The insurance industry is very adept at creating complex methods of dealing with risk but, as is often the case in life, if you go back to basics it’s really quite simple. Whatever product an insurer decides to underwrite they need to create a pot to pay for the claims and the costs of writing the business.
The number of brokers in the UK is not large it is estimated that there are around 2,500 – 3,000. This alone limits how much premium can be generated by the market.
Insurance brokers are almost unique in the exposures that they face. With other professions, large losses can normally be shared around. Let’s take a construction project with a total contract value of £10M. If the building is completed but then a problem arises, you rarely see a total building failure. Even if it has to be re-built, it’s extremely unlikely that the architect, contractor or engineer will be solely liable.
Now, what if a broker places insurance for that £10M building and there’s a serious fire? And what if the insurer refuses to pay, saying there’s a non-disclosure? The broker could be liable for the whole £10M and some. And the building design team and the contractor get paid £10M. What does the broker get paid?
Aside from this disaster exposure, clients can be unhappy when their insurance policy doesn’t respond as expected with smaller losses and the accusation of negligence can be quick to arise. Claims can often be defended but it a takes time and money, whether dealing with the courts or FOS.
At Manchester Underwriting Management, we included a ‘claims prevention helpline’ when we developed our broker product. Our insureds can speak to an experienced solicitor to talk through any issue they have with a client or insurer as long as it is insurance-related; they will even help draft correspondence. The idea is to try to solve the problem before it becomes a claim against the broker. Take our fire claim – legal help when the insurer first reserves their rights might mean the disclosure issue can be solved before the reservation becomes a decision not to indemnify. We get so much positive feedback.
The game changer now is COVID-19. As the first lockdown took hold, we saw the first notifications by brokers under their PI policies as their customers found that their business interruption insurances weren’t paying out. The notifications continue to arrive as the pandemic continued and the recent Supreme Court judgement has added to this with the media creating unfulfilled expectation. And the lawyers lie in wait.
Some insurers pulled out of the market, probably as much because of other loss experience as because of the pandemic. Other insurers have excluded pandemic-related claims, especially for new business. We took the decision provide our insureds not only with cover but also with support. Our insureds can speak to an experienced solicitor for support with disappointed customers who, understandably, can be angry and emotional. We have also had many conversations directly with our insurance broker clients on Covid-19.
Most brokers with commercial customers will be having to provide advice to them on insurance matters relating to COVID-19. It’s a difficult time as insurers tidy up their wordings on renewal to make the position clearer. The risk for brokers and their PI insurers has grown. We’re seeing claims start to progress and we expect to incur significant expense as we defend our insureds.
One thing we can be certain of is that this won’t be the last article on brokers’ exposure to COVID-19 claims!
Manchester Underwriting Management is a trading name of Pen Underwriting Limited which is authorised and regulated by the Financial Conduct Authority (FCA number 314493). Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 5172311.