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Clifford Chance

Clifford Chance

Insurance

Coronavirus and the "value" of an insurance policy

On 1 May the FCA announced a series of statements and guidance to firms regarding the impact of Covid 19 on the insurance sector.

There has been an understandable level of focus on the FCA plan to seek judicial interpretation of certain BI clauses, but the FCA has also set out proposed guidance on the impact of the lockdown on the value of insurance products and how firms should address this issue.

The government has since released its plan for restarting the economy and the gradual easing of lockdown restrictions and firms will need to consider the impact of these developments on this question of value.

Under the FCA's proposed guidance insurers have been given 6 months from the date of the final guidance to consider whether and how coronavirus has materially affected the value of their products and how to treat customers whose products have lost value.

The guidance requires firms to assess where the effects of the lockdown mean that either (i) claims cannot be made as the insured event can no longer occur, such as public liability insurances for businesses that remain closed such as bars and restaurants or (ii) where insurers cannot provide contractual benefits in the expected form or timeframe, for example annual boiler servicing or routine dental appointments.

These triggers seem clear, although there will be some uncertainty in some areas. For example, as we come out of lockdown it may be possible for boilers to be serviced within an annual plan. On that basis, the presumption must be that the trigger is not met although it's not necessarily clear in the guidance. The FCA then requires that, once firms have identified the products within scope of assessment, they are best placed to assess what the appropriate response should be. Examples, such as premium refunds, are given. The indication is that the FCA may review these plans so firms will need to consider if and how best to engage with the regulator in putting plans in place.

The FCA's statement is clear that firms are not expected to undertake a value assessment for products where a claim is still possible but the likelihood of a customer making a claim may have changed, but firms may choose to consider including such products in their support package. However the guidance then goes on to state that in these type of circumstances, the firm should consider the value of the product where a customer contacts them because they are having difficulty making repayments, wish to reduce cover, or have made enquiries about their cover in light of coronavirus or where the firm has reasonable basis for knowing, or has identified (or should have reasonably identified) that there are customers who are suffering financial distress such as missed payments, even where those customers have not contacted the firm.

This is potentially very challenging for firms and creates potential uncertainty in the guidance. It is unclear whether firms are only required to track these two instances (i.e. where a customer contacts them or where a customer gets flagged because they missed a payment) or should be conducting a larger diligence exercise and reaching out to their customers to understand if they are experiencing financial difficulties. At a minimum, the guidance provides that firms should make clear in their customer communications, including their websites, the different solutions available to customers and encourage them to make contact if they are experiencing temporary financial difficulties as a result of coronavirus.

Although the guidance is immediately helpful for those scenarios where the value assessment and corresponding remedy is clear-cut, it will be more challenging for firms to conduct value assessments and implement appropriate actions for certain products which may still provide a partial benefit to customers during the coronavirus period. In particular, the government's latest measures to take the economy out of lockdown lack the required clarity that businesses need to work out how they can operate in the current climate and foreseeable future.

As the impact of COVID-19 looks to extend into the rest of this year and beyond, we expect to see more from the FCA on product design and "value" well beyond this initial 6 month assessment period.

This article first appeared in Insurance Day