Many small business owners have been left without cover for possible losses due to the coronavirus pandemic.
It was one of the earliest rows of the pandemic: hundreds of small business owners across the UK were shocked to learn that insurance policies they had taken out to cover against possible losses from so-called “business interruption” did not cover disruption caused by COVID-19.
Insurers argued that such policies are usually designed to cover losses caused by physical damage to an office or factory by, for example, a fire or a flood rather than an infectious disease. SMEs argued the insurers were hiding behind the fine print of the policies and were morally bound to pay out.
The row has threatened the reputations of some well-known names, such as Hiscox, while also undermining trust in the wider insurance industry.
The Financial Conduct Authority, the UK’s leading financial services industry regulator, quickly referred the matter to the High Court so it could adjudicate on which policies – and to which customers – insurers should be required to pay out.
The test case involves eight insurers.
Yet the court’s ruling, while adding clarity, will not necessarily prevent this situation from arising again.
That is why a proposal from the Lloyds of London insurance market is so important.
The world’s oldest insurance market, which has previously said it will pay out $4.3bn (£3.45bn) relating to claims arising from COVID-19, has come up with three potential solutions to reduce the risk to small businesses in future from unexpected events.
The first of these, called ReStart, would see Lloyds’ market participants pooling capacity to provide business interruption solution cover for SMEs caused by COVID-19. The product would be specifically designed for SME customers and would be available without the need for government support.
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The second, called Recover Re, would provide immediate relief and cover for business interruption over the long-term, including the current COVID-19 pandemic, providing small businesses with an immediate injection of cash. Lloyds envisages that, while the insurance industry would supply the expertise required in managing risks and getting money out to the small businesses affected, governments might need to guarantee premiums to prevent the risk of customers defaulting and might also need to provide initial support in meeting claims payments.
The third solution, called Black Swan Re, would be a reinsurance framework between government and insurance industry partners aimed at better protecting customers from so-called “systemic catastrophic events” – such as another pandemic, or global supply chain disruption, or interruptions to critical infrastructure or utilities caused by cyber-attacks or climate change. It would provide reinsurance cover through the industry pooling capital and with government guaranteeing to pay out if ever the pool had insufficient funds.
John Neal, the chief executive of Lloyd’s, told Sky News that COVID-19 had highlighted there were not necessarily products in place today offering help to cope with such an event.
He added: “So we’ve come up with [ideas] to see how we can help either directly as insurers, or work with government, to try and deal with these huge systemic exposures should they arise again in the future.”
Lloyds has so far had 30,000 COVID-related claims reported and, to date, the market has already paid out on a third of them.
A number of participants in the Lloyds market are among the eight insurers taking part in the test case. They include Hiscox, Arch Insurance, Argenta and MS Amlin.
Mr Neal said that the second framework, Recover Re, could be implemented in any country where the government had the resources and industry commitment to support it.
He said it would enable the insurance industry to cope with COVID-type losses in future because it would have a long-term commitment from customers to pay premiums.
He added: “The only risk with that is the credit risk, should there be some failures seven, eight, nine, 10 years down the line. And the way to counter that would be to say to government, you could help with the flow of credit should that situation arise.
“And that’s very similar to what government’s been doing for credit insurance, actually, in the height of the COVID crisis.
“So, a bit like the old savings and loans type of structures that used to exist 10-15 years ago, but an insurance product can be an alternative to a loan structure.”
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Mr Neal said that Black Swan Re was a new approach to thinking about future insurance risks.
He added: “The industry’s been a bit too quick to solve yesterday’s problem in the past. Yes, we need to deal with a pandemic. But what happens if the next loss is a huge cyber loss or some massive interruption to the supply chain?”
He said it was perfectly possible the new body could be built out of Pool Re – the highly successful vehicle set up in 1993 by the insurance industry and the UK government in response to the vast losses and uncertainty being created at the time by Provisional IRA bomb attacks in London and Manchester.
The scheme has paid out more than £1.25bn since launch on losses related to 17 different terrorist attacks without ever having to call on the guarantee provided by the government.
Mr Neal added: “Black Swan Re is designed to be multifaceted and cope with any type of systemic exposure that we should encounter.
“And I think it could be possible to repurpose Pool Re to serve that function, but it does need the collaboration between industry and government, because clearly the sheer size of these potential losses is beyond what any one industry could cope with.”
The underwriting room at Lloyds of London’s world-famous City headquarters, on Lime Street, is due to re-open on 1 September.
It is a fair bet that these proposals will be intensively discussed in the meantime.