UK & Europe
Insurance & Reinsurance
The last month has been unprecedented in modern times. Turbulence in financial markets, disrupted commercial activity and Government and Central Bank bailouts to name but few of the issues we are confronted with.
Thoughts naturally, and correctly, turn to the health and wellbeing of family, friends, colleagues here and abroad and the implications for our Health Services and economy generally. Supporting individuals, businesses and re-establishing supply chains so that we can move back to more normal patterns of trading will be the priority.
It is also clear that there is going to be a severe financial price associated with the Covid-19 outbreak. The insurance industry is already in the firing line – property and business interruption, travel, event cancellation, supply chain and beyond. Governments, Central Banks, Regulators and the insurance community (and those that advise them) are working tirelessly to plot a route through.
The uncertainty and immediate consequences of the Covid crisis are also overwhelmingly likely to push economies around the world into a recessionary phase. And the lessons of all preceding recessions in the modern era is that they lead to a material increase in professional liability claims, invariably linked to economic and asset value movements and business failures.
The UK economy is no stranger to profound economic challenges. The immediate aftermath of Brexit and the Global financial crisis are but two examples. The costs and losses associated with these systemic events sit vividly in the memory. The impact of Covid is likely to be different but no less damaging.
It is perhaps for this reason that we have seen swift and laudable action from our key regulatory and professional bodies. These bodies recognise that the professional community is grappling with its own business challenges while also having to support its client base and to do so in compliance with professional standards of care and the demands of the regulators and professional bodies. None of this is easy.
The Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Prudential Regulation Authority (PRA) issued an unprecedented Covid-19 joint statement on 26 March 2020, identifying detailed underlying guidance to ensure the proper functioning of capital markets and financial reporting. The Royal Institution of Chartered Surveyors (RICS) issued prompt guidance in respect of the "valuation uncertainty" ushered in by the pandemic. The Law Society has also been quick to issue guidance to support law firms as businesses in their own right, but also in respect of the challenges of providing ongoing services to their clients. All of this guidance is aimed at supporting the professions through the myriad subjective judgements that will be forced upon them in the coming months.
From the construction sector to the world of investment and wealth management services, the "lock down" and financial effect of Covid 19 is presenting daily risks that need to be managed.
Once the immediate disruption associated with Covid-19 passes (whenever that is), the economy (and the professions that serve it) will be left with a significant tail – the aftermath of business failures, enforcement of security, going concern issues and beyond. The professional indemnity markets are no strangers to dealing with this type of aftermath although an additional feature associated with the Covid-19 pandemic is the legal and practical effect of the government and central back support to businesses, employees and the self-employed and the relaxation of insolvency laws. The hope is that this support mitigates the longer term financial consequences of the pandemic, shortens the recessionary trough and hastens economic recovery. But it would be naive to assume that the economy will not suffer some longer term scarring and quite how the allocation and application of the bailout will play out is unclear. Will credit be given in the context of losses that become the subject of professional liability claims? This area is likely to give rise to some complex issues. The Courts have long struggled with a fair and consistent application of the theory of collateral benefits in the context of liability claims.
In conclusion, the inevitable short term and longer term consequences of recent events is of heightened risk of claims, and potentially more complex claims at that. And all of this at a time where regulatory and professional oversight has moved to a more assertive and interventionist phase across the main professions.
The message for the professional firms and their Insurers will surely be to take stock of the lessons learned over the last 12 years and to interrogate our collective corporate memory. In previous recessions, what worked well, what didn't work well and how did the professions and their Insurers align themselves to emerge out of this global event in the best shape possible?
Immediate lessons revolve around the discipline of adhering to best practice against an infinitely more challenging and changing economic environment. Being up to speed with Covid related guidance, the forming of safeguard committees to ensure adherence to (changing) market standards and achieving the right outcomes on technical judgements. Enhanced peer review processes to ensure correct and consistent decision making in relation to the complex judgements sought of the professional communities. And being ever more vigilant in respect of maintenance of integrity, independence and objectivity, particularly in the face of what is likely to be fierce customer and client pressure. Finally, the rudiments of sound risk management – dealing sensibly with ones professional bodies and regulators, ensuring internal root cause analyses have the protection of privilege, protecting legal professional privilege and the like.
All of these "lessons learned" are even more important in the context of a more assertive and financially sophisticated claimant bar in the UK and internationally than we have seen before. Many of these claimant firms have sharpened their skills in the aftermath of the global financial crisis. And now they are all liberally supported by sophisticated litigation funding.
Closer to the insurance industry itself, it seems likely that the Covid 19 pandemic will raise demanding questions of insurance brokers (and those that advise businesses affected by the pandemic) for example in relation to advice on the extent of cover and triggers for business interruption cover and the nature and timing of Covid-19 related notifications. The likely volume and quantum of Covid-19 related notifications is inevitably going to put pressure on the market and it is not unrealistic to see enhanced risk for insurance brokers. We should expect to see the case law associated with laundry list and blanket notifications being tested under the Insurance Act 2015, and the interpretation of policy language and exclusions taking place under the gaze of governments and regulators and their own policy objectives.
It is not realistic to speculate beyond the three – four month horizon. At present, we do not know how far the restrictions on normal societal and commercial life will extend. But there is a horizon, and what we do know from previous cycles is that the pressure on claims functions and at renewal is likely to be significant. Anticipating future needs, assessing liability trends and identifying effective work rounds will be key. These are matters that are occupying our thoughts as we seek to provide thought leadership and meaningful insight to those we advise. No doubt these are matters that others are presently cogitating and we welcome discussion / dialogue on the issue.