After the Supreme Court Business Interruption Insurance Ruling: considerations for boards and shareholders today and beyond
Sicsic Advisory’s view on the Supreme Court’s judgement in the BI insurance test case
The Supreme Court’s ruling on business interruption claims resulting from Covid-19 closes a long-running and painful process. It brings clarity and firms should now focus on the consequences – ranging from the immediate to the long term.
Today the focus will be on the firms impacted – not just the hundreds and thousands of SMEs hoping for closure and expecting a pay-out – but also for the shareholders and finance teams in the insurers to understand what it means to practically settle so many claims within a short time frame.
The Supreme Court’s decision will have broad ramifications for many insurers, not just those in the headlines. Some have been preparing for an outcome like today’s for months by increasing their reserves and capital. However, others may have been mired in wishful thinking and delay. They must now assess the impact on their balance sheets and consider whether additional provisions are required.
In the short term, the impacted insurers face an operational challenge and execution risk to ensure consistency of treatment and fairness.
The debate around the deduction of government grants from business interruption insurance settlements demonstrated the complexities around this, and there could be similar issues around how much loss can be attributed specifically to the pandemic.
Prompt and consistent execution will be critical for starting the long road to rebuilding customer relationships. Remediation programmes of this scale will require appropriate governance and oversight.
In the medium term, insurers should review whether their policy wordings could give rise to a similar dilemma in the future.
At the core of this dispute was a collection of low value standard policy wordings which insurers had not anticipated would respond for so many of their customers at exactly the same time.
A parallel could be drawn with the way cyber insurance is worded and sold, and whether a systemic issue could cause the same problem. Another virus, say, which affects servers on West Coast of the US and takes most businesses offline.
Then there is consideration of the sale process. The commoditisation of the sale of what have been shown to be complex legal contracts raises the question of whether a non-advised sale process is suitable and whether the role of each player in the long value and distribution chain is clear. These risk factors should be pro-actively reviewed in anticipation of increased regulatory scrutiny. For brokers, we could see an escalation in choice between quick, standard, non-advised sales and the more complex, bespoke risk advice.
In the long term, there will be strategic considerations for both insurers and brokers around their portfolio mix and whether their business models will continue to support certain types of products, advice and distribution channels.
The Supreme Court’s word is final – but for insurers the work has just begun.
Please get in touch to discuss how Sicsic Advisory can support your business to assess the impact of today’s decision and to respond to its consequences.