Last week the UK’s big insurers cancelled their dividend payments. If you had been relying on Aviva, RSA, Direct Line or Hiscox to provide you with any of your income this year, too bad. Legal & General aside they aren’t paying out: that adds up to around £1.3bn that shareholders thought they were getting that they now aren’t getting. The Bank of England suggested this in early March and the Prudential Regulation Authority would like to be clear that they consider it a “prudent decision.”
It makes some sense of course. Obviously insurers must, as the PRA says, “protect policy holders and maintain safety and soundness.” Some insurance claims are falling off (no one is driving so no one is having accidents, for example). But at a time when there might be more life, business interruption and critical illness and unemployment claims than usual, hanging on to cash is a good idea. Not going bust in a crisis is a good way to make sure you are still around to pay out to your policy holders in the future.
That said, this isn’t all about ability to pay: as AJ Bell’s Russ Mould points out, “applying EIOPA’s own Solvency II ratio, which measures how much capital insurers have to hold to be confident they can withstand a worst-case loss scenario” our big insurers look “well buttressed.” It is also about public perception. It looks good for regulators to take a tough line (everyone needs to look busy at the moment). And it looks good for insurers to make a big deal out of prioritising cash for policy holders over cash for shareholders.
However, there are an awful lot of policy holders around at the moment who might say that from their point of view, it doesn’t make much difference how much money their insurer does or doesn’t have: they don’t appear to be paying out on policies anyway. Take business interruption insurance. Turns out pandemics aren’t covered. A small number of policies look like they cover contagious disease-related interruptions but even in these limited cases, there have been reports of refusal to pay out, on the basis that the outbreak is global not local to any one business premises and that the office closures are government directed. The clauses, where they exist, say the industry, are more intended to cover the odd office closure as the result of, say, a localised outbreak of norovirus.
Cue outrage. But possibly misplaced outrage. Think about how the insurance industry works—the basis of the business is that bad things usually only happen to a few people at a time. When appalling things happens to a large number of people at once, it stops working. The industry either goes bust, gets out of the market—or in this case never really enters the market. When that happens the government has to take over. Hence the UK War Damage Commission, which paid for damage to buildings and land during and after World War Two; the creation of Pool Reinsurance to cover terrorist damage after the 1993 IRA bombing of the Baltic Exchange and that of Flood Re to cover homes in flood-prone areas.
When things are just too huge for the private sector, the government tends to step up (this being the entire point of government). And that is exactly what is happening in the UK (and across the world) today. What are the many state schemes on the go but a state underwriting of business interruption? They don’t come with the simplicity of a one-off insurance pay-out of course. Nor are they perfect. But add together the employee furlough scheme, the small business grants and the Coronavirus Business Interruption Loan Scheme (which is now improving fast—so far £1.1bn has been lent out in over 6,000 loans, with another 22,000 formal applications being processed) and you can hardly deny that the state is once again stepping in where insurers fear to tread.
What does this all mean if you hold the shares? The insurers won’t come out of all this covered in glory (they never do). But they’ll come out of it solvent. Barring government intervention to prevent payouts to shareholders longer term in the form of dividend controls (unlikely but possible), odds are that the insurance sector will be paying its dividends as normal next year.
Merryn Somerset Webb is editor-in-chief of Moneyweek. She tweets @merrynsw
