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Three legal and regulatory challenges facing (re)insurance – Clive O’Connell comments for Insider Engage

After the UK Supreme Court decision in the case brought by the Financial Conduct Authority (FCA) last year over business interruption (BI) coverage, insurers and reinsurers will be looking closely at their wordings this year.

Underwriters will be keen to ensure that the cover that they are selling is what they think it is, and that, accordingly, their exposure to risk is what they assume it is, argues Clive O’Connell, a partner and head of insurance and reinsurance at McCarthy Denning.

“This does not apply solely to BI business,” he says. “While the recent case threw a spotlight onto BI coverage, the issues that it exposed apply to coverage generally. It is essential for the pricing of cover and for calculation of exposures and reserves, that insurers and reinsurers know exactly what cover they are selling and buying.”

“The current economic climate is difficult and volatile. It is a climate in which disputes could well be incubated. Now is the time to conduct a thorough audit of one’s wordings. Next year might be too late,” he adds.

Gordon Vater, UK business development director at claims services provider Gallagher Bassett, is concerned about the risk of a more stringent regulatory environment.

“The fall-out of the FCA Covid-19 BI test case has left an increasingly aggressive regulator, who’s not afraid to intervene with policyholders,” he says. “The loss sustained from business interruption claims is still playing out for insurers across the UK and this may see the FCA taking actions that are not strictly in their remit.”

The BI case revealed wide-ranging issues for underwriters, O’Connell stresses, with wordings much more inconsistent and less watertight than expected.

“In some cases, individual companies had multiple wordings covering the same type of issue. While those wordings were probably all evaluated in the same way, it is easy to see that different wordings could give rise to very different results.”

O’Connell says that, in addition, the wording of reinsurance contracts needs to reflect the cover given under insurance contracts.

“This can only be achieved if there is discipline in relation to the insurance wordings that are used and that the reinsurance wordings are designed to reflect the underlying cover,” he says.

“Twenty years ago, contract certainty was introduced to ensure that contracts existed. Now, it is essential that the meanings of those contracts are also certain.”

The rest of this article can be found on the Insider Engage website by clicking here.