Mactavish, the outsourced insurance buyer and claims resolution firm, claims that the Covid-19 crisis has revealed some of the systemic flaws in an insurance market that is no longer fit for purpose.
It says that many businesses bought cover – under business interruption and other policies – that they believed would protect them from precisely the sort of severe, once in a lifetime event that we see unfolding around us today. Unfortunately, insurers have not played much of a role at all in the crisis, and many are still doing everything possible to avoid paying out.
The company’s own research shows that even prior to Covid-19, 45% of large or complex claims were disputed by insurers. These claims took an average of three years to settle, and even then, yielded just 60% of the value of the original claim.
In addition, Mactavish believes that the relationship between brokers and insurers requires robust and immediate regulatory action. In a report published last year, Mactavish demonstrated that some brokers receive revenue from insurers that is far in excess of their fees from clients. This income is often directly linked to the premium they place, meaning that as policyholders’ costs increase, some brokers stand to make greater profits.
Mactavish’s CEO Bruce Hepburn said “The insurance industry is not held in high esteem, and rightly so. A lot of the practices we see in our work are wrong. Policyholders appoint brokers to work for them to get the best deal. In reality, whilst there are some very good brokers, they are too often also working as the agent of insurers, producing incredible potential for conflicts of interest.”
Mactavish raised issues around the role of brokers with the FCA in May of last year, and pushed for them to be included in its business interruption test case, which reached its final judgement last Friday. Many businesses rely on the services of brokers and depend on their advice when buying cover precisely because insurance is such a technical subject. The legal battle that has been going on in the courts, makes clear just how complex these wordings are.
The ruling states that “the overriding question is how the words of the contract would be understood by a reasonable person” it also adds that an ordinary policyholder “on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.” Mactavish contends that ordinary policyholders who were not specialists in insurance would have seen little or no difference between the relevant wordings in the policies included in the action. Indeed, as the case has gone on it has become increasingly apparent that many of the insurers involved had little idea of what their wordings actually covered.
Hepburn added: “We have a ludicrous situation in which policyholders all too often pay brokers for professional advice only to find that such advice is deemed irrelevant by the FCA and the courts, and that the onus is entirely on the policyholder to interpret incredibly complex insurance law. Worse, many brokers’ terms of business actually exclude liability for the professional advice they do supply on wordings, meaning that clients cannot pursue them for damages even when their guidance has clearly been wrong. In reality, in too many cases there is little difference between using a broker and simply buying insurance through the aggregation websites we might use for travel or car insurance – except that brokers charge much higher fees and aren’t held to the same standard as consumer intermediaries.”
Mactavish believes that, of the small minority of firms who may have a valid claim as a result of the Supreme Court’s judgement, many may also have missed their chance to notify insurers because their brokers had previously told them that their claims were not valid. The company says that it has been approached by policyholders who have experienced precisely this scenario.
“What this amounts to is a wordings lottery in which a minority of businesses will find that they do now have a valid claim – however small – while others, through no fault of their own or conscious choice between wording types, are left with nothing. It’s lifted a veil on this strange industry in which neither insurers, brokers, or policyholders have a clue as to what is and isn’t covered under the policies they sell and buy. Ironically, the best hope for many claimants will be that some of the more responsible insurers realise the incredible reputational damage that this crisis has caused and move to settle claims promptly before it gets worse.”
“The insurance and broking industries seem to exist in a land that is detached from economic reality, but it’s important to remember that only last week the Federation of Small Businesses predicted that 250,000 firms may be facing bankruptcy in the months ahead. For them, this is all too real. Meanwhile, the FCA has pulled a small number of survivors from the wreckage and is now celebrating.”
Prior to the pandemic, Mactavish launched an initiative called the Reform Agenda to look specifically at some of these failures in the insurance sector. Amongst the concerns the company raised were issues around the commoditisation, the opacity of wordings, and the confusing role of the broker. It believes that these issues have now risen to public prominence as a result of the pandemic and hopes that this marks a turning point in how legislators and regulators look at the industry.
“Aside from the specifics of the FCA’s case, it’s important to understand that these issues are not unique to Covid-19. They are deep systemic failings that impact businesses day in, day out. The only difference this time is that a very large number of policyholders have been impacted by a single incident. Insurance is a compulsory purchase for many businesses, and I simply don’t understand why politicians don’t take an interest in it. The impact is a big as something like PPI, but gets a fraction of the attention.”
Mactavish wrote to the Treasury Select Committee last year with the intention of raising some of these issues and urging it to consider new regulatory approaches.
“Our role is to champion the interests of policyholders, but it is worth adding that these problems also impact the long-term health of the insurance industry itself. It is one of the UK’s major net-exporters, but that will not remain the case if it continues to sell an inadequate, unclear and overly standardised product through convoluted intermediary arrangements and then tries to do absolutely everything in its power to avoid paying out.”