Strategic relationships for optimal insurance coverage
Published in June 2024
‘Be prepared’ is a timeless sentiment. In business this means thinking about all eventualities and how risks can be managed, including the most appropriate forms of insurance coverage.
To coincide with Insurance Awareness Day this month, we invited Laura McDonough, Head of Professional and Financial Risks at Miller, to share her views on the importance of forging trusted, strategic relationships during the process of identifying suitable insurance providers and brokers.
From the intricacies of coverage and premiums to the future of machine learning and predictive analytics, with extensive experience of construction and property-related risk, Laura offers both thought provoking insights and practical guidance on a complex area of business.
Today it’s possible to insure just about anything. It’s a mega industry. Statista alone estimates that the global insurance market will reach 10 trillion US dollars by 2028. And whilst it is relatively straightforward to find solutions for car or home contents insurance, does the approach differ for insurance protecting business interests, loss or damage? What are the key things to consider?
The basics
Whilst industry-specific requirements and deviations must be considered, in general, all robust businesses should have key policies including employer, general, public, cyber and, where relevant, professional liability insurance.
Typically maintained annually, these can be costly policies – taking a significant percentage of business revenue in premium costs alone (plus the associated management costs and excess/deductible payments where claims are made).
Insurance requires nurturing and oversight of key relationships, terms of cover, provisioning and claims management.
If cover is not put in place – or lower levels of cover are purchased than recommended by insurance advisors – this can put your business in jeopardy.
No business ever wants to be in a position where they face a claim (which has any degree of merit) if they cannot rely on insurance to help meet their liabilities.
Insurance cover and limits
Key considerations
Whilst certain insurance cover and limits may be required by law (or by regulated bodies who appraise cover), the type and scale is generally driven by:
(i) the risk appetite of an organisation, considering protection via risk transfer to insurers
(ii) the insurance market’s appetite to accept risk and the total capacity of the insurance market for that insurance product line
(iii) the cost for the insurers accepting the risk versus the organisation accepting that risk on a self-insured basis, be it through “balance sheet risk” or via alternative risk transfer.
What is deemed “adequate and appropriate” regarding level of cover will therefore differ from one organisation to the next and depend upon the individual organisation and circumstance.
Examples of what may be considered when assessing what is adequate and appropriate insurance coverage would typically include:
- profile of organisation (size, formation i.e. Private or Public and then national or multi-national);
- industry sector, where certain industries inherently carry higher risks than others, and physical areas of operation are also important. Some countries or regions are considered more high risk due to factors like political instability, conflict, high crime rates and natural disasters but also those jurisdictions that may be considered more litigious or have heavy regulation or changing regulatory landscapes for particular sectors of industry;
- client type and/or contractual requirements which should also encompass historical activities and;
- actual cost of a claim (defending and/or settling), for instance, social inflation refers to the rising costs of insurance claims due to societal trends and views towards litigation, jury awards and legal precedent. Factors driving social inflation include increased litigation, broader contract interpretations and larger jury awards. In an environment where social inflation is high, the cost of claims can rise significantly.
If an organisation does not take the time to adequately assess risk factors (including historic, current and future/emerging risks), this could result in the organisation having to pay significant costs which are un-insured and which could impact its financial stability.
Therefore, it is crucial to regularly review insurance limits and cover to ensure they reflect current risk levels and industry and societal trends.
Processes and planning
In general, most organisations have clearly defined renewal windows. They work on a (typically) rolling, annual basis which means programming and planning a schedule of key activities throughout the insurance cycle.
Larger organisations often appoint an in-house specialist – hence the growth of the “Insurance Manager” role – to oversee this important aspect of risk management. Other smaller or medium sized firms will typically rely on support from their insurance broker and appoint someone internally to oversee this area.
No matter the size of business, insurance is an important investment and risk management tool and requires appropriate measures and planning.
Brokers are best placed to advise on appropriate levels of cover and excess and can often provide benchmarking materials to help guide what is suitable for your business. But ultimately the decision as to what premium, cover and excess levels are appropriate, will need to be taken by the business. It is therefore important that key aspects requiring decisions to be made are taken to the company’s board or relevant governing body so that an informed decision can be made.
Attention to detail
For every size of organisation, from sole trader to global multinational, preparation for renewal of the insurance portfolio should be given adequate time and attention. A clear pre-renewal strategy should be agreed prior to the start of engagement with the insurance market.
Think of the insurer as an investor/partner in the organisation. Consider:
- what is the insurers financial strength rating?
- is the insurer able to demonstrate a key understanding of the industry sector inhabited by the insured?
- how long have they been offering insurance solutions for that industry sector and/or particular insurance product line?
- what is their approach to claim management?
- what are the authority levels required to react quickly?
Insurance is, at its core, a promise to cover certain risks. Therefore, a strong relationship built on trust is crucial.
The organisation (policyholder) needs to trust that the insurer will fulfil its obligations when a claim is made. Likewise, the insurer needs to trust that the policyholder will pay premiums on time and provide accurate information for the insurer to be able to make a clear assessment of the risk that it is accepting and continued information outside of renewal where there may be changes to risk profile.
A clear understanding only helps foster a strong relationship between the insurer and insured. This may lead to better product offerings and pricing, together with sustainable risk transfer over several years – of great importance where the insured may have experienced a particularly difficult claim or where the market is experiencing a more volatile cycle.
People and partnerships
Whilst algorithms may do a good job of trawling the internet for the best travel insurance deal, in corporate undertakings this is not the recommended starting point. Value for money is important but (low) cost should not be the single driving factor.
This is where a broker can make a real difference in helping identify appropriate cover. They can also help shape and develop relationships with a key stakeholder in your business: the insurer.
Depending upon the size of your business, it may be appropriate to periodically tender or review your broker relationship to ensure they have your business interests front and centre. For example, they should remain proactive and strive to bring efficiency to your arrangements whilst nurturing relationships with insurers.
Insurance brokers have multiple insurer relationships and, because they act for multiple clients and place often millions in premiums each year, they can be very influential – both during the placement stage (purchasing power and influence) or in the unfortunate event of a claim being made (negotiating and securing insurer commitment).
As with any business stakeholder, relationship management is key. The insured business should also seek to nurture insurer relationships direct where this is possible. Whilst not immediately obvious to those businesses with a good claims record, the insurer relationship is nevertheless highly important. There are many ways in which to engage; and even better if this can be achieved away from a live claims scenario (where the relationship may be put to the test).
Relationship management in practice
As already mentioned, an insurer should be treated as an investor in the organisation. The insurance broker also plays a vital role as they essentially act as your advocate and advisor helping to navigate complex insurance decisions and developing the organisation’s relationship with the insurance market and wider peer group. They are very much a strategic partner.
The development of such relationships (with insurer and broker) is not necessarily all concentrated on the lead up to renewal but is often cultivated off renewal cycle. Here the broker may look to take a deep dive into a segment of industry; they may amplify a key growth area for the organisation and the insurer may be able to add value in helping to determine key risk points. An example of all three partners working together to achieve better, more informed outcomes.
The insurance broker can also assist with risk management and provide advisory services (such as actuarial analysis and other modelling techniques) and provide networking and introduction to a wider peer group. They should also keep the organisation updated on any developing areas of the insurance market or relevant industry sector at regular intervals throughout the year. This may extend to legislative developments impacting the organisation.
An organisation should align themselves with a broker who consistently demonstrates and brings value to the organisation they represent.
This should not always be measured in terms of the cost savings at renewal but by demonstrating a deep understanding of the industry segment and an intrinsic understanding of the direction of travel of the organisation they represent.
Future gazing
Any strong strategic risk management plan gives significant thought to what’s around the corner or on the horizon. Current and future challenges we foresee which might impact on insurance conditions include the ongoing wars in Europe and the Middle East, geopolitics (including trade wars and sanctions), climate change and extreme weather events, digital/AI scams, threat of future pandemics, and skills shortages causing resourcing problems leading to professional errors.
Indeed, the world faces an unprecedented mix of complex risks and challenges that in turn create increasing difficulties for insurers and the overall provision of insurance on commercially acceptable terms.
Keeping abreast of these developments and putting in place appropriate measures will go some way to manage these risks effectively, regardless of what insurance may be available. But proactive risk management also gives assurance to insurers that robust business practices are in place. This in turn can help to influence premium levels and other terms of cover.
Changing shape of digital solutions
Global volatility impacts insurance in terms of ability to provide cover – or because higher premiums are required for insurers to accept such risks and at a greater risk transfer point. It also provides an environment for the creation of new solutions to some of the limitations of (for example) traditional indemnity-based insurance.
One such solution is parametric insurance which offers a new way to manage risks that are difficult to insure using traditional methods – and where speed of payout may be key. Traditional insurance claims can take a long time to process as they require an assessment of the damage. Parametric insurance pays out as soon as the pre-determined trigger occurs – such as a hurricane of a certain intensity hitting a specific area or where a certain type of cyber incident (such as ransomware attack or a specific outcome seeing a period of downtime).
If we consider how insurance might be shaped in the future, using predictive analytics (to anticipate future claims based on historical data) and machine learning algorithms (to identify patterns and trends) is an increasing trend among insurers and brokers.
As with many aspects of business, using data analytics to improve risk assessment and artificial intelligence to automate routine tasks in the broking and underwriting process, frees up human time to focus on the complexities. Telematics provides detailed data on driving behaviour allowing insurers to price policies based on individual risk rather than applying broad demographic/geographic factors. In response to climate change, brokers and insurers use sophisticated modelling techniques to better predict events and price these risks.
The future of insurance (broking and insurance underwriting) is likely to be even more data-driven and automated; more granular and, where required, individualised. This raises issues around data privacy and security and so, the un-furling of new risks to consider and mitigate.
Collaborative counsel
In my experience putting in the time to develop (and test) strategic relationships with your insurer and insurance broker does lead to better product offering, pricing and sustainable risk transfer. These relationships assist in risk mitigation that may in turn lead to innovative solutions, insights into best practices and emerging trends for your organisation.
As a broker, my goal as a strategic partner to an organisation is to give that organisation the freedom to focus, the time to think and the support to grow. Which means that the organisation can concentrate on the road ahead, and meet whatever is next with confidence, supported by its insurance stakeholders.
