With her unpermissive persona and Central Bank enforcer pedigree, Fiona Muldoon was an inspired, if somewhat surprising, choice to take the helm at FBD five years ago, just months after joining as CFO. The insurer was widely seen as a financial calamity, with a series of profit warnings suppressing both investor confidence and its share price. In 2015 alone, the company posted a pre-tax loss of €88.5 million. 

Muldoon, a tenacious, unyielding presence in the boardroom and across the wider organisation, was retained to stem the losses and restructure the business to a sustainable path. When Muldoon announced her intention to step down in October, it seemed the job had been completed in some style. 

She had achieved this remarkable renaissance at FBD through a combination of carrot and stick – property investments were sold, motor premiums hiked and the use of insurance brokers scaled back. There was a dead-eyed focus on price and risk, and, of course, cost containment.

In 2018, FBD paid its first dividend in four years, coinciding with the 20th anniversary of its flotation on the Irish Stock Exchange. Its share price had rebounded a startling 80 per cent during her tenure, and in 2019, her final year in charge, the insurer booked a profit of around €110 million.

Analysts and shareholders were left salivating as the insurer dropped a string of breadcrumbs pointing to a potential dividend of €1 per share, a pay-out yield of 10 per cent compared to a stock market average here of 2 per cent.

Muldoon’s strategy was impressive. But she was, in certain respects, also lucky. The wider economic uplift had helped the cause as did the weather. Indeed, one reason for the 2019 bumper was the fact that the insurer was able to release money previously set aside to cover claims, back in what it called “exceptionally benign weather” throughout the year. Its investment pot also delivered handsomely.

As Muldoon’s long goodbye continues (she is due to leave in October), it appears that the luck is getting slightly threadbare. 

Business owners are increasingly furious, with various lobby groups seeking legal opinions to assess the hard-line stance taken by FBD (and also, notably, Allianz Ireland).

Covid-19 has left the insurer, along with many others in the industry, both scrambling and explaining. It has been accused by long-time customers, particularly publicans, hoteliers and restaurateurs, of casting them adrift and refusing to pay cover for interruption caused as a result of Covid-19 closures. 

Business owners are increasingly furious, with various lobby groups seeking legal opinions to assess the hard-line stance taken by FBD (and also, notably, Allianz Ireland). The government, through Paschal Donohoe, has issued some stern words about using technicalities to nullify policies, while the Central Bank has also written to Muldoon and other CEOs to remind them of their responsibilities. 

All told, it has been a publicity nightmare for the insurer, and its tagline of “Support, it’s what we do” has become something of a running twitter joke among exasperated customers.

But behind the scenes, other issues are also emerging. There is an acknowledgement in official circles that FBD does not have the financial heft to honour all potential claims for business interruption, even for a period of three months. 

There are also growing concerns about the robustness of its business model in the event this crisis stretches out for a prolonged period. Unlike other insurers operating here, it is not backstopped by a global giant. It is Irish-owned, and much smaller than its peers. 

The fear is that if policy renewals dry up and claims continue for a protracted period, the company could face significant issues. The matter is now being watched closely by both the Department of Finance and the Central Bank.

The standoff between insurers and industry has put the state in an invidious position. Through the wage subsidy scheme, it is effectively subsiding both industry and insurer. The state knows that without insurance pay-outs, many businesses, particularly pubs and restaurants, will never reopen. But it knows that if honoured, there could be casualties in the insurance sector as reinsurers have made it clear they will not honour business interruption claims. 

So just what has been going on behind the scenes for the past two weeks? And just how big an issue is this for the insurance industry in general, and Muldoon’s FBD in particular? 

*****

March 17, 2020 was a reflective, wistful one for Irish publicans. St Patrick’s Day should have been the busiest day of the year for pubs, but, instead, they were simply shuttered. Louis Fitzgerald played golf. Martin Keane performed a stocktake, and later had a few bottles of wine over dinner. 

Many others, however, began reading their insurance policies, and contacting their brokers. The initial mood was positive. All had cover for business interruption, although just what that actually meant was somewhat vague and open to interpretation. Others, to their delight, found that they had taken out insurance against human contagious infectious diseases. 

“Good news on insurance,” one broker told his roster of Dublin clients through email early that morning drawing attention to the relevant paragraphs of a boiler plate Allianz policy.

It stated that that the policy would include loss “as a result of interruption or interference” caused by a range of factors including “any occurrence of a notifiable disease”. A subsection of the Allianz policy even outlined what a notifiable disease was, stating that it was “any human infectious or human contagious disease, an outbreak of which the competent local authority has stipulated will be notified to them”.

By evening, however, the mood music had changed. There are two main players in the pub insurance industry, and both FBD and Allianz Ireland were both being very coy.  On St Patrick’s Day, Allianz refused to tell one large pub group, which employs hundreds of people in Dublin, whether it was insured or not in relation to the crisis. 

Essentially, they were playing for time. Behind the scenes, insurers were engaging frantically with their battalion of lawyers and seeking opinions from legal counsel. The initial legal advice was that the policies were not specific enough to force pay-outs, and there was enough vagueness to nullify the policy. 

“Look at the wording, it is just not covered,” said one source. “There is cover for business interruption where it is caused by a notifiable disease ‘at the premises or attributable to food or drink supplied from the premises’.  That is just not what has occurred. 

“Look at it from the insurer’s point of view. They are insuring the unlikely and remote risk of an individual pub being shut down. That language does not, on any fair reading, cover what has occurred here. The pub has not shut because of any notifiable disease at the premises. That is the bottom line. It is an industry-wide prophylactic measure.”

Crucially, they also engaged with reinsurers. Most insurance companies sell on a portion of the risk to reinsurers. The Irish insurers wanted to know if they would be covered if they opted to pay out. The answer came back negative. Put bluntly, they could pay, but they would have to cover it themselves. 

The finance departments were ordered to assess the potential damage of paying out to their reserves. The answer, it quickly emerged, was enormous and potentially catastrophic.

The lobby groups went into overdrive. Pub groups called on insurers to honour policies and pay out for business interruption. Insurance lobby groups, meanwhile, said it would threaten the solvency of the sector. 

Having received their advice and crunched the numbers, FBD and Allianz decided against covering business interruption, unless it was specifically and explicitly stated in the policy that it would be covered for these events – although they did agree to waive insurance fees while outlets were shut. 

Both insurers were claiming that the pubs had not been explicitly ordered to close by the Government, and that the government advice was just that – advice. Plus, there was no reason to believe that there was an actual human contagious disease on any of the premises. 

The lobby groups went into overdrive. Pub groups called on insurers to honour policies and pay out for business interruption. Insurance lobby groups, meanwhile, said it would threaten the solvency of the sector. 

And with each passing day, it was getting worse. The president and chief executive of the Restaurants Association of Ireland (RAI), which represents 2,500 restaurants across the country, soon started engaging with legal counsel as the group’s members prepare to take action against big insurance companies.

The RAI, which is led by Adrian Cummins and whose president is Mark McGowan, retained lawyer Gareth Robinson and began gathering policies from its members to have them reviewed legally in preparation for a series of court cases against insurers refusing to pay out.

As the war of words escalated, the matter quickly became political. 

*****

As the crisis unfolds, new issues are emerging on almost an hourly basis. Some require quick-fix legislation. Others require blunt force. The top civil servants and political aides in the key economic ministries have been operating in a sense of perpetual motion for weeks now, trying to cover off issues before they emerge.

The same applies to the Central Bank, which has been revising forecasts on the economy, compiling data on risks and also working to ensure consumers are treated fairly through this period. 

It was immediately obvious that the insurance standoff had the capacity to escalate very quickly. Most of the businesses impacted were high-profile and visible – restaurants and pubs are visible manifestations of the wider economy – and their employees are a world removed from executive-level workers. 

The Department of Finance knew that this would become an issue. But the trouble was deciding what to do. Paschal Donohoe has used the state’s position as shareholder in the past, and had hauled in the bank CEOs to the department to discuss how it could help borrowers during this crisis. 

But the state’s position is weaker when dealing with insurers. They were not bailed out by the state, and once they operate within legislation and Central Bank rules, little can be done to force them to pay out on policies. 

On the other side, the government was acutely conscious that consumer protection must be enforced. In conjunction with the wider response to Covid-19, the department opted for a two-fold response. 

The department knew it was in a difficult position. The more money insurance companies lose, the more they simply raise premiums next time around. And premiums have already been rising for some time – a recent Central Bank report found insurers had raised premiums by 42 per cent between 2009 and 2018 on motor policies, even though the cost of claims fell by 2.5 per cent over the same period.

And, in the worst case, the department was – and remains – fearful that a player will simply exit the market, as many others have done in recent years.

On the other side, the government was acutely conscious that consumer protection must be enforced. In conjunction with the wider response to Covid-19, the department opted for a two-fold response. 

The first was the wage support scheme – essentially, the state moved in to fill the vacuum left by the insurers. It was obvious that some class of support scheme was required given the scale of redundancies, but it was all the more pressing because of the lack of business interruption business cover. 

The second, complementary salvo was to call out the insurance companies, particular around the issue of whether outlets were ordered or merely advised to shut down by the state. Minister for Finance Paschal Donohoe entered the debate, calling on insurers not to reject businesses’ claims for loss of earnings if they were advised by the Government to shut up shop to contain the spread of Covid-19, amid evidence the industry is relying on fine print and technicalities to avoid pay-outs.

The notion that insurers were trying to distinguish on the government advice – and profit from it – did not play well in government. Private calls were lodged with senior industry players warning that the government would not stand by and allow this to go unchallenged. 

Similar frustrations were also emanating from the Central Bank around the issue of whether businesses were asked or told to close. 

The Central Bank had learned the lessons of the previous crisis, when, according to critics, it put the wellbeing of the financial institutions above the interests of consumers. The tracker scandal is the most notable manifestation of this mindset. 

In this case, however, the bank was keen to take a stand and ensure that the industry did not “self-protect”. Its advisers assessed the situation. In cases where a claim was legitimate, the bank was determined that the claim would be dealt with immediately. If there was any ambiguity, or the policy was not clear, it wanted the insurers to pay out.

The trouble was that the issue of business interruption fell into the middle. Officials believed that the bigger corporates would have the legal clout to assess the policies; the trouble, however, was that many small businesses had no real remedy and did not have the reserves to fight an insurance company in the courts. 

“The CEO of each firm shall take responsibility for the oversight of how their firm is managing determinations of whether claims are covered or not in the context of Covid-19.”

Central Bank regulators

The Central Bank opted to meet with the insurers and to put their CEOs and board members on notice that they would be held personally responsible for how they handled the crisis. This might seem a trite point, but the threat takes more significance as a result of the new Senior Executive Accountability Regime (SEAR), which governs the behaviour of senior figures within the sector. Under the rules, the Central Bank has the power to sanction individuals concerned in the management of regulated entities, including with monetary penalties of up to €1 million.

Ahead of the meeting, which took place yesterday, Derville Rowland and Ed Sibley, two senior regulators, sent a letter to the insurance hierarchy. The tone could not have been clearer: 

“The Central Bank expects that you, your Board of Directors and senior management teams take account of the difficult and challenging situation in which many of your customers find themselves and to develop consumer-centric solutions to the handling of insurance payment breaks and policy rebates in light of the Covid-19 emergency as a matter of urgency. Furthermore, the board and senior management must ensure at this time that claims are appropriately assessed, and where there is insurance cover in place, that claims are accepted and paid promptly.”

The letter added: 

“The Central Bank expects that the CEO of each firm shall take responsibility for the oversight of how their firm is managing determinations of whether claims are covered or not in the context of Covid-19. Where necessary to gather further information with regard to the management of determinations as to whether claims are covered or not in the context of Covid-19 the Central Bank will, as deemed appropriate, require certification from the CEO as to such matters. Engagement with customers – All firms need to be sensitive to changes in customers’ circumstances due to the public health measures taken to counter the spread of Covid-19, which have left many in a financially vulnerable situation.”

The message prompted immediate action. Axa Insurance quickly said it will pay out legitimate claims from up to 4,000 firms here with business interruption cover if their companies have been adversely impacted by Covid-19.

The company has written to the 4,000 holders of the policies, which typically cover shops and offices, telling them it has deemed the coronavirus does meet the description of a disease as set out in their policies.

However, Axa said it also has more customers whose policies only cover specifically named diseases that do not include Covid-19 and as a result, the policyholders will not be covered. The number of customers in this category is understood to be in the region of 10,000. 

FBD and Allianz, however, were not for turning – although Allianz announced a number of small initiatives around payment period and financial distress. To understand this hard-line interpretation, you need to understand the current state of the insurance industry – in Ireland and globally.

*****

The insurance industry globally is in very serious trouble, and while policymakers are focused on the risks of a credit crunch, the real worry is that the crisis could trigger a cover crunch. Basically, behind all of the cancelled flights and hotel rooms is travel insurance. Events ranging from music festivals to the Olympics will have event cancellation insurance. Every patient, particularly in the US, is a health insurance claim. This is not to mention legitimate business continuity claims, and the standard losses the insurance industry expect to cover. 

2020 will be a horrible year for claims and many of these are exceptional “black swan” events that they will not have properly reserved for. In addition, 2020 will also be a tough year for revenues with some estimates suggesting global GDP shrinking by 10 per cent, severe pressure on premiums, and no growth potential.

But what makes this a perfect storm is the regulatory framework for insurance and the fact that insurer’s investment portfolios have been thrashed. The industry will be under public pressure to keep costs down and help business customers to restart.

To put this in context, Hurricane Katrina cost the insurance industry $40 billion. 9/11 was fairly similar, and the Deepwater Horizon oil spill was only about $2 billion in losses for BP’s insurers. But the industry can’t even start to estimate how expensive the Covid-19 exposure is going to be. 

Moreover, in previous cases, most of the risk was spread around through re-insurance because terrorism, pollution, and extreme weather are at least recognized risks. It remains unclear whether a pandemic on this scale was ever re-insured by the major insurers. In addition, in previous major events, the broader economic climate was benign, and the losses were localised. With Covid-19, everything everywhere, is impacted. 

As such, this is something of a doomsday scenario for the industry. 

One way or the other, this will have an impact on business. Premiums for all businesses will go up in the future. Business insurance premiums have already been surging due to the well-documented claims culture and the desire from insurance companies to make up for years of losses here. We have also had an extended period of low government interest rates that have reduced their investment returns.

Based on past experience, the response of insurers to the crisis will be to raise premiums and pull out of less profitable business lines, thereby reducing competition further. 

In Ireland, the journey has been a difficult one. Between 2003 and 2010, average premiums declined by 27 per cent as the insurance companies embarked on a boom-time gamble for market share. As a result of the revenue chasing models, the industry under-priced and ultimately lost close to €1 billion over the space of five years at the start of the last decade. Quinn Insurance collapsed into administration and others withdrew from the market. 

The industry has been marked by boom and bust. The response of insurers to this crisis draws from the learnings of that narrative. 

What happens next?

The Central Bank is determined to ensure that their insurers play fairly, although it is aware that it cannot force them to pay out on disputed claims. Instead, it is urging the insurers, where ambiguity exists, to favour the customer. The Department of Finance is taking a similar view.

For now, the insurance company is effectively the state. The wage subsidy scheme is a state-backed insurance policy for employees. It will not offset losses for companies, but it is designed to provide an economic stimulus to workers to ensure the economy and households can continue to function. 

Over half a million Irish people are receiving either pandemic payments, unemployment benefit or wage subsidies. 300,000 of them were in work at the start of this month, when the economy was at or near full employment. 

As Stephen Kinsella writes today: “Covid-19 has wiped out the gains in employment made since the 2007/8 crisis. It has forced the state into a hyperactive, adrenalised moment, at which anything could be done – but only in this moment. What are the risks to this frenzied behaviour, both positive and negative, and what can we do about it?”

Beyond the money, the issue had damaged the reputation of insurance companies, who have been accused of profiteering and using the fine print to avoid paying out on policies.