Let’s Talk: Policy wordings

Insurance is often described as a “promise”. The promise is that policyholders will receive financial protection against losses caused by accidents, natural disasters, crimes or other harms in exchange for paying premiums. And the words used to describe that promise matter.

Fast Fast Forward recently spoke with Gabriel Low about the importance of policy wordings to insureds, insurers and, more broadly, stable and efficient insurance markets. Gabriel is a Wordings Specialist based in AXA XL’s Singapore office. He primarily supports the Financial Lines team on Professional Indemnity, Cyber, Crime, Directors & Officers, and Trade Credit coverages.

On your LinkedIn profile, you describe your “core tenet” as “say what you mean and mean what you say”. Given your current role, that seems apt.
While that aphorism is relevant in many personal and professional contexts, it certainly applies to my current responsibilities.

Policy wordings are the foundation of insurance contracts. First and foremost, the words and phrases used in the contract define the covered and excluded risks and the circumstances or conditions that trigger the coverage. Since these terms establish the boundaries within which both parties operate, the policy wordings must precisely articulate which risks the insurer will and won’t assume on its balance sheet as well as the coverage triggers. Clear and comprehensive policy wordings lessen the risk of disputes and foster transparency and trust between the insured and the insurer.

Moreover, policy wordings serve as a crucial tool for risk management. By delineating the scope of coverage and exclusions, insurers are better equipped to assess and price the risks. At the same time, a transparent and specific understanding of what risks are and aren’t covered helps clients make informed decisions about optimising their investments in risk transfer and prevention. This clarity also incentivises clients to take proactive measures to minimise risks that can’t be economically transferred via insurance and insurers to invest in new products and services to support clients’ particular needs.

Saying what you mean also plays a pivotal role in resolving claims. In case of a dispute or claim denial, the policy wordings should provide an objective framework for resolving conflicts and interpreting the parties' intentions.

However, if the wordings are poorly drafted or ambiguous, disputes, delays, and even litigation can arise, causing frustration and financial strain for both parties involved. Conversely, well-crafted policy wordings facilitate fair and efficient claims processing, which naturally benefits clients and insurers.

Thus, both parties should strive to avoid ambiguity or misinterpretation and use clear and explicit policy language—in other words, to say what you mean and mean what you say.

What challenges do you and your colleagues face when working with clients and brokers in developing policy wordings?

Our principal challenge is ensuring that our policy wordings are compliant, up-to-date, and aligned with industry standards and best practices. This is a multi-faceted process.

For starters, new regulations and requirements are routinely issued to address evolving risks like cybersecurity threats and climate change. And since AXA XL is a multiline insurer doing business with a diverse range of clients in many different jurisdictions, we closely monitor numerous insurance markets to ensure our policies are compliant, fair and transparent.

Then, AXA’s internal policies are regularly revised to address new goals, such as ESG considerations. For example, AXA XL recently amended its underwriting guidelines to exclude thermal coal mining operations and new upstream oil and gas exploration. Also, the terms and conditions of our reinsurance contracts are often amended to reflect changes in the risk landscape and in the market environment. In both instances—changes involving our internal policies and reinsurance contracts—corresponding revisions in our policy wordings are required.

What are some of the capabilities someone in this role needs?

Although the wordings specialist role sounds relatively narrow, it is actually quite diverse. I like to describe it as wearing three hats: one for legal, one for compliance and one for underwriting. Each has different challenges and requires different capabilities.

The legal hat is very localised. That is because jurisdictions don’t always use the same words or phrases to describe similar legal concepts or issues. Hence, we need to ensure the words and phrases reflect the conventions of the particular jurisdiction to avoid time- and resource-consuming disputes. For example, the UK and Singapore treat warranty breaches differently, even though both are common law jurisdictions. I’ll skip the details, but note that these dissimilar approaches are highly relevant to our Political Risk, Credit & Bond underwriters when developing credit insurance policies featuring non-payment clauses.

I’ve already touched on the compliance hat and our ongoing challenges in that arena.

The underwriting hat is the most engaging and discerning role. Here, we need to know where to draw the line between protecting the company and stepping forward to win the business. There is a natural, ongoing tension between clients who, on the one hand, seek broad coverages and low premiums and insurers who, on the other hand, need to make prudent underwriting decisions that are likely to produce reasonable profits. Striking the right balance, of course, is the focus of the negotiations between insurance buyers and their brokers and insurance underwriters. Our role is to craft language that precisely and accurately describes the covered and excluded risks so that the underwriters can calculate the premium and clients clearly understand what they are getting in return. However, given the magnitude and scope of the risks our clients aim to mitigate, agreeing on the contract terms and conditions is often an iterative process involving considerable give and take. In these situations, we work closely with our underwriters to ensure that the policy wordings correctly reflect whatever revisions both parties accept.

On top of developing new products and continuously reviewing and updating underwriting guidelines, we conduct post-bind checks where we review a handful of bound policies to see if they comply with our rules and guidelines.

In sum, our varied responsibilities require legal training, a commercial orientation and, last but not least, an appreciation for words. Although my mother tongue is Mandarin, I learned English as a child and have always enjoyed its richness and variety. Words are our tools, and people in this role, myself included, tend to share an affinity for words.

Any closing comments

In my admittedly biased opinion, I don’t think I exaggerate when I say policy wordings is the cornerstone of the insurance business. That’s because policy wordings shape and define our client relationships while ensuring clarity and transparency. As such, carefully crafted, comprehensive and tailored policy wordings are essential in fostering trust, enhancing client satisfaction and limiting disputes.

Although the function is sometimes perceived to be dry, my experiences suggest otherwise. Working for a multiline, multinational insurer like AXA XL, my colleagues and I interact with a wide range of people internally and externally, regularly change our hats, and are on the front lines supporting clients navigate continually evolving risk landscapes. It also gives me ongoing practice in saying what you mean and meaning what you say.