Risk managers begin to feel burden of the Insurance Act

This will leave such firms open to disputes and litigation as insurers and the courts test the new laws. Furthermore, there is concern at the Federation of European Risk Management Associations (Ferma) that continental European risk managers in particular are unaware of changes to insurance placement law under the Act and, as a result, are ill-prepared for its implementation (see related article). Risk managers are currently preparing for the Insurance Act, with some already undergoing policy renewals with the legislation in mind. In force from 12 August, the Act has important implications for policy wordings, disclosure and the way in which risks are presented to underwriters. Early application of the Act has already high-lighted some unintended consequences, according to Charles Beresford-Davies, head of the risk management practice at Marsh in London.hideApplication of the Act is “proving an extremely com-plex process” that presents a huge burden for risk managers, he said. “For the larger, more sophisticated buyers, the Act has created a great deal more process, documentation and due diligence,” he added. According to Clive Clarke, deputy chair of the Association of Insurance and Risk Managers in Industry and Commerce (Airmic) and chair of the association’s insurance steering group, much of the initial work to interpret the Act is falling on risk managers, supported by their brokers. Mr Clarke noted that interpreting and applying the Act is proving to be a bespoke exercise, perhaps more so than many had expected. Given differences in corporate structures, risks and insurance arrangements, it is down to risk management teams to apply the act to their own businesses, he said. Awareness of the Act is high among large corporates, but many risk managers have yet to fully realise the extent of the work required if their contracts are to be compliant, according to Bruce Hepburn, chief executive of insurance governance adviser Mactavish. “The Act is very challenging and burdensome for risk managers, and they are only waking up to that late in the day,” he said. Many wrongly believe that existing market practices will meet legal requirements under the Act, believes Mr Hepburn. “Even though the Act rebalances the law in favour of policyholders, it will set new standards of disclosure and placement that won’t be met by existing practices in most cases,” he said. As a result, Mr Hepburn believes that many companies will enter into insurance contracts this year that do not fully comply with the Insurance Act. This will place them at a disadvantage if it comes to a claim. He also believes that such companies will be innocent targets of inevitable litigation that will follow the Act. Insurers have yet to show their hand. Other than some high level guidance, it is not yet clear how insurers will interpret key aspects of the Act, such as disclosure and fair presentation of the risk. A “uniformed response” to the Act has yet to emerge from insurers, either in the form of guidance or with regards to contract wordings, according to Marsh’s Mr Beresford-Davies. “Some insurers have issued amendments and endorsements, while some are silent on the issue and are likely to just allow the Act to apply. It is inevitably taking time to understand each insurer’s position,” he said. Where insurers have already adapted their wordings to allow for the Insurance Act, the results have not always been ideal, he warned. “Early drafts of some policy wordings fall short in terms of clarity and insurers’ intent, and sometimes they offer a narrow interpretation of the Act. This is still a work in progress,” he said. Risk managers at large corporations have been engaging with insurers over the Insurance Act, according to Brian Kirwan, chief executive of Allianz Global Corporate & Specialty in the UK. “Awareness is high and so is interest. Risk managers have read the Act, understood it and have questions on its execution. We can’t advise clients, but we can discuss issues, such as fair presentation and what constitutes a reasonable search,” said Mr Kirwan. Key aspects of the Act, such as implications for disclosure and presentation of risk, contracting out and consistency of approach to wordings and disclosure, should become clearer during the course of the next few months, he explained. “Over time, as we move through renewals, it should become clearer which information is considered key by underwriters,” he said. Even though it is early days, a number of issues are already beginning to emerge, such as implications for coverage taken out in advance of the 12 August deadline. Although contracts entered into before August are not subject to the Act, there may be implications for amendments or endorsements made after the deadline, explained Airmic’s Mr Clarke. There is no definition given under the Act for variations and there will therefore be legal uncertainty around changes made to contracts entered into before 12 August, according to Mr Hepburn. “It is not clear how changes made after 12 August will interact with the existing contract,” he said. Another contentious issue has been the degree to which companies can bring about benefits of the Act ahead of its August deadline. “We have been advising clients to behave as if the Act were in force. Even where they renew before August, they should prepare for their new obligations—such as around disclosure, gathering and presenting data and audit trails—under the Act,” advised Mr Beresford-Davies. There is consensus on the benefits of testing Act-compliant pre-placement procedures before August. However, amending contracts to reflect the Act is less straightforward. Airmic has recommended that risk managers prepare for the Act in good time and start renewals early. The Association also worked with law firm Herbert Smith Freehills to draft a clause that aims to achieve the benefits of the Act for buyers renewing ahead of the 12 August implementation date. There are lesser aspects of the Act—such as remedies for breach of warranty—that can be adopted early, according to Mr Hepburn. But he cautions against early adoption of the main thrust of the Act around issues such as disclosure and fair presentation. “It is important to not adopt early parts of the Act with which you cannot comply, or do not understand what it would take to comply,” said Mr Hepburn. “Our advice is not to adopt the Act early in terms of contract in most cases, but to prepare for the Act in terms of processes,” he added. According to Mr Beresford-Davies, most large clients want to be ready for the Act in advance. However, decisions on whether to use endorsements to get the benefits of the Act early are complex, he added. “It is not a one-size-fits-all approach,” he said. For example, some policyholders already have advanced non-dis-closure language in their policies. It is possible that a standard Insurance Act endorsement could be less advantageous than some bespoke policy language already in place, Mr Beresford-Davies explained. The transition to the Act poses a challenge for risk managers, brokers and insurers, according to Kees van der Klugt, director, legal and compliance at the Lloyd’s Market Association. “It could be the case that a particular policy wording does not strictly need to be changed because of the Act, but after the new law comes into force, the policy will react differently. The parties need to be aware of the pitfalls,” he said. “Uncertainty could result unless there is clear drafting. There are inevitably areas of the new law that will be tested in the courts, but steps can be taken to minimise the risk of disputes,” he added. Risk managers, brokers and insurers also need to be mindful of inadvertent contracting-out when revising wordings, according to Mr Van der Klugt. Clauses may be drafted that aim to reflect the new law but with wordings that are subtly different from the Act—for example, in relation to pre-contractual disclosure. “If such wordings are brought into the market in slips after 12 August, this could result in inadvertent contracting-out from the Act, but in a way that may not meet the contracting-out requirements. This would be fertile ground for future disputes, if allowed to happen,” said Mr Van der Klugt. While it is too early to tell if the Act will achieve its goals, potential changes in the relationship between insurer and customer are already becoming apparent. Mr Kirwan notes risk managers’ growing interest in understanding how insurers arrive at underwriting decisions, including pricing and risk selection. According to Mr Kirwan, the Act requires insurers to clearly articulate to buyers how underwriters use information provided by the policyholder. As transparency over insurers’ use of information increases, risk managers could take actions that drive the structure and cost of their insurance, he explained.

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