FCA outlines expectations over COVID-19 BI claims

The Financial Conduct Authority has urged insurers to quickly assess and settle any business interruption policy where it is clear they have an obligation to pay out. This was among a series of obligations set out today by the watchdog in a Dear CEO letter to the industry -- one in which it urged for clear, accurate and timely communication with insureds over the issue.

Interim chief executive, Christopher Woolard said insurers and brokers have an essential role to play in supporting customers that may be unclear as to whether they have appropriate cover in place, adding that it will be collecting information from firms in order to assess exactly how they are interpreting policies.

"Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic. While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances," he stated.

"In contrast, there are policies where it is clear that the firm has an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. A key objective of the FCA is to ensure that financial pressures on policyholders are not exacerbated by slow payment, rather, such claims should be paid as soon as is possible. This is consistent with the wider objective of the authorities to support business and consumers during the current crisis. If there are reasonable grounds to pay part of a claim but not to make the payment of such claims in full, we would like you and your Board to adopt an approach of making an interim payment. Many firms are already doing this. If you disagree with doing so, we would like you to send to us the grounds for reaching that decision including how you believe it represents a fair outcome for customers. Your firm’s decision is likely to help inform our assessment of its culture."

Payment of some policies, it said, may be disputed. In that instance, where a policyholder is a small business with an annual turnover below £6.5m, and fewer than 50 employees or an annual balance sheet below £5m, it is likely to fall within the jurisdiction of the Financial Ombudsman Service, which can provide speedier decisions on claims of up to £355,000.

Welcoming the news, managing director of engagement at the CII, Keith Richards, said it represented an opportunity for the insurance industry to demonstrate its ability to pay claims quickly.

"We welcome the FCA’s approach to business interruption insurance set out in the Dear CEO letter, including its decision not to intervene where policies do not cover pandemics.

"We also support the FCA’s focus on paying claims in a timely fashion. Each year, the CII interviews 2000 small businesses to gauge their trust in insurance. To date, SMEs who make claims have told us that their claim is usually dealt with speedily - in fact, speed of payment is one of the best performing indicators that we measure. However, perceptions about how quickly a claim will be dealt with among SMEs buying insurance is significantly worse – our research shows that it is one of the areas that SMEs are most concerned about.

"The insurance sector has an opportunity to demonstrate that its ability to pay claims quickly is better than most people perceive it to be. We are confident that the majority of insurers will continue to build trust in the profession by delivering on their promise with a clear, accurate and timely processes that the FCA is looking for.”

Consultant Mactavish was less optimistic about insurers' prospects of satisfying the regulator's requirements, saying recent investment losses and more careful cash management are likely to hamper settlements and that, like so many other offices, claims departments are not at full capacity due to the lockdown, or because staff have fallen ill with the virus.

"The impact of coronavirus on businesses is huge, and sadly most did not have insurance policies that covered pandemics so relatively few will be successful if they make a claim," CEO, Bruce Hepburn said. “However, with many businesses struggling insurers have a duty to make any legitimate settlements as quickly as possible, but to also respond to clients who have made claims to let them know the outcome and the reasons for this.

"Insurers should have their feet held to the fire over this and the only way of doing this would be to have a review process set up so that their actions can be monitored properly."

Mactavish further called for an independent review process set up to monitor how insurers are dealing with coronavirus-related claims and settlements.

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