Covid-19 – 7 steps to treating insurance customers fairly

Published by Wan Hsien Heah on

Our experts

  • Wan Hsien Heah

    Wan Hsien Heah

    Partner and Consultant

  • Estimated reading time: 9 minutes

    Insurers need to give careful consideration about to how best to deal with their customers, especially during the Covid-19 pandemic

    While the Treating Customers Fairly (TCF) initiative primarily applies to personal lines customers, the considerations discussed below do also apply to commercial lines customers, especially in the Small and Medium Enterprise (SME) space.

    Treating insurance customers fairly has always been at the heart of the insurance industry. However, when push comes to shove and an extreme situation such as Covid-19 arises, treating customers fairly becomes more difficult as insurers try to balance their customers’ needs with their own financial viability.

    Covid-19 brings the need to treat insurance customers fairly into the spotlight. There have been a number of articles globally in the media on how insurers have been accused of denying legitimate claims. This incurs reputational damage for the insurer, even if the accusation is baseless. In turn, this impression has a knock-on impact that affects the reputation of the industry as a whole. 

    In this blog, another in our insurance Covid-19 series, we look at the actions that insurers can take now to help customers get through this difficult time, and better prepare the industry for future pandemics.

    What are the risks of not treating insurance customers fairly?

    The main risks to the insurer are both conduct risk and reputational risk. Both can arise when there is a mismatch between a policyholder’s prior expectations and the insurer’s intent with respect to claims. To an extent, this is now a risk event as it speaks to a failure within the sales process to ensure that the product meets the needs of the customer and that terms and conditions are unambiguous. This is particularly acute where consumers are highly sensitive to price and pay insufficient attention to the terms and conditions that they have signed up to.

    The unwillingness of insurers to pay, even when they are liable, exacerbates the damage to their reputation and heightens the risk of a conduct investigation. Loose wording, and the ensuing waves of legal action being taken against insurers, brings the confrontation into the public domain. Such an occurrence is unlikely to end well for the insurer, even if they win the legal argument. 

    If an insurer is not there for policyholders in time of need, they will take a reputational hit. This is a tricky predicament as policyholders who are more desperate may attempt to “shame” insurers into paying invalid claims. There are indeed calls for insurers to pay out in the spirit of the arrangement – not under the letter of the wording. This remains very much a grey area and insurers will need to decide carefully how they respond to this.

    The action of one insurer can lead to reputational damage for the sector as a whole. This is because many of the complaints have made it to national or international news media. Insurers should consider co-ordinating their responses, as has been done through the various industry and trade bodies, to avoid tarnishing the reputation of the sector as a whole. 

    It is also important for reinsurers and brokers to consider their role in this as they will have some influence on how the sector could respond to a stress event like Covid-19.

    IFAs must carry out an Appropriate Pension Transfer Analysis (APTA) for every member they advise, but preparing an APTA can be time-consuming and complicated. It is crucial that where IFAs outsource some analysis for their APTA to companies such as Barnett Waddingham, the process remains robust, seamless and avoids delays. Barnett Waddingham gives IFAs access to online platforms which seamlessly provide APTA calculations as part of their transfer advice process.

    The stance of regulators in regards to Covid-19 is generally to protect the policyholder. Some regulators have applied pressure to the industry, ordering them to justify non-payments of claims. In the US some states have started legislating to allow for claims retrospectively, even if they were outside of the policy wording. This has dangerous consequences for the financial viability of insurers who operate in those jurisdictions. 

    Fortunately for the UK, the Financial Conduct Authority (FCA) has already set down expectations that it is unlikely to interfere where there is no obligation to pay. However, it continues to expect that insurers carry on behaving in accordance with its principles of business, regardless of the operating difficulties that insurers might experience. 

    Firms that fail to conduct themselves in accordance with the principles of business can certainly expect intervention from the regulators (whether the FCA or the CMA) and possibly fines and redress payments.

    What actions can insurers take now to treat their customers fairly?

    Our 7-point plan is a good start to help you shape your approach to TCF.

    Transaction costs are higher in most assets – especially credit assets – at the moment and so this will need to be considered.

    One of the best ways of dealing with conduct risk is for insurers to be clear and transparent with their customers. Insurers should make clear to their customers about the situations under which a claim is valid or not. This needs to be done in line with the policy wording. 

    Insurers will do well to clarify any potentially ambiguous terms to manage their policyholders' expectations. This applies not just to personal lines customers, but also to businesses - particularly SMEs - who may be looking for an insurance pay-out to ensure survivability. 

    Consistency in messaging between the insurer, broker and distribution teams is paramount to avoiding confusion. Insurers who are members of a trade body will need to ensure that their messages are also consistent with the agreed statements of their trade body.

    Insurers should explore the range of communication channels that are available to them, to encourage the flow of communication with their customers. This could be dedicated hotlines for Covid-19 customers or improving their online offering to divert customers away from call centres. They may also look to extend call centre hours, where possible, or use virtual chatbots to handle less complicated matters like changes in circumstances.

    Insurers will also need to be clear with their customers on how they will communicate with them. The Covid-19 situation has unfortunately seen an increase in scams, where third parties pose as the insurer in order to defraud their customers. Customers need to know that they can communicate in a safe and secure way with their insurer.

    This also applies in an insurer’s communication with their regulators. They may seek the relaxation of certain rules as it may be in the best interests of their customers to do so. For example, timelines for dealing with customers may be extended due to an increased volume of claims to allow each claim to be assessed fairly and with due consideration. These expectations must be managed proactively to avoid later sanctions with respect to conduct risk. 

    Insurers should consider what it is that their customers want during this difficult time. There have been numerous examples in the US, and more recently in the UK, of motor insurers refunding premiums to policyholders— in recognition of the lower exposure due to the movement restrictions. This can be a welcome relief for policyholders who are struggling financially; for example those on furlough or who have lost their jobs and are in desperate need of cash. 

    An alternative to refunding these premiums is to offer additional value added services for free, such as paying for the cost of delivering groceries, vouchers for food shopping or medical testing. This will show how the insurer is thinking about their customers. It will also help manage insurers’ cash outflows.

    TCF already applies to policyholders who are struggling with premium instalments in ordinary times; it applies even more so in today’s situation. Insurers can consider payment holidays (in exchange for reduced or frozen cover), waiving administration fees, waiving APR interest fees for those paying in instalments or even offer a return of premium at the end of the policy to help their customers. 

    These measures do not necessarily need to erode the financial strength of the insurer. Alternatives like a promise of a higher discount at renewal, or tagging on additional ancillary cover for free, may be enough to demonstrate that insurers are keeping an eye on their customers’ needs.

    Where a claim is valid, an insurer should make sure that the claim is paid quickly, as liquidity will be the primary concern for the claimant. Insurers can consider various approaches here to ensure speedy payment without claims leakage, including making staggered payments as a claim progresses through its lifecycle. Interim payments could also be made pending finalisation of a claim. This is to support policyholders so they can continue to pay unavoidable bills whilst the final amount is agreed on. 

    Insurers will need to ensure that any changes made affect both Covid-19 and non-Covid-19 claims equally. It is important not to forget that the rise in Covid-19 claims does not necessarily mean a decrease in other types of claims. 

    Insurers may decide to make changes to their covers; for example to exclude Covid-19 or pandemic perils. Policyholders will need to be made aware at renewal that these are new exclusions which they need to consider. Any variations mid-contract should be done carefully to avoid disadvantaging policyholders who were expecting a continuation of cover, especially in relation to Covid-19. This is arguably unfair as the insurer will be penalising the policyholder for its own failure to assess the insurance risk at the outset. 

    Fundamentally, insurance is done on the basis of uberrima fides, which also applies to the insurer. The same considerations apply at renewal where an insured may be expecting a continuity of cover, only to find that cover has been suspended at renewal.

    Where a dispute arises on the legitimacy of claim, the insurer can make use of ex gratia payments as a means of managing reputation risk. However, this could be quite expensive, given the large potential exposure and time under exposure.

    Insurers should also assess if there is a need for any temporary relaxation to its processes in light of this extraordinary situation. This may include accepting duplicate documents from customers instead of originals, waiving prior notification of changes or allowing customers some flexibility with evidences. 

    Insurers may also want to allow some flexibility with things like customer notification of changes to circumstances, especially where the insurer’s call centres may be inundated with more urgent calls. There have been some examples of this in the UK, where volunteers for the NHS are not required to notify their motor insurers as long as they are part of the Association of British Insurers (ABI), so that cover is automatically extended without additional charge.

    The FCA defines a vulnerable customer as “...someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”. The treatment of vulnerable insurance customers will be critical as the composition and pool of vulnerable customers will change to include those under financial stress as a result of redundancies or being on furlough. Insurers should ensure that they are continually identifying such customers and proactively engaging with them to ensure that they understand what actions are available to them. 

    The response to Covid-19 should be no different to how an insurer responds to, say, a flood event. For example, an insurer could identify affected customers based on their occupation or location and proactively contact them to ensure they are making use of their insurance policies where applicable.

    Insurers will also need to ensure additional flexibility is available to their distribution staff, in order to protect vulnerable customers without necessarily losing their custom altogether. This may include flexibility in pricing or in adjustments, as well as call centres actively following up with vulnerable customers to ensure their specific needs have been understood and met. 

    Where had all the scammers gone? Suddenly, every day wasn’t another sage of escalating threats and attempts at intimidation from the liberation boiler rooms. Weeks could go by without anyone threatening our jobs, reputations or businesses. Had the overseas transfer charge driven the overseas scammers into permanent retreat? Or were they just rapidly googling how to re-register their schemes somewhere within the European Economic Area (EEA) to circumvent the charge?

    An FOI request from Royal London to TPR, reveals £60bn of DB transfer activity since the introduction of pension freedoms, with £34bn in 2018/19 alone (close to 250% of the previous year’s figure) and more than twice as many individual transfer cases (210,000 compared to 100,000 in 2017/18).

    One measure specific to the Covid-19 is to assess the payment of dividends and bonuses. The Bank of England has already suggested insurers consider carefully the payment of dividends whilst the Covid-19 situation is ongoing, with some insurers already suspending dividends*. The same consideration should also apply to the payment of excessive bonuses to insurance executives, recognising that staff should be remunerated for working through these difficult times.

    Being responsible with dividend payments and bonuses has a bi-fold effect. Firstly, it provides the insurer with additional financial resources to ride out the storm. Secondly, it avoids the risk that the insurer is accused of using public money to pay dividends and bonuses, especially if the insurer benefits from any sort of job retention scheme or suspension of levies and taxes.

    Long-term considerations for managing insurance customers

    Covid-19 has placed particular scrutiny on treating insurance customers fairly. As well as the associated conduct risks, insurers face threats to their own reputations, together with the industry. However, there are actions that insurers can take now to help customers get through this difficult time and better prepare the industry for future epidemics. 

    Insurers should also be aware that there may be a lag in their conduct risk key performance indicators, such as in loss ratio monitoring, for example. So pro-active steps may need to be taken in order to address the risks in time.

    In the above we have covered the actions that a specific insurer can take in the short term. In the medium to longer term, insurers could consider doing a ground up assessment of their conduct risk, even to the extent of quantifying the capital needed to buffer a redress event. There are also conduct risk dashboards that can be put in place to help boards and senior managers monitor the potential risks that they face. 

    There has also been talk of a “Pandemic Re” in the UK for future pandemics like this. Additionally, insurers could consider if additional government support to address claims for Covid-19 may be necessary, as has happened in some parts of Continental Europe. This will have the added benefit of using insurance policies as a means of delivering state aid. That may cut through some of the issues around eligibility and speed of payment.

    Please reach out for further information or if you would like to discuss your conduct risk exposures further. We also have experience assessing and quantifying conduct risk, including from a risk management and capital modelling perspective.

    *Bank of England. 2020. Letter from Sam Woods to insurers on distribution of profits. 31 March. Accessed April 29, 2020. 

    Wan Hsien Heah is an associate and senior consulting actuary within the Insurance Consulting team, with experience in a broad range of General Insurance services. 

    Matt Bett is a consulting actuary within the Insurance Consulting team, providing advice and support to General Insurance clients.

    Get in touch

    Stay up to date

    Get the latest independent commentary and exclusive insights from a range of experts at the forefront of insurance, risk, pensions and investment – tailored to your preference.

    Subscribe today