Richter compares the current discussions around BI policies to similar conversations that occurred around cyber cover within property insurance wordings, for example. He explains that events such as the Covid-19 pandemic, therefore, act as a spotlight to reveal industry areas that need fine tuning and finessing.

He says: “It is natural that there might be a bit of ambiguity there. It takes a loss event of this kind to ensure that wordings become clearer. You see that in other emerging risk areas as well, when you talk about cyber coverage in property policies for example, there is ambiguity there.

“Now, companies are taking action and making sure that it is clear and there is either affirmative cover or there is no cover at all.

”We will move towards that clarity and affirmative cover or not on this topic as well, around pandemics and BI, but it does take an event like [Covid-19] to force the industry collectively, between carriers and brokers, to put [in] the effort to ensure that clarity is there. It’s frustrating for customers.”

Richter, therefore, views the ongoing coronavirus outbreak as an opportunity for insurers and brokers to be proactive in reviewing policy wordings, thinking outside the box to see whether these could be applicable for other “black swan events”.

“It’s an opportunity because we are starting to see more of these black swan events in the last few years, so I think it’s an opportunity for the industry to take a more proactive look at its insurance contracts and say ‘what are the other black swan events where actually it’s not entirely clear what the coverage is?’, and try and get in the front of that because there is a real danger from an industry perspective that reputation will suffer,” he explains.

“It’s probably about time to do a more holistic and proactive review of those contracts and work out what are the other ambiguous areas, even if it is a one in a hundred years event?”

Richter adds that acknowledging that there is uncertainty within current BI policy wordings would go some way to repairing the tattered remnants of the insurance sector’s reputation.

“Acknowledging the fact that there is, perhaps, not absolute clarity in the contracts between them and their customers for certain events like [the Covid-19 pandemic], acknowledging that proactively and taking steps to fix that [going] forward would be a step in the right direction,” he says.

‘Could have been better’

In terms of the sector’s broader response to this year’s unprecedented pandemic, Richter confirms “we all could have done better”.

He continues: “Most industries could have done better. I think there’s been different degrees of success in terms of enabling workers to operate remotely, both within the back office but also within contact centres. It’s a mixed bag.

“Some insurers are doing well and they’re on the front foot and they are seen to be helpful and others less so. But we can’t be too hard on ourselves as an industry because even the best of the best, if you like, haven’t been perfect on this. But certainly, it’s an opportunity to learn.”

For Richter, the key for the sector’s future success, however, lies in organisational agility – this is a conversation he is having with many chief financial officers at the moment, as they try and envision what day one after the pandemic will look like and how businesses will need to react to this.

“CFOs at insurers are all looking at the future and saying ‘well, how do I prepare for the day after, if you like? When is it going to come and what is the path to getting there? What’s the recovery path? What’s the time frame around that and what will be the market conditions for when we get there?” Richter explains.

“The common theme that comes across these discussions is around organisational agility in all its dimensions, so yes, plotting a course and starting some initiatives based on a central scenario, but having the ability as an organisation to be agile and to be able to change course depending on how events play out over the next one or two years.

“No one expected this to happen, [it is] a completely unexpected black swan event, so it does emphasise the need for organisational agility. I think we’ll see a number of moves towards that organisational agility agenda, and that has implications for how businesses do change but also how they operate and it implies quite a large transformation actually from the way they work at the moment.”

Pandemic impact

As well as posing operational questions, the Covid-19 pandemic has had a mix of other impacts on the insurance market, adds Richter. This includes budget cuts for transformation and change projects and a focus on cost reduction, as well as a lack of investment appetite and capacity.

Furthermore, businesses are having to place greater emphasis on employee health and wellbeing, to counteract the stress and anxiety felt by the general public as a result of the wider pandemic and its ripple effects on finances and communities.

In particular, Richter has noticed more conversations around the inflexibility of motor insurance, especially as policyholders were typically using their vehicles less during the imposed lockdown period.

“[The] discussion around the motor insurance market and the absence of flexibility in the product lines is now becoming a bit more obvious from a consumer perspective,” he says.

“Most of us are not driving, most of us just keep on paying for the product even though we’re not really using it as much. [Some insurers have] proactively gone out and said they will share some of the savings with the general population. Most of them haven’t done that.”

He adds that this consumer realisation could see telematics come to the fore.

“This may be a catalyst for pay-as-you-drive motor insurance,” he continues. “I’ve had approaches from technology companies that specialise in that space and enable that sort of proposition and they are very active in the market, telling that story and trying to get traction in that. I think that may well be something that comes out [as a] stronger trend from this period.”

Richter further outlines potential issues surrounding capital within commercial insurance. He says: “There is some discussion and some concern about how long and how strong the hard pricing market can be in the context of the greater availability of capital and then few good places to necessarily put it in, especially if you consider the risks at the moment in the equity market.”

The future of insurance

But what does Richter predict will become the ‘new normal’ in the world of insurance?

“We’re going to see insurers across the value chain digitising more aggressively and with a faster pace than they have done before,” he says. “I think we’ll see a lot more flexible and remote working within the employee population and that will become more the norm with digital interactions taking place a lot more.

“I think we’ll see a lot more digitisation within the commercial insurance markets. They’ve learned that they don’t need to be on the Lloyd’s trading floor to conduct business and we’ve now proven that, so that will likely accelerate some of the move towards more electronic trading within the commercial insurance industry.”

Despite the new foothold on remote and home working, Richter does not think “we’ll see companies moving out of where they are”. Instead, he believes there will be “a combination of smaller offices or companies growing, but not necessarily growing their office footprints at the same pace as they have done in the past”.

Richter further predicts that social insurance, with a community-centric model, will increase in popularity as a result of the Covid-19 pandemic, and that insurers progressing to using the cloud will be “a mega technology trend that will run for the next few years and then we’ll get to a point where the vast majority of insurance tech is on public clouds over the next few years”.

He continues: “The journey to cloud is a huge trend at the moment and I don’t think there is a general insurance [chief information officer] who we speak to that doesn’t have a journey to cloud strategy that they’re implementing at a level of maturity. Most of them are relatively early in that journey. I think there is a strong desire to move towards the public cloud in a very major way across the insurance industry.”

Even insurers’ implementation of technology developments has evolved, according to Richter, moving from a very sequential process to instead have “a much more agile approach”, where insurance teams work hand-in-hand with technology staff to create regular sprints or iterations on an ongoing basis.

Machine learning and artificial intelligence (AI) is also still on the cards and being experimented with, but this hasn’t been deployed at scale yet, concludes Richter.