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Business Interruption Insurance

Why are claims volumes lower than anticipated by insurers in their provisions?

To date insurance companies have received fewer Business Interruption (BI) claims than they had anticipated. Having strengthened their reserves and raised provisions equating to billions of dollars, companies have only received a few hundred claims to date. So why aren’t the claims volumes materialising? And will they materialise at all?

We consider three main reasons as to why expected claims may have not yet materialised:

The eagerly anticipated determination of the second test case outcome, due to be heard from 6 September 2021 (although unlikely to conclude until the end of the year). Whilst the first test case, and its subsequent rejected appeal, determined that the exclusive use of the Quarantine Act could not be relied on to exclude cover for losses associated with COVID-19, this outcome did not address any wider coverage questions including:

  • Definition of disease
  • Proximity of an outbreak to a business
  • Physical damage requirements, and
  • Application of government mandates under prevention of access clauses.

Without clear guidance, it remains difficult for policyholders, brokers and claim preparers to ascertain and gather the required information and evidence to confidently submit a claim. The Australian Financial Complaints Authority (AFCA) can make decisions on matters outside of the test case outcome, (up to $1.085 million, in line with the maximum they can award), they have agreed to wait for the ruling in the courts and will not decide on related complaints in the absence of a court outcome.

The idea that claims will be lodged after the court case outcome is what happened in the UK. There was a significant uplift in claims after the court case and volumes have been increasing since.  As at July 2021 41,500 claims have been made with one insurer responsible for 8,600 of them. Interim and final claims payments made relating to BI coverage have totalled over GBP 968 million, with individual claims payments now averaging GBP 30,000.

BI Insurance can often be bundled in with other insurance products purchased by a business and there may be a lack of awareness of the coverage that businesses have for BI. Businesses that do have cover may not understand the steps required to make a claim and what evidence is required. The ICA, ASIC and AFCA have all released publications in the media to try to encourage claims from businesses who have been impacted by the pandemic, including providing support and information about the steps required.

There are many businesses and industries that have been able to pivot during the pandemic to alternative delivery models and so have not experienced a loss in operating profit which would enable them to make a claim. For example, restaurants who have switched from in-house dining to take-away models.

Job Keeper is expected to cost the government $90 billion to support businesses through the pandemic, as well as other government aid packages like the COVID-19 Business Grant and JobSaver. It remains to be determined if this will be included in loss calculations, although we consider that this is likely. These additional subsidies have meant that many businesses did not suffer an overall loss during the potential claimable period.

So, will the claims volumes materialise, and are the provisions that insurers have made accurate? It is no doubt a complex situation, but our perspective is that claims volumes will definitely increase as we have already seen in the UK. However, it will not be until the court case has been heard, and probably not to the level that Insurers had originally anticipated. The claims volumes are more likely to come from the industries that have been most impacted by COVID-19 and could not either switch to alternative delivery models or that Job Keeper and other government provisions did not bolster their operating profit to pre-pandemic levels.

Our Deloitte Access Economics team has produced the following analysis of the sectors most impacted:

How can Insurers prepare for an uncertain volume of claims?

Whilst uncertainty remains in Australia for now, there are still a number of things that insurers can, and should, do to get themselves prepared and therefore minimise costs in relation to processing claims.

The low volume of claims so far should not lead insurers into a false sense of security. The claims volumes already in play are much greater than an insurer would have to deal with on average and so a plan to deal with these and the influx of claims is important. Scenario models which capture the potential different volumes of claims based on current claims and the economic data related to the pandemic (e.g. location, industry, general economic performance).

At our recent Deloitte Torque the Talk - Business Interruption forum, panellist and AFCA’s Insurance Commissioner John Price made it very clear that delays in claim handling would not be viewed favourably given the time that insurers have had to prepare. He said this was a moment for the industry to protect its brand and reputation.

Acting in the utmost good faith has been taking centre stage in recent court determinations, and the applicability of that to BI should be taken into account by insurers. Consideration of the circumstances of the claimant, due regard to the potential for partial payments, considering the amount of time that has elapsed since the claim event and how the period between the claim date and payment point.

There is a big opportunity for technology and automation in processing these BI claims. A number of insurers have invested in automated solutions which process some low value claims in minutes. We have seen that, in the UK, this type of approach has significantly reduced the overall cost of processing claims and both a good financial and brand outcome for insurers who have already finished finalising their claims.

These automated solutions can easily be repurposed and used on similar claim operations going forward. So the spend can drive longer term benefits for claims operations and customers alike.

Whilst the claims volumes are uncertain, having a surge capacity in place that can deal with a spike in volumes should the claims arise is essential to avoiding brand damage and spiralling costs. There are some insurers in the UK who had not prepared for increased volumes of claims either by simplification of processes or increasing resourcing capacity. . These insurers have increased costs from legal and consultant reactionary spend and are only 10% through the claim backlog one-year post court case.

Surge capacity does not have to mean outsourcing, some insurers in the UK have repurposed other General Insurance (GI) teams from areas of the business who have a low volume of claims as a result of the pandemic.

Whilst taking a proactive stance now costs time and effort, it should save financially and potentially legally in the long run. This is the perfect opportunity for insurers to showcase their social credibility and become a brand leader through this uncertain time.