‘More work to do’ on business interruption cover as lockdown lifts

Biba 2021: With businesses opening up again post-lockdown, there is more to be done around business interruption (BI) insurance, said an expert panel at Biba’s resilience-themed conference last week.

Catherine Dixon, director of underwriting and technical for commercial lines at Allianz, explained that where many business owners adjusted their cover during the lockdown period, Allianz is now working with its broker partners to ensure that end clients’ insurance is re-adjusted to reflect business re-openings.

“Especially with BI where you have long indemnity periods, it’s those type of conversations that are happening to make sure that if policies have been adjusted in a particular way as a result [of] particular circumstances, that they are adjusted back to where they need to be. And if the worst does happen, a customer then has the cover they would expect to get for that policy,” she said.

David Williams, managing director of underwriting and technical services at AXA, added that the insurance industry needs to be as “collaborative as we can” on this readjustment work.

“Certainly, we hope that people still recognise the value of BI, but we need to [reset] it and be talking about those perils covers,” he said.

However, “more cover costs more money”, he added.

He told online delegates about one of AXA’s scheme facilities where cover was in place for Covid-19 - but only 30% of customers that were broker advised took BI cover.

“It comes back down to that flexibility that we want to give to our customers and the desire to make sure that they are fully protected,” Williams added.

Problem areas

Prior to the pandemic, there were still a lot of issues around BI, said Damian Glynn, Sedgwick’s director and head of financial risks. He pointed out there was “more to do”.

He referenced a report in 2012 between the Chartered Institute of Loss Adjusters (CILA) and the Chartered Insurance Institute (CII), entitled Business Interruption Policy Wordings, which identified some key areas where BI policy wording could be tweaked to bring clarification.

“The basic mechanism is fine, just a few tweaks on practical problems [is needed]. Frankly, the amount of change that has been bought about has been minimal,” he said.

Glynn was also concerned that some media reporting has added to the confusion around BI, especially regarding the Orient Express Hotels case.

Lessons learned

Dixon believes there are many lessons to be learned from the FCA test case on BI claims linked to the pandemic.

“Insurers are having a look at the moment and [are] taking stock of what that means – whether cover intent is matched by cover applied is one of the big learnings from this. There is a fair amount of work on the go across the industry reviewing the outcomes, learning the lessons and then considering what needs to be done next,” she said.

When asked by panel chair Vivienne Hexter, head of technical, commercial risks solutions at Aon, whether a simplification of cover may be needed going forward, Dixon said she believes it has got to the point in BI where its “strengths have become its weakness”.

She continued: “One of the strengths of the business interruption structure is that it is really flexible - if you think about all the different business models that are out there, lots of different approaches to that, different revenue models.

“The BI wording can deal with all of this; the broker can explore these aspects with the customer and arrange cover in line with the client’s needs. It’s a very flexible, needs-based policy.

”That should be a good thing, however it’s criticised for being too complicated. Are there ways of simplifying it? I think there probably are. But that may well mean that it becomes inflexible or less flexible and there may be a narrowing of cover as a result of that.”

Dixon questioned whether customers might prefer “narrower covers but in a more simplified wording, rather than lots of add-ons that makes the cover difficult to understand and, therefore, [leads] to uncertainty at the point of purchase and at the point of claim”.

She suggested splitting damage and non-damage covers out - this might drive some interesting conversations with brokers and their customers about actual cover requirements and help improve the understanding of what has been bought at the point of policy purchase.

“The damage element is pretty well understood - it follows a material damage policy linked by the material damage provider. Non-damage is less well understood. Some are offered as standard, some are purchased separately within limits and different indemnity periods,” she explained.

When asked whether parametric policies for BI are the way forward, Dixon said this could lead to faster claims, which is a positive thing, but “some customers would be over-indemnified and some would be under-indemnified”.

“As long as everyone understands how it works and their expectations are met - it’s just that we are wedded to the concept of indemnity within the insurance world,” Dixon concluded.