Airmic

Outsourcing & Offshoring – an insurer’s perspective

The insurance complications, which are almost inevitable whenever companies enter into outsourcing or offshoring arrangements, are often overlooked, two senior underwriters from XL Insurance told the seminar.

Just as risk management becomes more challenging in these circumstances, so does insurance buying, and for broadly the same reason: you lose a large element of control. Underwriters like certainty; anything that reduces it can make insurance more expensive and harder to obtain. The establishment of material facts can also be more challenging whenever you depend on a supplier for the information, with obvious implications when it comes to making claims.

“If you outsource it becomes a thirdparty risk and the available insurance usually reduces drastically,” Huw Chandler, Property Risk Engineering Practice Leader, Europe & Asia Pacific at XL pointed out. The quality of information in these situations can often be a key challenge, and it almost always reduces whenever a function is outsourced. “The level of disclosure on a third-party risk can never be as comprehensive as for your own premises. And uncertainty costs money when you’re buying insurance,” according to Peter Smithdale, Property Underwriting Manager.

Both speakers stressed the importance of communicating with underwriters. “If the broker, the client and the insurer are doing their jobs properly everyone should understand what’s covered,” said Chandler. “Getting the right information is challenging for all concerned. There will still be contentious issues, so it’s important to discuss these with your underwriter and broker.”

He highlighted the underwriter’s role in asking awkward questions. That way, issues are teased out and problems addressed at an early stage, sometimes averting the unintentional disclosure of inaccurate information.

He cited the example of a corporate insurance buyer who was unaware that two of his factories were being outsourced. Also, going back to the days of the Cold War, a manufacturer of military tanks who depended on a factory in Czechoslovakia (then on the Soviet side of the argument) for vital ball bearings. They had failed to register the fact that the supply would stop immediately in the event of conflict.

Getting the relationship right between insurance and wider risk management is essential, especially when considering business interruption issues. To quote Smithdale, “You need to manage your supply chain because not everything is insurable. With people outsourcing, people lose control. A small incident [at a supplier] can magnify out of all control.

“You can risk manage these risks and then discuss with your insurers the appropriate action.”

A member of the audience raised the thorny question of what would happen in the event of a claim where it turned out that material information was inaccurate because it had been given by a supplier. Would the claim still be valid? The answer, we were told, depended very much on the individual circumstances.

It was a fair but nonetheless inconclusive response, which highlighted the insurance hazards of outsourcing and the increased uncertainty that goes with them. Finding the right cover, supported by reliable detailed information, is always going to be more difficult in these circumstances. That is no reason to avoid outsourcing, but you need to think about this aspect at the outset – and not, as often happens, as an afterthought.