Broker schemes susceptible to Covid claims fallout

Broker schemes have come under fire for ramping up insurers’ exposure to Covid-19 through the use of broader and less clear-cut language within policy wordings, leading to an increased frequency of claims payouts for business interruption (BI) non-damage extensions.

As an example, insurer Aviva highlighted within its Q1 trading update, published in May, that its broker schemes would be one of the key business areas detrimentally impacted by the Covid-19 pandemic, alongside travel, surety, construction and other commercial lines products.

This was swiftly followed by news that insurer Covea’s Covid-19 claims exposure had also shot through the roof as a result of its broker scheme, NurseryCare, which it underwrites on behalf of childcare insurance specialist Morton Michel, owned by broker PIB Group.

Broker schemes are even being pulled into the FCA’s test case on clarifying business interruption (BI) wordings in reference to Covid-19-related claims.

In its defence documentation, for example, insurer RSA pointed the finger at broker Jelf, now known as Marsh Commercial, for policy wordings.

It said: “Marsh Material Damage and BI - Resilience and Jelf Material Damage and BI – Resilience were wordings drafted by the brokers Jelf/Marsh who (acting as agents for the policyholders by which they were retained) placed the relevant risks with a number of different insurers including AIG, Aviva, QBE, RSA and Zurich. RSA4 was used for both SMEs and larger businesses.”

Blame game

As this evidence stacks up, industry voices are therefore identifying broker schemes as a key area of concern for Covid-19 exposure, perhaps pointing the finger at brokers’ involvement in policy wordings as being the root cause of grey or unclear coverage.

However, Peter Blanc, group chief executive at Aston Lark, said: “I don’t think any broker set out to try and bankrupt their insurance partners.”

He described the “accidental inclusion of cover” within broker schemes and the resulting claims fallout surrounding BI policies as a “really, really unfortunate set of circumstances” – although he does add that broker schemes are “possibly more exposed purely because some of the wordings may not have received the usual insurer level of scrutiny”.

Ashwin Mistry, executive chairman at Brokerbility, admitted that brokers and insurers alike have been caught out by “some of the boilerplate clauses, some of the endorsements, some of the unforeseen exclusions or otherwise, or the variations of risk which is now causing a lot of challenge and interpretation of what was meant as opposed to what the contract actually says”.

Mistry attributed some of the issues surrounding grey broker scheme wordings to the soft market of yesteryear, which drove brokers to broaden coverage in a bid to differentiate their services.

Blanc agreed: “It’s always a trade-off. Whenever anyone sets out to create a scheme, you either try to make it really competitive and cheap and you try and sell on price, or you try to make a really fantastic wording, which becomes known as the industry standard, in which case people buy it because it’s the best. And when you do that, obviously you are broadening the wordings.

”They try and throw the kitchen sink at the cover to convince clients that it’s the best thing since sliced bread.

“I guess this will just be a wake-up call.”

It is this “broadening” of policy wordings that has extended BI cover to perils which the insurer might not have intended, such as the coronavirus pandemic. This then boils down to insurer intention versus the reality of policy small print – an issue that is being debated as part of the FCA’s test case.

Blanc continued: “Some of the wordings were designed to cover things like e-coli outbreaks in restaurants, or an outbreak of legionnaires’ disease at a leisure centre, those sorts of events.

”If you try and describe an e-coli outbreak at a restaurant, you’d describe it as the outbreak of a contagious disease at your premises or the outbreak of a contagious disease that means you have to close your premises. So, if it’s not worded carefully enough, you can see how people can accidentally include cover for Covid.”

Insurer risk

Blanc explained that broker schemes can be set up in numerous ways and although the policy wordings may be broker-driven or insurer-driven, both parties contribute to the final product.

Mike Hallam, head of technical services at Biba, agreed. He added: “Broker scheme wordings are no more or no less likely than insurers’ wordings to be exposed to the effects of the pandemic.

”In terms of fulfilling the insurance contracts, the detail of the insurance falls on the carrier, which will always agree the terms and conditions of the policy.”

Mistry continued that even if brokers do take the lead on policy wording construction, “the insurer allows the wording” and accepts any risks with “eyes wide open”.

He said: “A broker will ask for, in effect, all risks with no exclusions.

”It’s up to the insurer to then go back and say ‘we’re not prepared to give you all risk and no exclusions, we’re prepared to give you cover based on what we see as an underwriting discipline and what areas of risk we’re prepared to carry, coupled with the backing of our reinsurers and our potential capacity providers and investors’.

“The brokers will always ask. Even going forward post Covid-19, those requests are still going to persist.

”It’s up to insurers then to recognise their capability, their skillset, their capacity, their understanding of the risk and perhaps become a little bit more circumspect in what they perhaps would have been giving away pre Covid-19.”

Although policy wordings would have been happily agreed between brokers and insurers pre-Covid-19, it is these self-same wordings that are now causing insurers to feel the pinch when it comes to BI claims, said Blanc.

He continued: “It feels like there will be some underwriters who will have to make payments. There are some underwriters who are already making payments.

”It will cost the insurers money and that will have an impact long-term on those insurers. It will certainly exacerbate the hard market that’s already with us; we’re already seeing premiums go up and I’m expecting that to get worse.

“The chances of [insurers] being able to walk away scot free are probably pretty slim.”

Mistry added: “If the policyholder benefits from loose wording, then unfortunately insurers have no other option but to pay up and live with the consequences of their actions.”

This is true for insurer Covea with regards to the aforementioned NurseryCare scheme, which appears to cover business interruption claims for childcare facilities that have had to close because of coronavirus under its loss of revenue clause.

PIB Group chief executive Brendan McManus told Insurance Times that Covea has been “brilliant” in its response to this noted claims exposure.

He said: “There was a question mark over whether the cover was there, but they’re paying the claims. They’ve paid a number of claims already and I’m sure that was a difficult moment for them.”

The future of broker schemes

Despite Covid-19 placing all broker schemes under scrutiny, both Mistry and Blanc agree that scheme structures and their popularity will remain untouched, as they still provide benefits for insurers and brokers – Blanc even went as far as to say broker schemes are a “crucial part of innovation in the sector” and are “absolutely vital to the wellbeing of the insurance industry”.

“Any insurer that wants to provide cover that is of interest to customers is well-advised to look to support broker schemes,” he continued. “We ought to be constantly innovating and I think it’s great that there’s a vibrant market where insurers put capacity behind broker schemes.”

Although the fundamentals of broker schemes will remain the same as they were prior to the pandemic, Mistry expects there to “be lots more questions asked about the width and breadth of the policy wordings”.

He explained: “Going forward, clauses and extensions are going to be looked at very vigorously and that is going to be the onus on insurers.

“Both [insurers and brokers] will have a look at [broker scheme structures and wordings], but I think also the reinsurers will have a view now because they’ll want confidence in investing and insuring the insurers.

“I think investors and those that provide capacity and capability to the insurance market will be asking a lot more searching questions, so I don’t think it’s just the insurers and brokers, it’s the people behind them.

”I think clients will be asking more questions, which is correct, and I think those who provide capacity for insurers in cash will also be asking for questions.

“This is not over by a long chalk; there’ll be lots of questions from a number of different parties and ultimately the insurance industry will have to respond.”

Blanc agreed: “Underwriters will be particularly cautious about looking at wordings that get proposed and they’ll be looking at what are the potential ramifications from these wordings?”

But what about the broker-insurer relationship? Will passing the liability buck lead to strained relations between partners?

Mistry said: “I sincerely hope this doesn’t impact the relationship. I think it will impact how insurers view endorsements going forward, but it’s too early to pass judgement on that just yet because it’s got a long way to go and I think you’ll see a lot more action post the [FCA’s] court case.”

Blanc takes a more optimistic view. “I don’t think insurers and brokers will fall out over this because we have to work together, we want to work together and ultimately we’ve all got the same aims in mind; we all want to actually deliver great jobs for our clients.

“The best thing insurers and brokers can do is to work together to get the best outcome from this and to make sure that the insurance profession comes out with a decent reputation.”

Policy documents

For Blanc, the discussion surrounding broker scheme presents an opportunity to evaluate policy documents and improve their functionality.

He explained: “I would love to see an even stronger drive towards much, much simpler wordings, a real clarity over what’s covered and what’s not.

“I fundamentally believe that policy wordings are too long and too complicated, and one thing that has come out of this is actually you can have a myriad of different policy wordings covering the same risk and all written differently. Some of them written with lots of double negatives and cover being included in one section and excluded in another section. It is far too complicated.

“It’s really clear that customers don’t understand and don’t read the policy wordings. So, if there’s a long-term output from this, it should just be that brokers and insurers have to work together to improve client communication to make sure that clients really understand what it is that we’re covering.”

Mistry places this emphasis for educating clients on brokers.

“Not necessarily enough time [has] been spent to explain the intricacies of policies, what is covered, what is not covered and what it actually means because most policies, even a modest tradesman policy, is about 50 or 60 pages long without commas or full stops. It’s virtually a legal document.

“However, within those legal documents are lots of legalities and assumptions, where [if] the policyholder doesn’t know what he or she is buying, then I think the onus on brokers now becomes greater to explain exactly what’s going on and for policyholders to spend much more time understanding policy risks to their business, but also understanding what cover they’re buying.

“This is a moment to reflect, both from a broker perspective and an insurer perspective as to what they’re going to do.”