Tag Archives: George Barrett

FCA guidance on “Product value and coronavirus”

On 3 June 2020, the Financial Conduct Authority (FCA) operating in the United Kingdom issued guidance on its expectations of insurance firms in relation to product value arising from the COVID-19 pandemic. This guidance applied to all non-investment insurance products, including all general insurance and private medical insurance (PMI) products. The guidance is available here.

What does the guidance say?

The main purpose of the guidance is to “identify any material issues from coronavirus that affect the value of [insurers’] products, and their ability to deliver good customer outcomes.” The FCA defines product value as “what the customer is paying for and the quality of the product or service it is intended they receive.” The measures were placed into effect from the day of the release of the guidance and the FCA stated that it would review the response from insurers after six months. At a minimum, the FCA is expecting insurers to review their products and take appropriate actions.

In this blog post, we have put together some further guidance on how UK non-life insurers can go about reviewing their products.

Key highlights
  • If insurers are unable to provide benefits or pay claims in the usual way, they should seek alternatives to ensure that policyholders are getting product value.
  • If the level of insured events is reduced during the pandemic, then insurers should make suitable adjustments to their policies and premium levels to ensure that the value of the policy to the policyholder is not materially worse.
Analysis: Product review process

Firstly, insurers should review the impact of COVID-19 on their claims experience both during and after lockdown. There are many types of insurance products that will have seen lower levels of claims as a result of the lockdown during the pandemic. Insurers should regularly review loss ratios, as a decrease in loss ratios could indicate that customers are getting less value from their products. However, insurers should not ignore the possibility of a spike in claims post-lockdown, e.g., warranty or breakdown cover insurance policyholders might have been reluctant to have a technician enter their homes during the lockdown period, leading to reduced claims. However, as the lockdown eases, and policyholders become more comfortable with such repairs, there may be a spike in claims. Insurers should also be mindful of cross-subsidies within their portfolios, and of their overall solvency, as some lines of business will likely experience claims levels well in excess of normal levels.

Insurers should also analyse the driving factors behind decreased claims experience. The FCA identifies two main drivers of decreased claims experience:

  • The insurer’s own ability to provide claims benefits is reduced, e.g., the reduced availability of repair services for motor vehicles due to lockdown measures. In this case, insurers should seek alternative ways of providing benefits and paying claims. This issue could also affect insurers in other lines such as:
    • Motor own property damage
    • Extended warranty
    • Household contents
    • Boiler breakdown
  • A genuine decrease in the insured activity below the level expected at underwriting. For example, annual travel insurance policies that are no longer useful to policyholders. In this case, policyholder refunds or decreased premium rates may be the ideal way to ensure product value. When the reduction of risk under the policy is such that there is “little or no utility to consumers,” the FCA’s expectation is that firms carry out a product level assessment of value. Lines affected in this way could include:
    • Travel insurance
    • Motor insurance
    • Public liability
    • Marine and aviation policies linked to passenger travel

At the time of writing, the first major lockdown of the UK is easing, although the risk of further waves of the pandemic and future lockdowns, local, regional or national, remains. Therefore, insurers need to be aware of precedent-setting and managing consumer expectations. These considerations remain equally valid for any future waves of the virus, and insurers should take advantage of their learnings from the first wave of COVID-19 infections to enact responses to decreasing product value in a manner that is rapid and more specific to the nature of the outbreak.

Additionally, due to the virus and the ensuing recession, policyholders could find themselves in financial difficulties, and may miss insurance payments. In this case, firms have been instructed to consider the value of the product to the customer when deciding on a course of action. The FCA has also issued some additional guidance on treating customers fairly in this type of situation, which may be found here.

Case study: Private medical insurance in the UK

In the UK, all nonemergency procedures were postponed as hospitals made preparations to deal with the worst-case scenarios. During this period, loss ratios have lowered significantly, as a material number of operations have been deferred. While insurers have ramped up their telehealth coverage, many policyholders have had treatment delayed and, therefore, have received much more limited value from their products than they would expect. One option for insurers would be to provide some form of a refund to customers during the period where hospital facilities were shut, as has happened in Ireland. A number of larger UK medical insurers have promised a future refund if claims remain low for an extended period. However, early indications are that, not only will the vast majority of the deferred treatments occur, but there is a significant potential for the claims cost to be higher than anticipated, due both to delays in treatment and to increased provider costs resulting from new social-distancing and cleaning guidelines for treatment.

Using ORSA to navigate new COVID-19 risk environment

The economic impacts along with the epidemiological aspects of the COVID-19 pandemic will reshape the outlook for the insurance industry over the next three to five years.

Insurance companies will need to adapt their overall operating models, incorporating the effects of the virus to continue to achieve their strategic objectives and goals. These effects will include elevated operational risks like cyber threats related to new remote work environments for employees.

The Own Risk and Solvency Assessment (ORSA) process provides the framework for insurance companies to understand, evaluate and quantify their risk profiles. It is inevitable that the ORSA will form a major part of the backdrop to work in 2020 and likely further into the future.

In this paper, Milliman’s Ian Penfold, Sophie Smyth and George Barrett discuss how insurers can explore their future exposures to COVID-19 through the ORSA.

How is automation changing the way insurance companies work?

Job automation has shaped cultures and economies since before the agricultural revolution, throughout industrial revolutions and into the current digital age. The insurance industry is not immune, with automation and innovation continuing to drive the scope for significant change.

Traditional automation has been transformative in automating simple, repeatable tasks in back-end processes. Robotic process automation (RPA) combined with artificial intelligence and machine learning capabilities can be, and are being, used to automate high volume and high frequency tasks that have traditionally required human intervention.

In this paper, Milliman’s George Barrett, Claire Booth and Tanya Hayward discuss how automation has affected—and will affect—the nature of insurance companies’ processes and the nature of their clients’ needs. They cover numerous examples of how automation and RPA are transforming the way insurance companies operate and discuss the impact of job automation on insurers.

Insurtech innovations create new risks

While the number of newly founded insurtech companies decreased in 2018 and the early months of 2019, insurtech funding for 2018 continued to break records by exceeding $4.5 billion and funding in 2019 is on track to exceed $5 billion. This suggests that the industry is maturing and establishing a strong foundation within the insurance world.

The increased funding of insurtech companies shows that the insurance industry will continue to evolve. Companies seeking new opportunities to take advantage of artificial intelligence (AI), big data, and autonomy will need to enhance existing risk management approaches to account for new risks created by innovation. In this paper, Milliman’s George Barrett explores innovation driven by insurtech within the global insurance market. He also considers the emerging risks faced by insurance companies.