The race for insurance to be fit for purpose in the context of modern business
9 December 2016
In the event of a major crisis – a terrorist attack, for example, or a serious cyber-breach – most companies can rest assured that their insurance cover will mitigate the damage. Or at least it will soften the blow. Most senior management probably don’t know what their insurance cover is, but it’s presumably there when they need it, surely?
Herein lies the problem: it might not be. Insurance purchase is a complex process, especially in today’s world, where risks are harder to define and even harder to quantify. The reality is that most top executives spend very little time reviewing their insurance programmes and as a result believe they have cover where they do not, either because they don’t have the relevant insurance at all, or, more likely, the wording of the policy leaves holes in the cover which could result in insurers to refusing to pay out, either partially or in full.
In reality, most insurance policies do pay out as and when expected, but it is by no means certain, and complacency in this arena can be devastating for businesses. Some insurance policies are potentially worth hundreds of millions of pounds. If, in the event of an incident, the claim is either refused or delayed, it can seriously dent a company’s profits, cash flow and even potentially undermine the financial viability of the business.
Insurance policies should therefore be viewed not so much in terms of how much they cost but in terms of the size of the maximum indemnity available under the policy. In no other area of business would a contract worth potentially hundreds of millions of pounds fail to receive appropriate board-level scrutiny.
The demands placed on today’s boards are unprecedented and clearly executives cannot be expected to have a detailed understanding of their entire insurance programme – that is reserved for the insurance specialists. However, for those insurance policies that are “business critical” – such as if the insurance is designed to cover against events that could lead to significant balance sheet damage – then it needs to be on the boardroom agenda. Executives need to have at least enough knowledge to ask the right questions of their insurance specialist.
One of the first questions to ask is, how well does the insurance programme fit with the company’s risk map? If there are critical areas of the risk map left exposed by the insurance programme then the reasons need to be understood and investigated. In particular, board executives should take the time to review their insurance cover through the lens of the business model, focusing on potential risks to the key revenue sources.
Too many companies wait until a crisis occurs to do this, but by this point it is too late. Instead, it is best practice for senior management to test their insurance programme against specific scenarios, such as those at the top of the corporate risk map, with their insurance advisers. This will demonstrate how the policies would respond in the event of a claim, improve understanding at the board level, and flush out any gaps in cover.
An excellent example of this problem was illustrated in a recent survey which revealed that 50 per cent of board directors in FTSE companies believed they had cyber cover. In actual fact, market sources showed that only 15 per cent were covered.
In today’s world, the emerging risks facing companies are increasingly intangible, covering areas such as cyber, intellectual property and reputation. It can be hard or expensive to find insurance cover for such areas but the insurance industry is waking up to the need to find solutions and businesses should certainly ask their brokers what options are available.
The second question to ask is, how effective are the insurance policies? In other words, will they pay out as and when expected? Most loss adjusters agree that more than 80 per cent of refused claims could be avoided if the policy had been written correctly in the first place. This is entirely preventable by spending the time to tailor policies to fit with the precise nature of the business.
It is vital that insurance is not viewed simply as a necessary cost overhead without much consideration of its scope or effectiveness. Be aware of false economies: when it comes to business-critical insurance, it is strategically advantageous to spend more on getting insurance cover that is actually fit for purpose. As with most purchasing decisions, you get what you pay for.
John Hurrell is CEO of Airmic