With insurers in lockdown it’s time to take control

Last week was not a good one, finishing off with a call from your insurance broker on Friday afternoon with the news that:

  • Your Business Interruption Policy is not going to respond to your exposure.
  • The significant claim on your Property Policy is being kicked into the long grass by Insurers.
  • Your premium cost for your annual renewal is likely to go up significantly.
  • The Professional Indemnity Insurers you’ve been with for five years are pulling out of the market, even though there’s never been a claim made under the policy.

So, you are asking yourself this question: what exactly is it I’m getting for my annual premium spend which is already a material overhead and which I’ve just learnt is going to get even bigger?

To answer this question, you need to understand that the psyche of Insurers is no different from any other business when confronted with a very large and unexpected loss which, through no fault of their own, is going to decimate their financial forecasts and destabilise their Balance Sheet. They have no option but to do their very best to maintain their top line income at the same time as reducing their expense line.

Insurers’ top line income is their premium and so increasing this on their profitable lines of business is essential – thus the significant proposed increase in your premium cost.

Insurers’ expense line is their general overheads and claims. Reducing general overheads impacts service quality, and controlling claims costs involves stopping underwriting non profitable lines of business (e.g. your Professional Indemnity Insurers withdrawal), limiting cover by attaching stringent policy terms, conditions and exclusions, scrutinising very carefully all claims and rejecting any of doubtful merit.

Add to the above, the indication from the Rating Agencies that they are likely to downgrade the credit rating of many Insurers, alongside the real scrutiny the ABI is now under from the Treasury Select Committee to answer some searching questions posed on behalf of the business community, and you have the perfect storm for Insurers, which is unlikely to abate any time soon.

So, what can you do?

Think the unthinkable

You are the client and the paymaster general so take control over the dialogue.

You have a statutory obligation to carry Employers Liability insurance and Third Party Motor insurance, nothing else.

You may also have a contractual obligation to carry certain insurance covers, let’s see if we can get these removed or diluted.

Analyse your risk register

Armed with your risk register, take each policy in turn and ask yourself the following questions:

  • What is the policy renewal date?
  • What risk does the policy cover?
  • What is the annual cost of the policy?
  • What is the excess?
  • What is the limit of indemnity?
  • When did I last make a claim on this policy and what was the claim’s value?
  • In the changed circumstances, is the risk still present or has it changed or disappeared?
  • What are the cancellation and notice provisions in the policy?
  • On a cost benefit analysis, is the policy worth renewing?
  • Can or should I cancel the policy and attempt to recoup the premium already paid on a pro rata basis?
  • What risk mitigation steps am I taking at the moment in respect of the risk that the policy covers?
  • What additional risk mitigation steps could I take in respect of the risk?

Distilling it all down, if it is going to cost you an arm and a leg to purchase a contract of insurance which may not cover you for the risks, and which you may no longer actually need, and in respect of which you may struggle to make a successful claim, and against an Insurer whose financial forecasts are likely to be impacted and whose credit rating is under scrutiny, would you not be better considering some of your options? These might include:

  • Cancelling the policy and recouping the premium on a pro rata basis.
  • Cancelling the policy and renewing it but at a reduced premium.
  • Cancelling the policy and retaining the risk on your own Balance Sheet, taking the appropriate steps yourself to mitigate the potential liability.

You will almost certainly have worked out how much you can afford to pay if an unforeseen event happened, and how frequently you could afford to meet this during the course of a financial year, without it materially affecting your balance sheet – it’s always good to have a figure in the back of your head anyway.

Risk retention v risk transfer

An obvious first step in any risk mitigation strategy is to review the basis of your contractual relationships with all third parties (principally your suppliers and customers). Fixing appropriate indemnity provisions and liability caps could instantaneously reduce your exposure and improve the likelihood of recoveries from third parties in the event of a risk falling in.

Utilising independent Health and Safety Consultants is another cost-effective way of ensuring compliance with best practice in the workplace, improving working conditions and reducing the likelihood of injury and harm to your workforce.

An accounting exercise, to look at the strength of your balance sheet and its resilience to insurance events and risk exposures, is an essential step to take and will give you some additional comfort.

A halfway house could be to make a fundamental change to your risk appetite philosophy by transferring only the top end of the exposure to Insurers, for a reduced premium, and by way of a customised insurance policy designed to ensure the cover you require and for which you are going to pay a premium is in place.

And if this proves to be unachievable, consider buying cover on a first loss limit basis where the amount above a certain figure is self-insured on the basis this it would be very unlikely to fall in.

Underpinning all the above is the need for the correct analysis and construction of your insurance contracts in tandem with ensuring your business is not exposed under the terms of your commercial agreements with third parties. This analysis is fundamental to giving you the protection you need in what is now a very different world. The reliance which may previously have been placed on the transfer of risk to Insurers warrants re-evaluating, forensically and without delay.

Next steps

As insurance and commercial lawyers familiar with managing projects to secure the right outcomes for insurance buying clients, we are ideally placed to help you. Working alongside our colleagues in the broking, insuring, accounting and consultancy sectors, as well as your existing insurance advisers, we will ensure that everyone on the project team is ‘on message’ and understands the need to challenge the accepted norms. Only by doing this will it be possible to identify the full range of options available to you and deliver the best result – speedily and cost-effectively.

If you would value a wholly independent scrutiny of your current risk transfer and risk retention arrangements and strategy, please send your contact details to my colleague Josh Bates at joshuabates@oconnors.law and we will pick up a dialogue with you directly.

Paul O’Connor