If a claim cannot be paid in full, the regulator recommends that insurers make an interim payment

The interim chief executive of the FCA has addressed a ‘Dear CEO’ letter to insurance bosses, warning that business interruption (BI) claims for small to medium-sized enterprises (SMEs) should be “assessed and settled quickly” where there is an obligation to pay out.

Today’s letter also emphasised that if there are reasonable grounds for an insurer to pay part of a claim, but not pay for the claim in full, then companies should issue interim payments – organisations that fail to do this will need to communicate its decision-making process to the FCA directly, explaining how they are delivering a fair outcome for customers.

Christopher Woolard, interim chief executive of the FCA and author of the published letter, wrote: “There are policies where it is clear that the firm has an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. A key objective of the FCA is to ensure that financial pressures on policyholders are not exacerbated by slow payment; such claims should be paid as soon as is possible.

“If there are reasonable grounds to pay part of a claim but not to make the payment of such claims in full, we would like you and your board to adopt an approach of making an interim payment. Many firms are already doing this.

“If you disagree with doing so, we would like you to send us the grounds for reaching that decision, including how you believe it represents a fair outcome for customers.

“Your firm’s decision is likely to help inform our assessment of its culture.”

These actions, according to Woolard, align with the authorities’ wider objective of supporting businesses and consumers during the coronavirus pandemic.

Policy payments

Despite this warning, the regulator did acknowledge that the majority of BI policies purchased by SMEs does not cover pandemics.

“Our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic. While this may be disappointing for the policyholder, we see no reasonable grounds to intervene in such circumstances,” Woolard said.

Here, the regulator also emphasised the “essential role” that insurers and brokers play in terms of communications.

Woolard added: “Insurers and brokers have an essential role to play in supporting their customers who may be unclear whether they have appropriate cover in place.

“Clear, accurate and timely communication is crucial, which we expect firms to deliver. The FCA is also collecting information from firms in order to assess how they are interpreting policies.”

Woolard further noted that “payment of some policies may be disputed”, especially for SMEs – those with an annual turnover below £6.5m, less than 50 staff, or an annual balance sheet below £5m fall outside of the Financial Ombudsman Service’s jurisdiction, which typically offers faster decisions in these cases, as well as more timely payments.

“In due course, the ombudsman will share details of the approach it will be taking to deciding complaints about business interruption insurance, most likely through a series of ‘lead cases’,” Woolard wrote.

“In the meantime, the ombudsman is working closely with financial businesses and their representative organisations to ensure it has a good understanding of the types of complaints it might receive.”

Keith Richards, managing director of engagement at the Chartered Insurance Institute (CII), said: “We welcome the FCA’s approach to business interruption insurance set out in the ‘Dear CEO’ letter, including its decision not to intervene where policies do not cover pandemics.

“We also support the FCA’s focus on paying claims in a timely fashion. Each year, the CII interviews 2,000 small businesses to gauge their trust in insurance. To date, SMEs who make claims have told us that their claim is usually dealt with speedily – in fact, speed of payment is one of the best performing indicators that we measure.

“However, perceptions about how quickly a claim will be dealt with among SMEs buying insurance is significantly worse – our research shows that it is one of the areas that SMEs are most concerned about.

“The insurance sector has an opportunity to demonstrate that its ability to pay claims quickly is better than most people perceive it to be.

“We are confident that the majority of insurers will continue to build trust in the profession by delivering on their promise with a clear, accurate and timely processes that the FCA is looking for.”

Small business unit

Woolard’s letter further revealed that the FCA has now established a small business unit, designed to “coordinate the activities of the FCA across small business issues, in terms of ensuring regulated firms are supported through the challenges posed by the current crisis, gathering intelligence about the treatment of small businesses by financial services firms during the crisis and ensuring a coordinated response by the FCA to any issue identified.”

This unit will be headed up FCA head of department Andrew Wigston and overseen by Jonathan Davidson, executive director of supervision, retail and authorisation, and Sheldon Mills, interim executive director of strategy and competition.

Today’s ‘Dear CEO’ letter follows guidelines issued by the FCA in March, which outlined its expectations of general insurance firms during the Covid-19 outbreak.