What is Financial Vulnerability?

There are few professions that understand their client base as well as an insurance broker. When the FCA introduced and formalised the concept of customer vulnerability in 2015, its guidance touched on an issue that some brokers may have already been considering many years prior. 

We have since spent more time trying to understand this vast and complicated subject. The more we consider the subject the wider the net seems to become! However, in making more people aware of the challenges faced by the financially vulnerable, identifying these clients and providing them with timely support has been made easier. We are now able to be a pillar to clients who require our support the most. 

The FCA defined a vulnerable costumer as:

“A vulnerable consumer is someone who, due to their personal circumstances is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.”

What is happening in 2020?

2020 has bought with it unprecedented challenges, due to the coronavirus (Covid-19) pandemic.  Despite the extraordinary measures taken by, not only the UK government, but governments all over the world, many businesses have already warned of the losses they face and the impact this will have on our everyday lives going forward.

Firms have faced early challenges as a result of Covid-19 and have already had to make difficult decisions to try and survive these testing times. Businesses must continue paying their contractual obligations but with little or no sales or income, positive cashflow is proving to be one of the biggest obstacles.

As part of the government initiative to help the UK economy to stay abreast of the situation and in preparation of coming months, government backed business loans were made available,  but only 1.4% of application for small/medium sized business loans have been approved: https://www.theguardian.com/world/2020/apr/12/applicants-uk-coronavirus-business-loan-cbils. I have already had several discussions with the brokers who, unfortunately, have not had a successful application to said funds.

Financial vulnerability is truly prevalent within our society. Remember that vulnerability can be both temporary and permanent. A majority of UK adults only manage to ‘make ends meet’ with no resilience to weather financial impacts. Many businesses follow the same pattern. They live ‘hand to mouth’ on a monthly basis. I cannot tell you whether this is a reflection of the attitude to credit and quick wins we have as a culture or if this is how modern business is executed but I think that, with no financial reserves, many will have to make more and more difficult decisions in the very near future. 

Insurance can unfortunately often be viewed by many as a compulsory expenditure as opposed to an informed (and savvy) purchase. Keeping this in mind, the quality of the cover provided is often only highlighted in the event of a claim; sometimes the result of a claim is the difference between continued trade or having to shut the shutters for good. Many do not view it as a risk management tool that it is and are constantly trying to find the ‘cheapest’ quote available.

This can lead to many brokers are seeing their renewal uptake slow down as policyholders decide that there is not enough money in the pot to pay the premium or that insurance is not needed if the business is closed.

What can do you do as a broker?

  • Giving the policyholder options and all the information they need to make an informed decision. Can they reduce the level of cover short term?
  • Are there any payment options available?
  • Be sure to protect yourself as a broker. Any communication where a policyholder has reduced the level of cover should be recorded and filed. Most importantly, confirm any instructions received on a durable medium such as an email confirmation.
  • If a policyholder wants to defer cover for a few months, put a note in your diary to ensure terms are with them in good time.
  • Consider putting processes in place to allow you to process what could be a lot of renewals in a short amount of time.

What is the impact on the broker?

We will probably find that brokers will see the financial strain early in the summer month as a knock-on effect of lapsed policies. It is hoped by many that the dips in fees and commissions now will bounce back once the economy has had a chance to rebuild or once the restrictions imposed are relaxed. Brokers will face additional challenges as premiums will be driven down (even more so) by business struggling to salvage 2020.

Many brokers are already considering their expenditures going forward and many have used this situation to review how they will do business in the future. Can they reduce their rent but moving to smaller offices? Can they sublet a portion of their existing offices to reduce their rent bill? Can they communicate with their policyholders more effectively by innovating and using the technology available?

A lot of brokers have been caught in the crossfire between policyholders and insurers and have had to have some awkward conversations in relation to business interruption. During this time, it is important to maintain the duties of broker to find a suitable solution to meet your client’s business needs. It may not be easy, but it is why we do what we do – this is the value of insuring risks with a broker. These may be testing times, but putting a plan in place as to maintenance, recovery and, of course, ensuring we are FCA compliant will hopefully help us avoid becoming financially vulnerable – and able to help those that are.

About the author

Atul has eight years’ broking experience with the global insurance broker – Marsh. His time with Marsh included looking after large global programs as well as complicated UK national risks within both the general insurance and credit insurance sectors.

Having first-hand experience of a brokerage, he can empathise with the challenges a modern broker faces.

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