Industry voices fear the fallout of the regulator’s test case on the broker PI market, predicting that it could become ‘a backstop for the entire business interruption industry’
This month, the FCA is gearing up for its court action against insurers as it seeks to clarify business interruption (BI) policy wordings and coverage in light of the Covid-19 pandemic and the associated lockdown regime – this government-mandated measure led to a tsunami of BI claims being rejected by insurers such as Hiscox and MS Amlin due to BI causation quibbles and “barn door holes” in policy small print.
Brokers will undoubtedly be watching the court case with double-edged interest; naturally in support of their business clients who have had BI claims refused, but also to track their own potential exposure to professional indemnity (PI) claims if the FCA agrees that insurers were right to reject coronavirus-related BI claims.
This could then have a further knock-on effect on brokers’ PI insurance.
For example, Charles Manchester, chief executive at Manchester Underwriting Management, said that if brokers are found liable in relation to Covid-19 BI claims, then brokers’ PI could become uninsurable.
He explained: “If the courts or the [Financial Ombudsman Service] start finding brokers liable for their customers’ losses on business interruption from Covid-19, then I think the PI market will disappear.
“I don’t think anybody would write brokers PI and I don’t think its insurable at that point because you would be putting billions of losses onto a market that even if you treble or quadruple the size of it wouldn’t be able to cover a fraction of that exposure.
”Nobody in their right mind would write the business if that were to happen.
“If [clients] don’t get their claims paid by insurers then they’re going to look to the broker. It’s human nature.”
As a result of the ongoing BI claim debate, Manchester added that “very few” insurers are writing new business for broker PI, while others have pulled out of this market.
“The PI market for brokers has locked down right now because there is the worry that if things go wrong, you could end up with [the] PI market effectively being a backstop for the entire business interruption industry for all the billions and billions of losses suffered as a result of the lockdown,” he continued.
Mark Pitcher, partner and head of e-commerce at PolicyBee, agreed with Manchester’s sentiment.
He said: “The PI market for brokers is already going through change. There are fewer insurers in the market and hence premiums are increasing. The pandemic will likely exacerbate this.”
Covid-19 exclusion
One way the broker PI market is responding to the coronavirus BI risk is by adding Covid-19 exclusions into policy wordings at renewal – Pitcher added that this will most likely be the case for directors’ and officers’ insurance too.
For Branko Bjelobaba, principal at general insurance FCA compliance consultancy Branko, this exclusion should signal warning bells for brokers.
He said: “Brokers face the challenges of dealing with clients who don’t get their BI claims met and then having no insurance cover in place to cover their exposure – that’s not a good position to be in.
“The FCA are predicting orderly failure of insurance brokers; this is one of the big dominos that could lead to this.
“The alternatives we have are no Covid-19 cover or we can get it, [but] it’s subject to these exclusions, or these terms and conditions and by the way it costs this much, so not a good time.”
To mitigate potential exposure, Bjelobaba advised that brokers revisit the advice they gave customers surrounding BI extensions and “remind yourself whether the client ever asked for pandemic cover and also remind yourself whether or not you ever went to the market to specifically seek pandemic cover, or were you just giving advice”?
Manchester, however, recommended that brokers look at the experience of the underwriters writing their PI policy, and suggested that they submit their presentation to insurers as early as possible.
But, the Covid-19 exclusion could impact brokers being able to afford PI insurance at all, continued Manchester.
He said: “At the end of the day, we are there for our customers.
”If they want a cheaper quote by excluding Covid-19 then we will give them the cover and we will exclude Covid-19 and it will be cheaper.
“I’m not sure they are doing the best thing for themselves or their customers in doing that. Most brokers don’t want to do that. So, it is a major impact on the PI market for brokers’ PI.”
Financial burden
It is these financial considerations that may now drive brokers’ decisions around PI cover as claims in this area increase – Manchester noted that he is now seeing one or two broker PI claims a day, when pre-coronavirus his firm would typically see a couple of claims per week.
“In several months’ time, as the economy starts to really feel the pain, that’s when we’re going to see more claims,” he said. “If you write general insurance brokers’ PI and you don’t exclude Covid-19 claims, you know you’re going to get claims, simple as that.”
Bjelobaba agreed that broker PI premiums will escalate; he estimated they will increase by up to 40%. Manchester, on the other hand, said: “I wouldn’t be surprised if in a year’s times brokers aren’t paying three times what they were [paying] a year ago.”
On top of expensive premiums, brokers could also face the legal costs of defending PI claims through the courts. Manchester said he expects “to spend an awful lot of money on legal costs”.
Alongside this, brokers are spending more time adhering to FCA guidance around their business operations during the pandemic, yet this extra, time-consuming work is not making any money for them.
“None of that will generate any income whatsoever,” Bjelobaba said.
“The converse will be true. If you have to make refunds to clients or people skip their instalments, or demand is less because their clients have failed, they’re getting less money in plus their costs will have gone up because setting up working from home for everyone has increased costs.”
Manchester added that brokers “are between a rock and a hard place”.
Should the FCA’s test case also review brokers’ involvement in BI claims?
Bruce Hepburn, chief executive at specialist insurance buyer and claims resolution firm Mactavish, said the FCA test case would be “incomplete” if it did not look at the role of brokers in developing policy wordings, providing coverage guidance and advising on BI claims.
The firm added that brokers are exposed to conflicts of interests because around 80% of their revenue comes from insurers, versus 20% from client fees.
Furthermore, Mactavish pinpointed the crux of the BI issue as a “mismatch of expectations between policyholders and insurers” and because brokers “sit between these parties and play a critical role in helping clients understand the complex technicalities of insurance policies”, their involvement should be included within the regulator’s case.
Hepburn said: “The FCA test case is a result of the ambiguity over the wording of some business interruption insurance policies. We need to look at why this problem occurred and, in representing their clients, what role brokers played.
“We have become increasingly critical of the small print in insurance contracts and believe the current problem of coronavirus claims being rejected brings this issue into stark relief.
“We feel that intermediaries have increasingly started to use over-standardised policy terms, which are often pre-defined as part of a broker scheme or facility that sees them work with a small group of preferred insurers on mutually beneficial financial terms. This has led to an increased use of generic policies that are often not adapted for client needs.
“This long-standing problem has been brutally exposed by coronavirus, with blanket refusals by insurers to pay the business interruption claims that companies across the country were counting on. This issue should be part of the FCA’s review.”
Where does Biba stand on broker PI?
Graeme Trudgill, executive director at Biba, told Insurance Times: ”Covid-19 has created the perfect storm for brokers’ PI. Capacity in some sectors was reducing and the market hardening before the pandemic with a number of insurers pulling out. Covid-19 triggered further market exits making it difficult for brokers to get the cover they needed at a premium they expected, and some insurers were not offering renewals at all.
”Because of the enormous challenges in the market it appears the key action for brokers is to consider the benefits of consistency in their provider and act early when it comes to renewal.”
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