INSURANCE ACT REFORMS: HOW TO TURN A CHALLENGE IN TO AN OPPORTUNITY; A PRACTICAL VIEWPOINT
The introduction of The Insurance Act 2015 brings in the most radical changes in material disclosure obligations in over a hundred years. The reforms represent a significant challenge for managing agents who place insurance for their managed portfolio. Following on from the ‘Getting to grips with The Insurance Act’ article in the summer issue of AQD, Trevor Palmer FCII of PIB Insurance Brokers now looks at some practical measures to help meet the new requirements and win new business.
The Insurance Act 2015 applies to all "non-consumer" insurance contracts (policies held by parties who are not individuals) and has been introduced to provide clarity in what happens in the event of a breach of the disclosure requirement. To avoid duplication with the content of any technical overviews you may have already read, this article takes a practical viewpoin to help focus on some key areas requiring your attention. Remember, when transacting insurance, you must be fully compliant with Financial Conduct Authority rules and regulations.
The Act makes reference to “fair presentation” and “reasonable searches” and also introduces “proportionate remedies”. These remedies are legal rights now available to insurers should breaches of disclosure arise. Their use will vary depending on whether a breach is deemed fraudulent, deliberate or reckless, or merely an innocent oversight or misunderstanding. In this regard, the Act succeeds in bringing clarity by removing previous uncertainties. However, some “remedies” open to insurers should give cause for concern as they could result in a worse outcome than before the reforms. To best illustrate some key areas of the Act, consider what is required when placing insurance for a new management case.
Case study: New management appointment
Congratulations, you have been appointed on a new management case and take on the existing insurance. To ensure your clients have a viable policy, you seek alternative quotations at renewal.
Adopt an “assume nothing, question everything” approach.
i) The “Fact Find Process”: The Act requires a “fair presentation of a risk”. When presenting risk information to an insurer, the content must provide either all material information, or set out enough information sufficient to prompt an insurer to make further enquiry for clarification. How you collate, record and maintain risk information and subsequently present to the market for quotation should be fully reviewed and agreed with your current insurance provider.
- Review the current insurance schedule and question everything!
- When checking information, explain to your new client the importance of disclosure requirements and the potential consequences of getting it wrong.
- Compare the property construction details to the records held by the insurer. Pay particular attention to the floor material (timber, concrete or other) and whether the building is purpose built or converted. Check any aspect of “non-standard” or “modern methods” of construction.
- What is the origin of the current buildings declared value? Has VAT been included? Note: some insurers require VAT to be included even on residential rebuilds that are zero rated. Verify this fact with the insurer.
- Obtain a “confirmed claims history” for the last three years minimum, do not rely on the memory of clients or directors of RMC’s and RTM’s. (See paragraph on “claims history”).
- Accurately record all risk information and ensure they are updated when changes arise.
- Establish what training needs arise out of this exercise and who will provide that training.
- Submit all risk information to your insurance provider for discussion. To ensure a consistent approach, create a template of your fact find process for future use.
ii) “Reasonable” search: The Act requires a “reasonable search” be undertaken to extract material information that a policyholder is deemed to know and that should be revealed by a reasonable search of information available to them. This should involve adequate enquiries to ensure risk-relevant information is captured.
- Create a record of the lines of communication for your new client of those persons with knowledge of the insurance risk. Update this record when changes arise.
- Verify occupancy details by sending out a contact update request (such as an “in case of fire” information request for sub-tenants). This also serves the dual purpose to update your insurance records. Not all insurers underwrite properties occupied by students, tenants on DSS/local authority arrangements, or flats with holiday lets, etc. Establishing as far as possible the nature of tenants/ sub-tenants is therefore important.
- Document all questions that have been asked and to whom these have been directed.
- Retain records of all correspondence and seek acceptance of any updates sent to insurers.
iii) Risk submissions to market: You now have a record of the risk information for your new client and are ready to go to the market for quotations. The content of the risk presentation to the insurance market should be reviewed and agreed with your insurance provider prior to submission to insurers.
- To demonstrate an adequate search has been carried out, include a brief statement of how you have collated the risk information and also what limitations may apply (in particularly when it comes to sub-tenants). Do not assume that your insurance provider fully understands how you operate.
- Ensure the submission is a fair presentation of the risk. If you have doubt – review it again.
- Invite the insurer to ask further questions.
- Review and agree the format of the risk submission for your new client with your insurance provider. Save the format as a template to give consistency to your future risk submissions.
The above action will ensure you have been thorough and your records will show you have “assumed nothing” and have created an up to date risk profile for your new client. The above process should be carried out for all clients’ insurance records. Once extracted, use the information to compare to the current insurer’s records (do not fall in to the trap of assuming their records are accurate). Now you have an up to date risk profile, go one step further to assess what alternatives are available. Reviewing the market not only ensures your clients maintain a viable insurance coverage, the exercise will also provide useful evidence should any future leaseholder challenge at the FTT arise about the reasonableness of premiums.
Where inaccurate records are discovered, they should be immediately corrected. Failure to address and document the fact find and risk submission process to meet the Act requirements, could lead to issues if previously undisclosed information surfaces when a claim is submitted. A robust system proving reasonable searches have been carried out will minimise the risk of this arising.
CLAIMS HISTORY: A WORRYING SCENARIO
For various reasons, freeholders, clients and directors of RMC’s will not always remember details of every claim, or be aware of all of them. For this reason, always insist on a “confirmed claims experience” from the insurers who have held the risk for the past three years. Why is this important? This is best demonstrated by the following scenario:
Example: a director of a new RMC client informs you there has only been one escape of water claim in the last three years. You obtain quotations on this basis and a premium of £2,800 is agreed and cover is placed with the new insurer. Several months later a sizeable escape of water claim affecting three flats is submitted. A Loss Adjuster attends and discussion with leaseholders highlights there have in fact been several similar incidents within the past three years. It is established the failure to disclose these facts is not deliberate. Based on the new correct information, the insurer now states had they been aware of the correct claims information they would have quoted a premium of £4,000 at inception to reflect the increased risk.
In this scenario the Act now gives the insurer the right to proportionally reduce the claim by the degree of premium under charged. The cost of repairs is finalised at £100,000, but the claim is reduced by 30% resulting in a shortfall of £30,000 in the claims payment. This is a shocking outcome that suddenly turns the joy of securing a new client into a severe headache. A larger claim would be even more disastrous. This outcome is potentially worse than what could have happened in the same scenario than before the Act was introduced. A request for a confirmed claims experience at the outset would have avoided the above scenario. The above outcome can also arise if the insurer’s original premium is deemed incorrect due to inaccurate disclosure of construction or occupant details.
WHEN THINGS GO WRONG
As seen in the above example, the implications of getting things wrong can have far reaching consequences. No matter where fault lies, a managing agent is in the middle of the insurance process and clients expect a professional service at all times. Insurance protects people’s homes/investments and failure to provide this protection is open to legal action, or at the very least the loss of a client. For your own protection and as a precautionary and prudent measure, an annual review of your limit of indemnity under your own professional indemnity insurance should be undertaken. That’s the negative, so what about the positives?
REVIEW YOUR INSURANCE PROCESS
The Act should prompt you to check your clients’ records and assess your whole insurance operations. This presents an ideal opportunity to widen your review. After putting in all that effort, why not put it to good use and review your arrangements? Are better options available? Will individual policies or a block portfolio offer the best solution for your clients? Can cover be improved to reduce the risk of uninsured losses putting pressure on service charges? Can premiums be reduced?
If you arrange insurance on an individual policy basis, each insurer may have a different approach to risk information collation, meaning a review of your process may take longer. If you arrange cover on a block policy portfolio basis, it will be a straight forward exercise to establish your insurer’s viewpoint on what they deem a “reasonable search” and identify their preferred format of risk submission. Consider the advantages of alternative solutions and whether they will aid your administration in meeting fair presentation requirements and if they achieve clarity and consistency in risk submissions. You must be able to demonstrate your arrangements also treat your clients fairly.
CHALLENGE AND OPPORTUNITY
New challenges in business life create new opportunities to demonstrate your professionalism to clients and prospects alike. Creating a robust process to demonstrate thoroughness in your approach to risk, with the ability to pinpoint any shortfalls in cover for new clients, will help strengthen your sales pitch for new management business. Not forgetting opportunities to source insurance for existing clients who currently arrange cover elsewhere.
The requirements of the Insurance Act Reforms must be fully embraced within your insurance operations. To justify the time and cost in ensuring your process meets this demand, it makes business sense to take it one step further and use the review to create a more efficient streamlined insurance operation within your business. Working closely with a strategic partner with specialism in property insurance will help achieve your goals.
The following guides are available from Trevor M Palmer, Director – Property, PIB Limited on email@example.com:
“Insurance Act Reforms: Implications for Managing Agents” This guide provides more useful information for your insurance operations.
“Insurance Act Reforms: Implications for Residential Leaseholders” This guide will be useful to send to RMC directors to help explain the importance of risk disclosure under the new Act.