CEO of AFM discusses the changing world and how the Independent Schools’ Mutual could provide an innovative approach to risk management.
Could you have imagined, last year, the prospect of the government saying that schools, offices, shops and hospitality venues must close and people stay at home in order to mitigate the worst effects of a health catastrophe? Most of us would have said that was far-fetched and never going to happen – but this is the world that emerged.
“the effects of climate change will be much more severe and long-lasting. “the effects of climate change will be much more severe and long-lasting. In the past few months we’ve all had to make dramatic changes to the way we live and work. None of that has been easy, but the resilience shown by AFM members in keeping their businesses operating in exceptional circumstances has In risk terms the pandemic is the epitome of a low frequency, high severity risk, the effects of which have been amplified by the speed at which it has spread worldwide. In the past few months, we’ve all had to make dramatic changes to the way we live and work. None of it has been easy, but with innovation to match the level of disruption, schools have continued to operate and educate remarkably well.
Whilst the pandemic has created many challenges, it has also provided a platform for innovation in the managing of acute risks, breaking down internal barriers and giving rise to far more collaboration between functions within an organisation, even while working remotely.
The media, as well as the Financial Conduct Authority, have rightly challenged whether insurers are treating their customers fairly during the pandemic. I say rightly, not because there are reasons to think they would not want to do so, but because the concept of fairness has always been difficult, and has recently become a lot more so. For example, even where payment of a claim for coronavirus is not covered in the letter of a contract, is it in the spirit to not honour the claim? if people aren’t moving about or holidaying, should their insurance costs be proactively readjusted? and to what extent does government financial assistance obviate the responsibilities of an insurer to.
Insurance and risk management
We have seen unparalleled use of the word ‘unprecedented’ in recent times; the action of the Financial Conduct Authority (FCA) in bringing a test case against insurers to the High Court is certainly that! Insurers have been challenged like never before to think about how they best serve customers – they may not have expected to pay claims arising out of a pandemic, and what their policy wording says and what their customers have been told makes all the difference.
The test case has brought a degree of clarity, in some cases more than others, and it has highlighted the need for greater certainty in what is covered by an insurance policy and what is not. The FCA has also issued guidance on what it expects of insurers in the light of Covid-19, in terms of assessing how their products continue to offer value and what they should do if that value is materially affected. This could include delivering benefits in a different way, the provision of alternative, comparable benefits, reducing premiums or partial refunds of premiums already paid.
It its report “Top Risks and Megatrends 2020”, AIRMIC (previously The Association of Insurance and Risk Managers) identifies that the lack of adequate insurance cover at an affordable premium, is emerging as a risk to businesses and that most risk managers are exploring alternative ways to reduce risk.
Mutuals, by which I mean organisations owned by their customers rather than external shareholders, are an important part of the risk industry, both in the UK and internationally. In 2019 the 48 members of my association, the AFM, had almost 10.5m policyholders and income of nearly £1.3bn with total assets of over £13bn. Mutuals go to the heart of the what insurance is for, where people in a profession or business come together to pool their common risks and work together to diminish those risks.
More relevant than their scale is the benefits that mutuals deliver for their members. Mutuals tend to be smaller than PLC insurers, and to focus on a narrower range of products, where they build expertise, adopting a more creative and collaborative approach to managing risks. Members may have different attitudes to risk and different experiences, which everyone can learn from. They can create real change and member empowerment.
This means that when it comes to pricing products, a mutual can be more focused and offer better value, because the products are wholly aligned with the needs of the customer. Without shareholder dividends to pay out, investment returns are typically much higher – and the business model means that mutuals can excel in customer service and claims handling: for example, in 2019 members of AFM paid out on 95% of income protection claims, compared to 88% across the whole market.
Innovation and change can sometimes feel daunting especially when it is thrust upon us, but the benefits and the history of mutuality mean this is a great choice for the education sector, and I encourage you to investigate the Mutual and see how it could work for you and your school.