Standardising policy wordings may be considered a ‘dangerous road’ by some in the industry, but could some standardised elements support the push for improved transparency and policyholder understanding?
Following the recent coronavirus-induced business interruption (BI) test case, the insurance industry has reacted by zoning in on the topic of transparency, seeking to revamp policy documents and insurance processes with an extra dose of clarity to avoid the possibility of a future legal repeat performance.
One idea to minimise potential policyholder confusion could be to standardise insurance cover or certain policy wordings; this is a suggestion which cropped up during a Chartered Insurance Institute webinar last month, which focused on how the industry could improve transparency.
Biba’s executive director Graham Trudgill was not a fan of this approach, however. He said that “standardisation is stifling” and does not “allow for innovation”.
He explained: “I don’t think the Competition and Markets Authority would approve of a standardisation of cover because you want to allow for innovation, change, growth and new policies, like parametric insurance, which could be the answer to some of these problems [because] it’s a very simple trigger that has to happen.
“It’s a dangerous road to have standardisation of cover. It’s ok to have your bronze economy, your silver middling and your gold fabulous cover, but you’ve got to be dead clear with the client as to what they have and haven’t got.
“Customers might want something a bit more expensive or a bit cheaper, so it is a difficult one for the industry to navigate.”
Building from base level
Damian Glynn, director and head of financial lines at Sedgwick International UK, agreed that “the imposition of standard wordings would likely be deemed anti-competitive and therefore illegal”, under the Competition Act 1998.
But, he noted that BI policy wordings in the past used to be more standardised than they are today.
He explained: “It used to be that insurers based their policy wordings on industry-standard models, notably the ABI ‘Recommended Practices, Wordings and Procedures’ relating to commercial material damage and BI insurance. Historically UK wordings were standardised.
“Most UK policy wordings, therefore, shared a common starting point. But, [due to] observing competition law and seeking to offer a wide variety of cover, much of it sector specific, policy wordings have diverged and, since 2010, this process has accelerated.
“The common heritage of most policies is still there to be seen – in formulae for settling BI claims and in the requirement for insured material damage to have triggered the BI loss.
“If some level of standardisation were to be attainable, that would be a return to a common starting point rather than a new concept.”
Even though Glynn believes BI policies should not be standardised as “it would be wrong to distil all available wordings down into one policy form”, he does think “it might be beneficial to have one standard form that all insurers offered, alongside any alternative wordings that they also wished to offer”.
“Maybe a common standard that everybody writes, developed by the ABI with appropriate input from others - Biba, CILA - with clearly agreed intention and definitions, would be a good idea,” he continued.
“That might require a change in the law. [It] would not be achievable overnight and would not necessarily be easy. But that doesn’t mean it is not worth attempting.
“There could be a standard core element, with standard extensions and endorsements to increase flexibility.”
Cutting down options
Glynn’s suggested approach may strip back the number of options available to potential policyholders, yet – in turn – this could help increase the much-sought-after transparency.
“Consumer choice is important, but that needs to be informed choice, not a bewildering range of options to make an uninformed choice from,” he said.
“The number of different policy wordings may reduce, but if that lead to [a] better, informed choice and a better understanding than most policyholders currently have, that is an improvement.
“Having a plethora of policies where the scope of cover can turn on different, but apparently similar, terms does not lead to an informed choice.”
Discussing the potential pros and cons of standardisation for insurers, Damian Glynn, director and head of financial lines at Sedgwick International UK, said: “If competition means a requirement to use different words for the sake of it, [then] the cover provided may not reflect the intention – reference the FCA test case just concluded, where the courts found cover where insurers maintained that was not the intention.
“If wordings wider than the standard are offered, borrowing the same language - in respect of which intention and meaning has been agreed – [this could] reduce uncertainty.
“The freedom to offer all or only a proportion of the modular elements (core cover, extensions, endorsements) of any standard wording and to offer different wordings altogether (wider or more narrow in cover) would continue to allow differentiation, as a choice rather than a requirement.”