While public perception of insurance has always been poor, the situation around BI claims during the lockdown is damaging its reputation further. Martin Friel investigates the impact on brokers

If awards were given out for the least-loved sector in financial services, insurance would win hands down every year. This lack of love, this poor reputation, is something that the industry has always chafed against, thinking it unfair and unrepresentative of the true value insurance brings to society.

Beyond publishing the annual number of claims paid and launching the odd initiative here and there, the industry has really done nothing concrete to address the reputational issue.

But that rather defeatist approach may be about to change with the fallout from the business interruption (BI) situation which one senior industry executive described as “an absolute clusterfuck”.

That may seem an extreme response, but it does at least acknowledge the severity of the BI problem. The great and the good of all the major insurers will be feeling the heat at the moment and will no doubt be using similar terms, but little has been said about the broker experience in all of this.

The broker experience
So what role did brokers play in getting us to this point and how are they managing the push and pull of representing their clients in a BI claim against the very organisations that pay them?

At the root of all this is whether or not insurers should be paying out on many of these policies, particularly when there was never any intention to cover a pandemic.

“Intention doesn’t matter,” says Paul Meehan, broking adviser and non-exec. “If the incident can be squeezed into the wording, the claim has to be honoured.”

He argues that if there is any vagueness in the policy, then the drafter of that vagueness loses.

“That is a fundamental principle of insurance.”

This is a widely held view, with many agreeing that insurers can’t have their cake and eat it. If they are willing to use legal interpretations of policies to deny claims, then they can’t deny customers the same benefit.

Intention doesn’t matter. If the incident can be squeezed into the wording, the claim has to be honoured

Paul Meehan

Steven Nock, partner and joint head of business interruption at loss assessors Harris Balcombe, is a man who spends his working life interpreting such policy wordings.

“A very small number of BI policies are paying out because they were designed to do so,” he says.

“However, the vast majority of policies that may respond under the current circumstances may do so on the basis of the wider wording that offers cover unintentionally.

“To some degree, some policyholders, and thus brokers, are benefitting from this unintended wider coverage.”

heart patched up

Taking on the insurers
Which leaves brokers in an interesting situation. If they know the policy was never designed to pay out in these circumstances, how can they force the issue with their insurers?

“Brokers may have this cover in the wordings accidentally, but they still have to support the client,” says Meehan.

“Their first duty is to the client under law of agency. They should and will support their clients in the actions against insurers even if, instinctively and morally, they believe something else.”

Supporting a client on a completely independent basis is one thing but of course, as we all know, the system of commission payments, profit shares and a plethora of other insurer-derived income, creates conflicts of interest for brokers.

This will be looked at more closely in the accompanying article, but for now it’s enough to ask the question: how do you represent a client against the organisation that delivers your income without damaging either relationship in the long term? It looks like a sticky situation for brokers.

“I don’t see any ambiguity. The clients are the ones who pay the bills and if we have no clients, we have no business,” says Romero MD Simon Mabb.

That is one way of looking at it and Mabb has certainly put his money (potential future commissions) where his mouth is. His firm has taken a very public stance in supporting its clients where it believes insurers should be paying out on BI policies.

And while Mabb is not expecting any negative reaction from insurers, he is prepared for it.

“Potentially, I’m not the most popular [with insurers] right now but I’m not trying to do anything to them that I don’t think is right,” he says.

“I’m trying to call people out where I think they should be doing better. They could potentially pull our agency but is that a good reason not to challenge a claim when you believe it should be paid?”

I don’t see any ambiguity. The clients are the ones who pay the bills and if we have no clients, we have no business

Simon Mabb

Policy problems
There isn’t a huge amount of fear of broker/insurer relationships turning sour, but the nature of that relationship plays a huge role in how we got here in the first place, where some policies look like they should pay, while others clearly won’t.

Add-ons have been the darlings of brokers for many years, providing an extra revenue stream and, perhaps more importantly, giving them a point of differentiation in an often-crowded market, particularly in the SME space. Having extra cover in a policy that a competitor lacks, can be a defining point of differentiation for a broker. But it seems that add-ons have created the inroads to these policies that clients are pursuing.

The unforeseen impact of these add-ons and cover extensions can be seen in a recent market update from Aviva. The insurer revealed it had an exposure to BI claims of approximately £200m but, crucially, said the vast majority of its BI polices wouldn’t be triggered by Covid-19. So where is that £200m liability coming from? For the answer, Aviva pointed to its broker book.

“Some insurers have allowed themselves to gravitate to the lowest common denominator of price, and wordings have got wider and wider,” says Brokerbility chairman, Ashwin Mistry.

“In the race to grab distribution, polices have expanded and expanded and brokers went for the widest wordings.”

This view allows brokers to play a passive role in this expansion of wordings, but the truth is, they have had as much a role to play as insurers. Indeed, it is often broker demand for exclusive wordings as part of a scheme that has resulted in insurers sitting on multiple versions of the same basic cover. Which goes some way towards explaining the ambiguity that defines the BI situation.

“One of the biggest aspects of all this is the relationship between brokers and insurers with insurers abrogating their underwriting to brokers and brokers securing their own wording,” says Stuart Reid, chairman of Partners& and Pikl.

“Adding infectious diseases would have been seen as a very easy way to flesh out a policy to make it more attractive.”

But that nice to have has resulted in a reputation that no sector would want to have. It seems the law of unintended consequences is making itself known in the land of insurance in the most destructive way.

Samantha Holland, partner at law firm Gowling, advises on policy wordings and believes that a lack of scrutiny, from both  brokers and insurers, has contributed to the situation.

“Nobody had ever really contemplated anything like this happening, and they wouldn’t have had it in mind that these policies would respond to these circumstances,” she says.

“Sometimes these things go into the wording and are not pored over as much as they should be and I’m not even sure how much sway they have with policyholders taking the cover anyway.”

Nobody intended for this situation to develop, for clients to have their hopes dashed and for the industry’s reputation to have been trashed. But it has happened.

What matters now is how the industry responds and whether or not it uses this situation to finally address some of the longstanding, underlying issues that have worn public trust down to a nub.

“This situation is going to change the way the industry operates, 100%,” says Mistry. People aren’t taking this seriously enough. All extensions will be repriced, underwriters won’t be happy to give away capacity like confetti, policyholders will take more notice and insurers will place greater focus on broker relationships.”

Or as Meehan puts it in slightly nostalgic terms: “Broking has been a really nice, comfortable business to be in but all that is going to change I’m afraid.”