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Foreword and Overview

Building simpler insurance products to better protect customers

Report foreword

The ongoing catastrophic societal and economic impact of the COVID-19 pandemic continues to demonstrate the significant challenges ahead, as governments around the world grapple with the consequences of this devastating health crisis.

While the global insurance industry’s response and recovery efforts continue to expand through claims payments, charitable donations, and product innovation, there have been distinct complications that have arisen from pandemic insurance coverage uncertainty and resulting court disputes between insurers and their customers.

Although insurers have been actively exploring ways in which they can remove complexity and improve clarity, these complications have highlighted an urgent need for the
global insurance industry to accelerate and further extend its efforts to simplify products and promote greater understanding of the cover it is providing to its customers.

Product complexity is an enduring challenge faced by the global insurance industry and its customers – from multi-national corporations, through to entrepreneurs and small business owners; as insurance products have evolved over time, they have become more complex in their design and the way in which they are delivered to customers.

This complexity can lead to a lack of customer engagement with the product they are purchasing, alongside a coverage expectation gap between the insured, and the insurer. This is a result of a number of influencing and interdependent factors which are described in this report and that remain front of mind for the industry as it continues to improve the way it protects and supports its customers, including through leading practice and product innovation.

This report has been published to support the global insurance industry’s efforts to better serve its customers through simpler products that promote enhanced understanding of coverages. It provides three important recommendations that the industry should implement to respond to the challenges that COVID-19 has presented, together with several actions that the Lloyd’s market will itself deliver to improve the way in which it provides products and support to its customers.

While product complexity presents a challenge for all customers, small to medium-sized businesses, who often lack access to risk mitigation advice, are particularly impacted where there is coverage uncertainty. For this reason, the report focuses first on how the industry and Lloyd’s can further extend leading practice and product innovation to these customers, and in time implement them across more complex specialty products bought by larger firms.

The fundamental purpose of insurance is to provide comfort and confidence to customers in a world full of changing risks that could threaten their livelihoods. We sell a promise to pay when the worst happens, based on a trusted relationship and shared understanding between the customer and their insurer.

While the societal and economic impacts of the pandemic are of a scale that has never before been experienced, it has reinforced the global industry imperative to accelerate our efforts to build simpler insurance products that are more easily understood by our customers. In doing so, Lloyd’s and the global insurance industry will remain relevant and trusted by customers, creating a braver, more resilient world.

John Neal, CEO, Lloyd’s   
Bruce Carnegie-Brown, Chairman, Lloyd’s

Report overview

The COVID-19 pandemic has set in motion irreversible societal change, calling for new insurance solutions and greater protection for customers’ short, medium, and long-term needs, as outlined in Lloyd’s Supporting global recovery and resilience for customers report.

As countries and businesses cautiously reopen and start recovering from the immediate economic and societal impacts, the insurance industry must take this opportunity to improve the way it protects its customers. Insurance plays an essential role globally for society – by providing financial relief to customers during challenging times, it helps people, businesses and economies recover from unexpected disasters. For many, this worked as intended during the COVID-19 pandemic, and we expect that the global insurance pay-out will be over $100bn, of which the Lloyd’s market will pay in the range of $3bn to $4.3bn

However, in some instances there has been confusion. While many insurers around the world believed coverage under business interruption policies did not extend to pandemics, there were a number of cases where customers did not agree. This is a frustrating and disappointing outcome for all. If insurers pay disputed claims where pandemics were not intended to be included under the coverage, they will be paying claims for which they have neither received premium nor reserved capital. If customers’ claims are not paid when they believe they have cover, they may not receive compensation that they were relying on and may over time choose to insure less risk – putting them in a more vulnerable position for when the next disaster strikes.

Earlier this year Lloyd’s interviewed executives and experts across key global industries to understand their priorities as a result of COVID-19. The research found that some attitudes to insurance had deteriorated, with the perception that some policies have not performed as expected. An insurance contract is a promise to pay valid claims as they arise, and all customers – whatever their risk needs and sophistication – want clarity about what they are and aren’t protected against.

These challenges highlight the urgency with which the global insurance industry must invest and focus on clarifying and simplifying its products. Doing so will mean customers have improved understanding of the cover they have in place and the most relevant protection for the risks they face.

Whilst we have heard the challenge clearly from customers at all levels, the need is particularly pressing for small to medium-size enterprise (SME) customers, who make up a substantial proportion of insurance policies sold globally but who typically have significantly less access and resource dedicated to risk management than larger corporate firms. By providing greater clarity of coverage, insurers and brokers can reduce prudential and conduct risk and, most importantly, better protect customers – helping us to offer customers greater value and fulfil our purpose as an industry.

Reinsurers also have a key role to play. As the industry develops new and enhanced ways of providing insurance products to its customers, insurers need confidence that reinsurance capital will respond to claims. Availability of reinsurance capital may also inform what risk transfer innovations insurers are able to offer customers.

Much progress has already been made in developing regulation, guidance and codes of conduct to provide greater clarity of coverage for customers, with the global insurance industry committed to this goal. Although the core principles already exist and are actively being applied, we have taken the opportunity to restate them, as well as to consider new ways to apply them in practice. These principles focus on how insurance products are worded and distributed today, as well as providing more innovative options which challenge and reconsider traditional insurance wordings, contract structure and delivery. They are particularly relevant to insurance products bought by ‘individuals’ – such as consumers or micro and small businesses – but over time should be extended to more complex specialty products which are often bought by professional buyers on behalf of larger businesses.

Whilst the report, Building simpler insurance products to better protect customers is not a comprehensive set of answers and cannot ensure that customers will always understand and buy the right cover, it sets out three key recommendations that the global insurance industry should implement across all customer segments to respond to the challenges that COVID-19 has presented:

  • Leverage and build on the application of existing leading practice, including a linguistics review of customer documentation – for both simple and more complex products.
  • Invest in continuous product design and delivery innovations, including data-led policies and digital contracts, as well as exploring more radical options like parametric or outcome-based insurance.
  • Involve customers directly in product design to build simpler, more relevant products for their changing needs and post-pandemic risk profiles.

Alongside these global industry recommendations, Lloyd’s is taking its own affirmative action. This includes reviewing how products are developed, designed and distributed, as well as reaching out to trading partners, risk managers and customers, so it can proactively implement changes across its global marketplace to enhance customer outcomes and more effectively meet their needs.

As many businesses around the world evolve to withstand the continued impacts of the COVID-19 pandemic, including radically changing their business models, the insurance industry must urgently reassess how it can better serve and support its customers. By simplifying insurance product design and delivery, Lloyd’s and the global insurance industry will ensure it remains relevant and trusted by customers, creating a braver, more resilient world.