News & Views

Why investors are asking tough questions about your insurance strategy

“Only when the tide goes out do you discover who’s been swimming naked.” Warren Buffett

Risk transfer solutions are under growing scrutiny as risk and insurance move up the board agenda. Getting your contract wording right has never been more important.

The report Tomorrow’s Risk Leadership, published last month by Tomorrow’s Company in collaboration with Airmic and others, raises some extremely important issues that speak to the heart of corporate governance.

Financial accounts, particularly those of listed companies, are under scrutiny like never before as investors, funders and their advisers strive to minimise and monitor risk. A management board’s ability to justify its decision to retain risk on its own balance sheet or to transfer it to an insurer is now a fundamental strand of corporate governance. Financial analysts and non-executive directors have got this firmly in their sights and are asking increasingly in-depth questions about companies’ risk transfer strategy.

This makes the job of risk and insurance managers, and their selection of insurance advisers, more critical than ever. Insurance underpins the balance sheet, credit rating and share price of virtually every company in the land. Because a rejected major loss claim has the potential to take most companies down, there has never been a better case or a better time for having a risk and insurance director at main board level, as argued in Tomorrow’s Risk Leadership.

Commentators such as Mactavish have often stressed the need for structural change in the placement of insurance by large organisations. Maybe the Insurance Act 2015 will prove to be a catalyst for this. The need to improve the standard of insurance submissions and more thoroughly test and review policy wordings in the light of past claims experience is certainly prompting some risk and insurance managers to re-assess who they want alongside them during the placement process. A greater input from those that have handled a company’s previous claims and from specialist accountants and lawyers is certainly likely to improve any risk placement process.

Furthermore, the rising profile of risk within companies is making insurance broker selection increasingly important. Too often, coverage issues arise from things that have inadvertently fallen through the cracks between an insured and its broker during placement. This can result in inappropriate exclusions, conditions and warranties, inadequate indemnity limits and unclear policy wordings.

A company should treat its broker’s service agreement as one of the most important contracts it enters into. After all, its content will determine a company’s ability to secure the optimum risk transfer strategy, insurance programme structure, premium pricing and balance sheet protection. Negotiation of such a service agreement requires specialist legal input to ensure the roles and responsibilities of both parties are appropriately defined and documented and that the indemnity provisions reflect the full value of such a market-sensitive service.