After over a decade of soft market conditions, the insurance industry was starting to show signs of increased volatility as we went into 2021, with reduced capacity, fewer providers and diminishing appetite for certain types of risk. The charity sector will feel this to varying degrees but perhaps most keenly, those operating in residential and community care.

Hardening market conditions are not typically caused by just one event. However, there is usually a catalyst that speeds up the process. A previous example would be the 9/11 attacks in the early 2000s, and of course the current significant agent of change is the ongoing uncertainty created by Covid-19.

The pandemic is the most expensive event ever to hit the industry through travel cancellation, credit & surety claims, potential FCA action, investment losses and unknown liability exposures going forwards. Lloyds of London has estimated that the total global cost to the insurance industry will be in the region of $203bn – almost double that of Hurricane Katrina in 2007.

At the start of 2020, as it became clear that Covid-19 would become a global pandemic, many charities understandably turned to their insurance policies to review the extent of cover they had in place for potential losses. With many charities relying on retail and fundraising events for substantial proportions of income and national lockdown forcing closure or cancellation, the immediate question was: are income losses covered?

Business interruption

For most charities (and commercial businesses), the response to questions about business interruption losses due to Covid-19 was simply that there was no cover in place. Business interruption policies are predominantly designed to provide cover for income losses following incidents of property damage, and Covid-19 losses would not fall into this category.

Many policies provide cover extensions in respect of losses resulting from denial of access or due to the presence of a disease, however, the extensions tend to be specific in scope, typically offering cover where certain specified diseases at the premises lead to closure or where access has been denied due to damage at neighbouring properties.

A small minority of insurance policies include elements of non-damage business interruption cover, which was open to interpretation based on the specific phrases used. The different reactions from various insurers to these particular policy wordings created a lack of clarity for policyholders, and the FCA stepped in to announce a test case in the High Court which would seek to provide greater legal certainty for policyholders in this situation. The result of the FCA test case was published in September 2020, however, at the time of writing, applications for appeal in the Supreme Court have been submitted by a number of the involved parties, so the argument is likely to rumble on into 2021.

While this leaves some lingering uncertainty for charities who may potentially have eligible claims, the position on future insurance is clearer. Any insurers whose policies included the potential for a valid pandemic business interruption claim moved quickly at the beginning of 2020 to apply specific new exclusions to their wordings. Business interruption cover for pandemics will not be readily available in the general insurance market going into 2021, and the current thinking is that a government backed pandemic resolution is the most likely scenario for charities looking to buy this cover. Timescales for this offering are uncertain as the steering group to review possible solutions is in its infancy.

Employers and public liability

While the majority of headlines regarding Covid-19 and insurance have focused on income losses, we cannot ignore the shifting appetite from insurers in other areas of cover, in particular liability for injury.

The long-term effects of Covid-19 on those who have suffered with the virus is still relatively unknown, and there is increasing evidence of people experiencing long-term health complications. This has created concern from many insurers regarding the potential for legal liability claims alleging that Covid-19 has been contracted due to the negligence of a policyholder and we begin to see movement towards limiting the cover on offer.

As a statutory insurance, employers’ liability limits tend to remain unaltered, meaning that charities will remain insured for allegations of injury to their employees arising from Covid-19. This will provide an element of comfort to charities, and the true test of whether an employee can demonstrate that Covid-19 was contracted in their workplace will be an area of future scrutiny as any claims progress.

Public liability coverage is more volatile as it is not a statutory requirement, meaning that insurers are free to limit or remove cover in its entirety. Various approaches are being taken across the insurance market, with the most restrictive exclusions being placed on those charities operating in sectors involving the residential care of vulnerable people. This is particularly significant given that it is potentially much easier for a claimant to establish that Covid-19 was contracted in a residential care setting, particularly if a resident has not left the home in some time, leading to a greater potential for a successful liability claim.

Key to continued cover of any kind will be for charities to demonstrate appropriate levels of risk control and mitigation in their handling of Covid-19. Insurance companies will be looking for reassurance that the potential for claims has been reduced or that in the event of a claim, they can defend it on the basis that all reasonable protections were in place.

Management liability (trustee indemnity)

A potentially overlooked but critical piece of cover is management liability. Most relevant to charities under this policy is the cover for statutory investigations, as we see more of the regulators begin to bear their teeth.

Of particular concern for insurers in current times is the potential for public inquiries into the handling of Covid-19 by policyholders, which could see calls on insurance policies, should members of senior management be required to attend and give evidence at such an inquiry.

Charities should be diligent about understanding the extent of cover under this policy, but should also expect to provide greater detail of their communicable-disease risk-control measures as part of their insurance renewal in 2021.

Other issues that are affecting the insurance market for charities

Solvency II

Legislation introduced in 2016 means that by 2021, all insurers are required to hold certain levels of cash to ensure they can meet their liabilities. This has resulted in insurers leaving markets and deterred new entrants who might drive cost competition. The reduction in supply is likely to continue placing pressure on cost.

Brexit

This has tended to fall into the shadow of the coronavirus pandemic, however, it is still a major concern for insurers. The ability and appetite of some insurers to offer cover for international charities may be impacted by the result of Brexit negotiations.

Low interest rates

Interest earned on investments can help to address underwriting losses. However, the current record low interest rates (0.1% since March 2020) and market volatility have driven most insurers to a position where they are seeking to make an underwriting profit through increased rate strength.

Rising motor claim costs

The technology of our beloved family cars is advancing at a rapid rate and this is making them more expensive to repair, increasing the costs associated with motor claims. Currently, motor claim costs are rising by around 4-5% each year, which in turn leads to insurers seeking an increase in insurance premiums.

Climate change

Climate change is without doubt having a massive impact on the world as we see it. The frequency of natural disasters related to climate change is becoming more common, leading to significant pay-outs by the global insurance industry. In the early part of 2020, storms Ciara and Dennis resulted in significant claims costs approaching £400m, we have since then witnessed floods and Australian/American bush fires.

Our advice

1. Give your insurance policy(ies) the scrutiny they deserve.

With insurance, the devil is very much in the detail. Ensure that you are clear on the extent of cover provided, and do so alongside your risk register to ensure that know aware which of your organisational risks are covered and which are not.

2. Invest in risk management

An effective risk management strategy is key for an organisation. It can help with general health and safety, but can also cover off compliance and governance issues, business continuity planning, quality assurance and training/planning.

3. Seek cover from a reputable provider

The financial stability of your insurer is key. Be cautious about using offshore solutions, as although the premiums may be cheap, you are trying to find a provider who will provide long-term stability and support in the event you do need to submit a claim.

Rachel Barker is an account executive at PIB Insurance Brokers

Charity Finance wishes to thank PIB for its support with this feature