The state has stepped in where insurers will not—but what is the future of their industry?by Merryn Somerset Webb / April 16, 2020 / Leave a comment
Last week the UK’s big insurers cancelled their dividend payments. If you had been relying on Aviva, RSA, Direct Line or Hiscox to provide you with any of your income this year, too bad. Legal & General aside they aren’t paying out: that adds up to around £1.3bn that shareholders thought they were getting that they now aren’t getting. The Bank of England suggested this in early March and the Prudential Regulation Authority would like to be clear that they consider it a “prudent decision.”
It makes some sense of course. Obviously insurers must, as the PRA says, “protect policy holders and maintain safety and soundness.” Some insurance claims are falling off (no one is driving so no one is having accidents, for example). But at a time when there might be more life, business interruption and critical illness and unemployment claims than usual, hanging on to cash is a good idea. Not going bust in a crisis is a good way to make sure you are still around to pay out to your policy holders in the future.
That said, this isn’t all about ability to pay: as AJ Bell’s Russ Mould points out, “applying EIOPA’s own Solvency II ratio, which measures how much capital insurers have to hold to be confident they can withstand a worst-case loss scenario” our big insurers look “well buttressed.” It is also about public perception. It looks good for regulators to take a tough line (everyone needs to look busy at the moment). And it looks good for insurers to make a big deal out of prioritising cash for policy holders over cash for shareholders.
However, there are an awful lot of policy holders around at the moment who might say that from their point of view, it doesn’t make much difference how much money their insurer does or doesn’t have: they don’t appear to be paying out on policies anyway. Take business interruption insurance. Turns out pandemics aren’t covered. A small number of policies look like they cover contagious disease-related interruptions but even in these limited cases, there have been reports of refusal to pay out, on the basis that the outbreak is global not local to any one business premises and that the office closures are government directed. The clauses, where they exist, say the industry, are more intended to cover the odd office closure…