More onerous reporting requirements could impact directors’ and officers’ insurance claims
The new UK Insurance Act will have “unintended consequences” for risk managers around the world when it comes into effect later this year.
So warns John Ludlow, senior advisor at Alvarez and Marsal and former global head of risk management for InterContinental Hotels Group.
The UK Insurance Act will replace a 110-year-old piece of legislation – the Marine Insurance Act 1906 – in August and means big changes to contract wordings and what is expected of clients, brokers and insurers.
The act is only applicable in the UK, but many global corporates purchase insurance from Lloyd’s of London and will therefore be affected.
Ludlow also expects other jurisdictions around the world to follow the new act, which he describes as “very well-intentioned, but a double-edged sword”.
One potentially troublesome part of the act is the duty of “fair presentation”. This requires policyholders to inform insurers of “every material circumstance” that the policyholder knows, or ought to know, in relation to their risk.
“This offers insurance buyers and risk managers more certainty over coverage, provided they’ve got their risk management sorted out and they’ve identified their risks,” he says. “But if risk managers don’t have sight of or can’t be as transparent as they’d want to be on some risks, then the [insurance] coverage will evaporate in front of their eyes.”
Greater disclosure of a company’s risk profile to insurers also has implications for listed companies.
“Once you’ve started disclosing risks in detail to your insurer, if you don’t then disclose them to your shareholders and it’s a significant risk and it materializes, how will that impact any D&O (directors’ and officers’) claims? How will that affect the validity of your D&O insurance?” Ludlow says. “This is almost an unintended consequence of the act.”
However, the additional reporting requirements should be viewed as an opportunity by risk managers to show their value to the board, Ludlow says.
UK brokers have also been vocal about potential consequences of the new act for them.
One problem is that when a broker is involved, their knowledge is included in what the policyholder ought to know, and so brokers need to ensure they share the appropriate information with their clients, or risk being on the hook if something goes wrong.
Another tricky area for brokers is the provision for insurers to ‘contract out’.
The act sets out a baseline standard for what policyholders should expect. But insurers can effectively opt out of this, and offer less favourable terms than afforded by the act, as long as they take “sufficient steps” to inform policyholders of any disadvantageous terms in the policy.
Where a broker is involved, the duty of informing policyholders about the disadvantageous terms rests with the broker, and the policyholder has no recourse to the insurer if the broker knew about those terms.
There are potential grey areas for brokers here for example, if a client wants a cheaper policy than the one a broker has recommended, and opting for this policy leaves the client underinsured.
In addition to the potential pitfalls within the act itself, there are concerns about the cost to brokers of implementing changes needed to comply with the new rules, and that it may be disproportionate to any benefits.