Business interruption insurance: What can we do right now?

It is not an easy problem to solve. Often, there is a lack of engagement among clients about what a policy does and does not cover. Even with engaged clients, the questions and issues that require detailed thought and understanding only become apparent when a claim takes place, and its full context can be explored.

However, standards do exist when it comes to maximising transparency and understanding, including the product governance guidelines that form part of the often-maligned Insurance Distribution Directive (IDD). While many aspects of the Directive (around disclosure documents for retail clients and incentives for intermediaries, for example) were subject to political horse-trading, and therefore had unsatisfactory outcomes from a consumer perspective, the product governance guidelines were less political and more carefully thought through. They provide some useful pointers for organisations looking to increase certainty around cover for their clients in future.

The first important principle underlying the IDD product governance standards is that product governance should be grounded on ‘a risk-based approach’ designed ‘to prevent and mitigate customer detriment’. This reminds us that systems and controls around client communication should not aim to hand over responsibility for establishing understanding to brokers or clients in a one-off, one-way process. These controls should instead be part of an ongoing, two-way process, and should be tested and refined over time using an evidence-based approach.

The second principle contained in the product governance guidelines is ‘carrying out product analysis to assess the expected product performance in different stressed scenarios’. This principle originally developed in relation to investment products and was designed to prepare for sharp falls in investment markets. However, it is just as relevant to insurance products and catastrophic events that suddenly affect a large proportion of clients. Using properly-tested scenarios within a strong risk-management approach can anticipate important events, such as products being assessed by the ‘court of public opinion’ during a high-profile claim, compared to when they are assessed by regulators with a stronger grounding in the way the sector works during calmer times.  

The third principle is around ‘identifying the relevant distribution channels taking into account the characteristics of the target market and of the product’, and the need for the insurer to consider ‘the degree of financial capability and literacy of the target market.’ This again reflects the fact that there is a value chain within insurance that include specialist underwriters, brokers who have input into the design of the product, and claims functions that may be outsourced. It reminds us that underwriters must have an ongoing sense of the value that is actually being delivered to clients as well as the value that should be delivered in theory. 

It also reminds us that clients, especially SME clients whose financial literacy may not be high, are as likely to pick up ideas about how the product works from application and renewal processes as they are from the product literature itself. For example, if they are not asked directly about a risk in the application process they may not realise that exclusions exist around that risk. As a result, an insurer needs to have a clear idea about how a client’s understanding of a product is likely to be built up, and have systems in place to test whether or not the proper level of understanding is being established in the real world.  

Equally, the IDD product governance guidelines make it clear that that brokers have an equal responsibility to make sure they have ‘all necessary information from the manufacturer on the insurance product, the product approval process, [and] the target market in order to understand the customers for which the product is designed for’. 

The risk-based thinking that must underpin good product governance applies to all the firms in the value chain, and should promote a strong, ongoing dialogue that maintains a clear understanding of outcomes for clients. 

When we look at the product governance guidelines in the IDD from the point of view of learning lessons from the past, rather than simply as a compliance exercise, we can see that they have important lessons for creating ever more transparent products and services. Their stress on understanding the target market, allowing for a lack of financial literacy, testing understanding and refining the entire customer journey are all crucial to securing better levels of consumer understanding in future – and reducing our dependence on the courts to create certainty and trust in future.