Our Director of General Insurance, James Dalton, delivered the keynote address to the Commercial Risk conference: “Claims Management - Adapting to new long-term risk trends” on the impact of the Covid-19 pandemic and the changing risk landscape.
Thank you to the team at Commercial Risk for the invitation to join the Claims Management conference today. Having had a look over the programme for the conference over the next three days, there’s a really interesting agenda and plenty for anyone working in commercial insurance. When I agreed that I would provide this morning’s keynote address, I was told that there would be a diverse audience participating from a number of countries from all the continents of the world. The challenge for me, therefore, was to prepare some remarks which would be of interest to everyone and so, in the time available this morning, I’d like to cover three key themes which hopefully meet the challenge.
The first is a theme around trust, transparency and product clarity, set against the backdrop of the test case on business interruption run by the UK insurance industry and our regulator, the Financial Conduct Authority (FCA). I know business interruption litigation in the context of the pandemic is taking place in a number of jurisdictions and that what has been happening here in the UK has been watched closely around the world. The second theme is around how the insurance industry can play a critical role in the future management of pandemic risk and catastrophe protection, and the third theme looks at the challenges associated with climate change and sustainability from a commercial claims perspective.
Trust, transparency and product clarity
As the first national lockdown began in the UK last March, insurers began receiving claims from businesses hoping that their business interruption insurance policies would cover them for pandemic-related losses. The ABI had to explain that the vast majority of business interruption insurance only covered physical damage, such as fire or flood damage, with a similar statement made by the Financial Conduct Authority. We were criticised at the time, but we felt that it was better to be clear and transparent with people even if they didn’t like what we were saying.
The focus now is for insurers to support their customers - through the swift payment of valid claims, making interim payments, and providing clear and prompt answers to customer questions.
For those business interruption policies that did provide cover for non-property damage interruption caused by infectious diseases, there were genuine questions of whether, and the extent to which, they covered pandemic-related losses that had resulted from an unprecedented national lockdown. Insurers and the ABI worked with the FCA on a novel, fast track process to obtain a definitive view from the courts on 21 sample policy wordings. It could easily have taken two to three years to obtain a final judgment from the Supreme Court, but it only took eight months. Despite the headlines saying that the FCA was taking insurers to court, this was a process that the industry supported and worked with the FCA to enable. After nearly 400 pages of legal rulings from the High Court and Supreme Court, it was decided that, of the 21 wordings, seven did not provide cover and 14 provide either some or complete cover in certain circumstances. In reaching this view, the Supreme Court quashed a previous ruling that had been the basis of insurance contract law for the last decade.
The focus now is for insurers to support their customers - through the swift payment of valid claims, making interim payments, and providing clear and prompt answers to customer questions. Overall, we estimate that £2 billion will be paid in Covid-19 related business interruption claims and the FCA is collecting and publishing data on the insurer response. Their latest update issued two weeks ago indicated that an interim or final payment has been made in 39% of accepted claims, that the number of accepted claims has increased from around 21,000 to around 35,000 and that total claims payments now total around £600 million. There continues to be a key role for brokers in helping their customers get the relevant documentation together so that claims can continue to be paid as swiftly as possible, in addition to helping explain to some customers why their policy was not considered to provide cover by the courts.
What has this process taught us as an industry? As you might expect, the process of reflection is on-going but I wanted to offer you a few thoughts.
Firstly, for an industry that had a problem with consumer trust before the pandemic, this episode has made things worse. Despite the fact that an average of £17 billion of claims are settled each year, there continues to be a deeply-held customer perception that insurers always try to wriggle out of paying. It is often said that claims are the shop window of the insurance industry, so it is essential that we redouble our efforts as a sector to pay valid claims quickly and with a simple customer journey.
Secondly, we must address the expectation gap between what a customer thinks an insurance product provides for and what the insurer intends to cover. It was for this reason that I wanted to be involved in the recent work of the Chartered Insurance Institute’s Transparency Forum which has made a number of recommendations to the industry about how to better meet customer expectations. And I use the word industry rather than insurers deliberately. Brokers and risk managers need to work together with insurers - as an industry - to ensure that customer understanding and engagement are prioritised over the speed of a sale. I accept that this might not be as problematic for large, commercial firms where you as professional risk managers have a clear understanding of the risks you face and the insurance you want to mitigate those risks. But, for small and medium sized businesses, there is more work insurers and brokers need to do to ensure that the expectation gap narrows.
Thirdly, we must redouble our efforts to engage in solutions to help tackle the hardest elements of risk to cover. In a time of crisis, the public understand that not everything can be insured. But they expect insurers to lean into the challenges posed and to work to develop solutions. There is no doubt that some product lines have become more expensive, if insurance can be secured at all. That does not mean that there is a market failure. What it means is that the industry and the Government need to work harder to develop creative and innovative interventions to allow the wider economy to continue to function effectively.
Future management of pandemic risk
This brings me to the second theme that I wanted to pick up with you this morning – the future management of pandemic risk. Throughout the pandemic, you’ve seen the UK insurance industry work with the Government to develop solutions to a number of the public policy problems Covid-19 has posed. We have worked with independent healthcare providers, for example, to enable the NHS to take over private hospital capacity to enable non-Covid+ patients to get the sometimes life-saving treatment they need. Negotiations with the Government resulted in the establishment of a £10 billion reinsurance scheme which shares the trade credit insurance risks between the public and private sectors, and which enables trade between businesses to continue. And we have worked with the Government to put in place a time-limited indemnity arrangement to provide state-backed insurance for care homes designated as being appropriate to accommodate Covid+ patients being discharged from hospital. There are important lessons to be learned from each of these interventions as we continue to grapple with possibly the most difficult of all the Covid-19 challenges – how to insure future pandemics.
In a time of crisis, the public understand that not everything can be insured. But they expect insurers to lean into the challenges posed and to work to develop solutions. So, if future pandemics are to be widely insurable, then the insurance industry will need to continue to be innovative and forward looking – to find insurance solutions that work for customers, carriers and other stakeholders.
As the events of the last year have shown, the costs associated with dealing with a global pandemic necessitating national lockdowns are astronomical and far beyond the ability of any domestic insurance industry to cover. In the UK, we have the largest insurance market in Europe and the fourth largest globally with London the international capital of speciality insurance and reinsurance. Yet, even in the UK, providing widespread insurance cover against pandemics would be virtually impossible without state support because the amount of capital insurers would have to hold against the risk would result in completely unaffordable prices for customers.
Where there are difficulties in the availability or affordability of insurance, many people call for the establishment of a reinsurance arrangement akin to Flood Re or Pool Re so it’s not been surprising to hear this call over the last year. But the establishment of a “Re” is not necessarily always the right answer – the bar to establishing such a scheme to address a public policy problem should, in our view, be a high one. There should be a genuine market failure, where no other public policy intervention could solve the underlying problem. Establishing such schemes is a complex and lengthy process and, it is important to remember, they are based on a cross-subsidy between consumers – one group of people pay more for their insurance so that another group can pay less. Such an arrangement comes with inherent public policy challenges and trade-offs, requires clear political will and a demonstrable and long-term benefit.
What we have seen over the course of the pandemic is Governments across the world spending trillions to support their domestic economies. So the key question in considering whether a reinsurance arrangement should be put in place is to consider whether Government intervention after the event is preferable to establishing a Government-backed scheme before the event which builds up huge reserves and is potentially unused for years, if not decades. There is unlikely to be a clear-cut answer to this question and Government decision making, potentially decades from now, cannot be predicted with any degree of certainty. But, were another pandemic to strike of the type that we continue to live through, it seems inevitable that Governments will, once again, be forced to make significant economic interventions.
It is that economic realism that forms an important backdrop to considering potential options for the future. And it is that same economic realism which suggests that the answer to the problem of managing the risks associated with future pandemics is not an either/or. Given the sums, Governments continue to spend, they are unlikely to want to carry all the future risk and, given what insurers have seen Government's spending, they are unlikely to want the totality of the risk transferred to them.
It seems inevitable, therefore, that the notion of some form of risk sharing between the public and private sector should be carefully considered. Public private partnerships between industry and Government come with a number of advantages:
- Firstly, the scheme will have a precise remit with a focus on the insurability of a particular risk or risks - flood risk in the context of Flood Re for example.
- Secondly, the public/private partnership will have a unique ability to influence and inform public policy debates within its sphere of influence.
- Thirdly, the public/private partnership is likely to have the ability to be innovative in a way that a conventional insurer or reinsurer is less likely to be able to be. For example, Pool Re placed the world’s first insurance-linked security to exclusively cover terrorism risk.
But with the advantages also come the challenges associated with public/private partnerships:
- Firstly, unless there is clarity right from the outset, it will be difficult for a particular type of risk to exit the risk pool, if that is indeed desirable.
- Secondly, unless the design of the scheme is very carefully thought through, there is a danger that risk sharing between the public and private sectors is not optimised. Too much risk sitting either with the Government or the private sector compromises the overall effectiveness of the intervention.
- Thirdly, the flipside of the coin when it comes to a scheme’s precise remit is that it is mechanistic, potentially lacking innovation or becoming overly focussed on the scheme’s financing rather than broader societal risk management.
Our starting point at the ABI has been to go back to the first principles of insurance - namely risk diversification and risk pooling, where the pandemic has tested these core principles. To consider how the industry can respond to some of these challenges, the ABI has set up a working group with participants from many of our insurers as well as participants from the City Business School. We continue to work through a number of challenges, including identifying the needs of customers, whether any solution needs financial backing from the Government, what type of product might be offered and whether that product would be mandatory.
We are also working with Lloyd’s, as a member of the Technical Advisory Group, on their Futureset project. Lloyd’s launched Futureset in February and, throughout 2021, it will focus on the landscape of systemic risks, including exploring lessons learned from the pandemic, as well as examining the global risks brought about by climate change. The first phase of this work will focus on defining a systemic risk register and a risk appetite matrix, in addition to identifying around 10 priority risks for further modelling.
In July last year, Lloyd’s also outlined three open-source frameworks that are currently being pursued, namely Restart, Recover Re and Black Swan Re. Restart is a market insurance pool to offer non-damage business interruption cover in the shorter term and is on course to go live later this year. The ABI is also engaged with the work being done on a so-called ‘Pan Re’ model that we heard so much about this time last year. Our Chair, Jon Dye, sits on the senior steering group and we have input our experiences of negotiating Flood Re into the wider work.
At the same time, we are also monitoring work being done in the international sphere on pandemic cover. We are feeding into the work that the European regulator, EIOPA, is doing in terms of looking at systemic risks and we are in regular contact with insurance trade associations in Europe, the US and across the world, many of whom have also been considering the issues associated with the insurability of pandemics in some detail. The message across all jurisdictions appears to be the same – Governments are not yet ready to discuss managing the risks associated with a future pandemic given that so much energy, money and intellectual capital is being directed towards the ongoing fight against Covid-19.
Informed by thinking and lessons from other jurisdictions as well as the further work many across the London insurance market are continuing to do, there will be a time to engage with the UK Government. We will need to discuss the design of any solution to the future management of pandemic risk and whether there is a desire on the part of Government to work towards the development of some future arrangement. That time will come, but that time is not now. Until then, we need to continue to work together as an industry to develop the thinking necessary to inform that discussion.
Climate change and sustainability
Although Covid-19 forms the backdrop to so much of what we are all doing on a day-to-day basis and forms a key component of the new risk landscape in which we are all operating, we cannot allow it to become all-consuming. So, the third theme of my remarks today is around the critical issue of climate change and sustainability. At this stage, it is not clear what impact the ongoing pandemic will have on what would otherwise have been the largest international summit the UK has ever hosted, but the UK’s role as COP-26 President has sharpened the focus of business and wider society on the issues of climate change.
Right at the outset of my remarks on this topic though, I wanted to emphasise that climate change is absolutely fundamental to the insurance industry's long-term prospects and insurance has a unique role to play from two perspectives. Firstly, as major institutional investors, insurers have the capacity to drive the growth in renewable energy and sustainable infrastructure needed to mitigate global temperature change. Secondly, as risk managers, insurers are at the forefront of picking up the pieces when things go wrong so have a key role to play – working with many in the audience today – to identify the risks arising from climate change and to mitigate and adapt to prevent them from occurring. This will be one of the key questions explored in the forthcoming Climate Biennial Exploratory Scenario – involving 10 of the largest insurers alongside the banking sector. But even if regulators were not interested, the case for action is compelling.
The impact of flooding and extreme weather in recent years is already evidence of the potential scale of physical risk. Even in the UK, which has a comparatively benign climate compared to other parts of the world, we face significant questions about how rising sea levels and more extreme weather will impact flood risk, the largest nat-cat risk the UK faces. There is an urgent need for further investment in flood defences, for planning decisions to account for likely future flood risk and for homes to be built and maintained in a way that minimises the damage flooding can cause. Too often the action needed to minimise the impact of flooding only comes after a flood event has occurred.
Though flood risk is the biggest challenge, climate change poses a number of additional risks for risk managers and claims handlers. As Governments drive wide ranging policy changes to manage the threats associated with climate change, new risks could emerge that are not yet fully understood. Solar panels, electric vehicles and sustainable timber can all reduce carbon emissions, but we know from past experience that unforeseen issues around the installation and use of new technologies can have significant consequences. One need only look at the current issues in the UK to see the significant fire safety issues that have arisen with the use of new and innovative products on residential buildings. As the switch to using many of these new technologies is viewed as both an opportunity to drive economic growth whilst reducing emissions, there is likely to be an onus on risk managers and insurers not to stifle their adoption and rollout. So, it will be important for risk managers and insurers to continue to emphasise that a new technology is not sustainable unless it is safe.
As well as managing physical risk, the sector will play a key role in adaptation risk. This is not just a question of understanding which sectors are likely to become less viable as Net Zero targets are implemented across the economy. Insurers and risk managers will play a key role in managing the transition and that will range from large scale adaptation, such as the decommissioning of carbon-intensive industries to small-scale changes, for example, decommissioning the millions of petrol vehicles on the road or replacing or recycling household devices.
The insurance sector’s commitment to tackling climate change is already clear. The ABI is a formal supporter of the Task Force on Climate-related Financial Disclosures (TCFD) principles and 2020 saw a 10% year-on-year improvement in our performance against the ClimateWise principles. But we also know these are just the first steps on a challenging and long path ahead. To meet these challenges, the ABI has established a Board level Committee comprising CEOs from across the industry, which is exploring the actions needed across the sector’s investments, its supply chain and in its interactions with customers and stakeholders.
While the 2050 ‘net zero’ goal is a long-term one, the decisions required to get there need to be taken in the short term.
While the 2050 ‘net zero’ goal is a long-term one, the decisions required to get there need to be taken in the short term. The ABI will continue to co-ordinate our sector’s collective efforts and argue for reform where there is a gap between what firms want to do to tackle climate change and what they are able to do. The first example of our current work includes a focus on the need for reform of Solvency II to allow insurers to use their capital to meet the challenge laid down in the Government’s 10 Point Plan for the ‘Green Industrial Revolution’. The second relates to better co-ordination across the investment chain where there needs to be a consistent taxonomy that allows insurers to support carbon-intensive sectors as they transition, rather than be judged against overly simplistic definitions of what is and is not “green”.
In the lead-up to COP-26, the ABI will work closely with our members, Government, regulators and climate experts to ensure our sector’s potential to drive forward the Net Zero agenda is realised.
in conclusion, as I said at the outset, it is always more of a challenge speaking to an international audience in terms of developing a set of remarks that seeks to offer something for everyone. But I hope in my comments this morning, I’ve managed to offer you some thoughts from the perspective of the insurance industry in the UK on how Covid-19 continues to challenge all of us, but also to set out some of the opportunities that we need to grasp as we seek to manage the emerging, new and unknown risks of the future. It is only by working with you in the risk management community that we will be able to meet that challenge, so it has been a pleasure to be able to join you this morning.