Lloyd’s of London estimates that, globally, insurers will suffer $200 billion in claims and losses on investment returns because of the crisis, with business customers inevitably feeling the pain as the market hardens.
It is a sad fact of timing that the insurance market was already hardening before COVID-19, after an “unprecedented favourable period of 15 years”, according to Bruce Hepburn, CEO of Mactavish, a specialist outsourced insurance buyer and claims resolution expert.
Certain industries (such as construction) and insurance classes (such as Directors & Officers and Professional Indemnity) have borne the brunt so far, with massive price rises. Salient examples of this include a firm that was paying £1.4 million a year for property insurance being quoted £2.85 million at renewal and a construction company which has seen its annual premiums rise from £1 million to £5 million on just one policy, as the value of its cover has been cut from £100 million to £40 million.
Premium increases are the obvious sign of a hardening insurance market, but it doesn’t end there for business customers. Insurers may look to reduce the value of cover they offer to customers (or withdraw it entirely), increase the number of exclusions within a policy and take a tougher line when responding to claims, particularly large value ones. Research by Mactavish shows that, on average, in respect of claims exceeding £1m: 45% will be challenged, they will take up to three years to settle and the value of the settlement will be 60% of the original claim. In other words, it wouldn’t be unusual for a company suffering an insured loss of £1 million today to only receive a £600,000 pay-out, three years from now (and not before having incurred substantial legal and management time costs in the intervening period).
Navigating the insurance challenge
Most businesses (rightly) rely on their brokers for advice on which of the available policies are most suitable for their business lines and represent the best value. Most companies are not, after all, in the business of buying insurance and managing claims, both of which areas can be complex and prescriptive. Unfortunately, however, an overreliance on brokers (who conversely are not in the business of doing or knowing exactly what it is their customers do, however knowledgeable they may be on the sector) can lead to the wrong cover being bought, at the wrong price, with the wrong exclusions and, even if the right type of policy has been bought, this leaves valid claims being missed.
That is why Livingbridge is working with Mactavish to offer an insurance review service to its portfolio companies. Issues of varying degrees of seriousness have been identified in every review to date, with Rob Smart, Chief Technical Officer at Mactavish, noting a number of emerging trends, including:
- Companies being informed by their broker that they don’t have a valid COVID-19 claim when, in fact, there is scope to submit a potentially valid claim;
- Some companies being entitled to a premium rebate as a result of reduced business activity;
- An overreliance by the insurance industry on standardised policy wording resulting in obvious and legitimate business risks being excluded from policies; and
- Changes to business activities during lockdown (e.g. working from home; pivoting to supply new goods or services) invalidating, or otherwise falling outside the scope of, existing insurance policies.
Further, some firms are already seeing COVID-19 exclusions being introduced to policies at renewal, some of which have the effect of wrongly ruling out existing or future claims for unrelated issues.
The key times for a business to review its insurance policies are in the run up to or just after a renewal. Other companies who might benefit from a review are those who are considering a COVID-19 claim, have introduced operating changes because of COVID-19 or have faced public criticism during the crisis.
So, whilst business customers should listen to their broker – many are excellent and, indeed, Livingbridge is an active investor in the sector and holds investments in a number of such brokers – they should not be afraid to test or challenge the advice they receive and they should also be open to obtaining a second opinion from an independent expert, where appropriate.
If you wish to find out more about reviewing your insurance please get in touch on firstname.lastname@example.org.