Covid-19 BI disputes to shake up broker and insurance buyer roles: Mactavish

The role of insurance managers and brokers is likely to come under intense scrutiny after Covid-19-related insurance disputes have exposed deep flaws in relationships between buyers, brokers and insurers, according to Bruce Hepburn, chief executive and founder of Mactavish, a UK-based outsourced insurance buyer and claims adviser. Covid-19 has left many companies nursing large business interruption (BI) losses. Much of the loss is uninsured due to inadequate extensions and exclusions in commercial insurance policies. However, a growing number of businesses are in dispute with their insurers that have denied claims. Hundreds of small to medium-sized business have joined group actions, while the UK regulator is currently testing the wordings of eight insurers in the High Court. The situation has exposed fundamental flaws in the insurance industry, raising serious questions around regulation and the conduct of brokers and insurance managers, according to Mr Hepburn. In particular, recent events have shone a light on the sometimes “cosy” relationships between professional insurance buyers and their brokers, as well as conflicts of interest for brokers, who typically represent clients but also act on behalf of insurers, he told CRE. The flaws exposed by Covid-19 coverage disputes will have long-term implications for the insurance market and the risk management profession, argued Mr Hepburn. “This is an issue that the industry cannot escape from. Insurance purchasing will not go back to how it was. The relationship between insurance managers and brokers will be under much greater scrutiny from now on,” he said. According to Mr Hepburn, the failure to identify pandemic risks and buy adequate insurance will raise questions of company boards and risk managers. Boards that dismissed warnings by risk managers on the potential threats could face litigation, while risk managers that failed to raise the issue may be seen to have failed in their fiduciary duty, he said. Covid-19 raises serious questions for all parties involved in risk and insurance management, he continued. “Firstly, you have to look at the role of brokers as professional advisers on risk and risk transfer. Did they educate their clients about pandemic risks? Looking at the corporate landscape, there will be some cases in which insurance and risk managers will have failed to prepare for these events; in others, those managers will have flagged those concerns only for them to be ignored by boards and risk committees. The reality is that pandemics and epidemics are far from unprecedented ‘black swan’ events and they should have been on the radar of every major institution, especially those most impacted,” he said. At a time of rising insurance rates, many insurance managers have been furloughed or made redundant during the pandemic, according to Mr Hepburn. Which he believes raises serious questions. “How can insurance managers be laid off in a hardening market that also coincides with a period in which companies’ risk profiles are changing so drastically? It suggests to me that they have not been successful in demonstrating their value and that the organisations they represent may have already missed the essential point of the ongoing crisis – that risk management was already an under-resourced and often ignored corporate function,” he said. In March, Mactavish called for “urgent and radical reform” of the UK commercial insurance industry. It said the focus on price over value of cover during the soft market has led to considerable erosion of insurance contract quality, growing opacity around broker fee structures and an increasing one-size-fits-all approach to complex risks. Mr Hepburn hopes more progressive risk and insurance managers will now push for a greater role, including new relationships with brokers that are more transparent and avoid conflicts of interest, as well as a bigger voice in setting corporate strategy. “Too often, insurance managers seem to act simply as a conduit to the broker or as managers of a commodified transaction – this undermines both their importance and their ability to enforce proper standards of governance. We now expect this to change and believe that there will be a cohort of more capable insurance managers that realise their role is to influence the way that risk is viewed throughout an organisation, from the board down,” said Mr Hepburn. “Recent events have given them the opportunity to demonstrate the importance of what they do. They should use this to redefine their roles and to create an independent voice for themselves. Those risk and insurance managers that don’t take this opportunity will likely find themselves in the firing line as boards come to understand that their own approach to risk and insurance governance is under scrutiny,” he added. “This is also about the insurance buyer standing up and operating independently of their insurance brokers. Policyholders need true objectivity, while the board needs to view the role of insurance buying seriously. It is a fantastic opportunity for high-quality risk managers but a major threat for many of the old-school buyers of insurance,” he continued. Insurers are under pressure over the response of insurance to Covid-19 BI losses. Insurers argue that policies exclude infectious diseases and pandemics. However, hundreds of businesses – often supported by their brokers – believe they are covered, and in some cases are taking legal action against their carriers. There are currently a number of class actions in play against Hiscox, QBE and Aviva, with others in the pipeline. “The direction of travel for the insurance industry has been in the wrong way. Direct brokerage fees and premiums are too low and customers do not do enough to assess their risks. The end result is that most buyers have cheap insurance that does not fit their risks,” said Mr Hepburn. “It is naïve to blame insurers alone – the insurance industry as a whole has clearly failed and policyholders are as much to blame as brokers and insurers. The reality is that too many policyholders have not investigated or discussed their risks properly and not enough time has been spent on buying and testing cover or managing conflicts,” he said. Mactavish believes that the fundamental issue at the heart of the Covid-19 insurance crisis is the mismatch of expectations between policyholders and insurers. Brokers sit between these parties and play a critical role in helping clients understand the complex technicalities of insurance policies, it said. It believes the insurance industry’s failings exposed by the Covid-19 crisis are symptomatic of its response to an investigation led by, then New York State attorney general, Eliot Spitzer during the early 2000s, into the use of anti-competitive practices in the insurance industry. As brokers looked to replace contingent fees, and falling income in the softening insurance market, a complex web of financial and contractual relationships has taken hold. In the drive for income, brokers replaced contingent fees with new service charges. However, research conducted by Mactavish suggests that brokers derive just 20% of remuneration from clients and as much as 80% from insurers, with 60% being both premium-linked and based on services to insurers. Brokers have also expanded into underwriting, often owning or helping to create broker schemes and facilities, MGAs or products developed exclusively with a preferred carrier. This has led to over-standardised policy terms and sees them work with a small group of preferred insurers on mutually beneficial financial terms, said Mr Hepburn. “The bottom line is that many brokers are the distributors of insurers, not an adviser. Some brokers sell far more services to insurers than they do to policyholders,” he said. However, buyer and broker representative bodies have hit back at claims that conflicts of interest are to blame for the growing number of disputed BI claims arising from the coronavirus pandemic. Mr Hepburn, meanwhile, also believes the current situation represents a failure of regulation. He argued that the UK’s Financial Conduct Authority (FCA), which oversees the regulation of insurers and brokers, has allowed conflicts of interests to flourish. “How is it that so many policyholders believe they have cover for BI when insurers are adamant that they do not? These products are sold by brokers, which, in some cases, have written the policy wordings themselves. I cannot understand why the regulator allows this scale of conflict of interest to exist and I equally don’t understand why buyers and their representative bodies have failed to understand the corrosive impact too,” said Mr Hepburn. “Ultimately, the regulator is to blame for allowing a regime to evolve that allows the situation we see today to occur. If it had stamped out the conflicts of interest and forced brokers to properly provide a service, then this situation would not have happened,” he said. The FCA has fast-tracked a High Court test case to establish whether there is cover for business interruption losses under certain business interruption wordings. The role of brokers – which advised customers but also drafted some of the wordings – is not addressed directly by the test case. The FCA should now conduct a wider review of the role of brokers and consider whether they have been negligent, Mr Hepburn said.

Covid-19 BI disputes to shake up broker and insurance buyer roles: Mactavish

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