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Summary
- The Financial Conduct Authority has told the UK Supreme Court that UK based insurers are violating the essence of insurance
- Insurance companies are reluctant to settle Covid-19 claims as settling these claims would cost them a huge amount of money
- On 15 September 2020, the high court had ruled in favour of FCA and policyholders on a majority of key issues
UK’s businesses have suffered substantial losses in the wake of coronavirus pandemic. The insurers in return have rejected claims related to pandemic cover. There is a lot of ambiguity in insurance policy wordings, and a lot of clarity is required. The regulator, Financial Conduct Authority had intervened amid the hue and cry of insurers denying claims.
Markets watchdog, Financial Conduct Authority (FCA) told the UK Supreme Court on Tuesday (17 November 2020) that UK based insurers are violating the essence of insurance as a concept by trying to evade accountability for pandemic-related business losses.
Insurance companies are reluctant to honour these claims as settling these claims would cost them a huge sum. From an insurer’s perspective, settling coronavirus business interruption claims could lead to devastation of the entire pool of funds. Insurance business thrives on a pool of investments that is created by premiums paid by the insurance buyers over a period. But this reasoning of the insurers simply defies the purpose of insurance.
Also read: FCA Seeks Legal Clarity on Business Interruption Insurance
Reportedly, the insurers decided in conformity with each other that it is an extraordinary situation, which might occur once in a lifetime and has an impact across the world. Therefore, these claims during the coronavirus pandemic are largely unsettled. Notably, several businesses have been devastated and are going through an existential crisis in the wake of the coronavirus pandemic. These businesses were in a tight spot after insurers rejected claims for business interruption cover as they had to shut down or restrict trading during the government enforced lockdowns. The insurers opine that the pandemic is different from other perils.
Business Interruption Insurance policy
The business interruption policies generally cover loss of revenue or profit to the company in the event of physical damage to business premises. In addition, the insurers settle claims when the insured ‘premises become inaccessible’ in the wake of public authority restrictions or in the event of a notifiable disease within a specified area. However, insurers argued that the “prevention of access” clause in the policy wordings does not cover losses incurred due to pandemic.
Also read: Performance Review of Two FTSE Listed Insurance Stocks: Admiral Group & Direct Line Insurance Group
High Court’s decision
On 15 September 2020, the high court ruled in favour of FCA and policyholders on the majority of key issues. A large number of policyholders are expected to benefit; however, not all policies would be covered. The apex law authority directed the policyholders to emphasise on precise policy wordings.
Why are pandemic losses not covered by insurers?
Pandemic, unlike other catastrophes are not covered across the sector. It is not a risk mitigation mechanism. Most catastrophes like floods, hurricane or earthquake are limited by geography or time. These catastrophes are confined to some boundaries and last for a certain period. Pandemic, on the other hand has no boundaries and its duration is hard to estimate. In addition, insurers have a finite amount of money on their balance sheet and the loss potential from the pandemic is infinite. Only the government can help the businesses bailout form infinite losses. The insurers could go bankrupt in settling pandemic related claims. It is important to note that the insurance industry has been hit as hard as other sectors.
Let us discuss the impact on two UK based insurers: HSX & DLG
Hiscox Ltd (LON:HSX)
The international specialist insurer, Hiscox, expects coronavirus pandemic claims to increase due to business interruption that could amount to be under £100 million net of reinsurance. As trading conditions continue to improve in every segment, the Insurer continued to deliver a resilient performance in the third quarter. The insurer witnessed an increase of 19 per cent in its gross written premiums during July and August in comparison to the same period last year.
On 18 November 2020 at GMT 1:09 PM, HSX shares traded at GBX 1,082, up by 0.98 per cent from previous day price close. The market cap of Hiscox Group was hovering around £3,712.39 million.
Direct Line Insurance Group Plc (LON:DLG)
United Kingdom-based personal and small business general insurer, Direct Line Insurance Group claims that the FCA test case would not have any significant impact on the Group's standard business interruption policy languages in the context of the Covid-19 pandemic. The Group is expected to deal easily with as it has underwritten a very small proportion of relevant policies on non-standard wordings that are least likely to get impacted by the test case.
On 18 November 2020 at GMT 1:04 PM DLG shares traded at GBX 299.70, up by 1.80 per cent from previous day price close. DLG shares have delivered a modest price return of 7.56 per cent in a year’s time. The market cap of Direct Line Insurance Group was hovering around £4,017.24 million.
