Policyholders should be willing to pay higher insurance premiums for contract certainty, according to an Airmic report on the importance of business-critical insurance launched at its annual conference. Produced in conjunction with PwC, it urges policyholders and insurers to raise awareness at board level of the strategic value of certain types of insurance.
The report, Business critical insurance: Identifying those insurances that support the business and its strategy, proposes that insurance policies fall into three categories: mandatory insurance, which is required by law or a regulator; optional insurance used to reduce risk exposures if the risk/reward trade-off is appropriate; and business-critical insurance which underpins the company’s operations.
“Unfit for purpose”
“Insurance can be viewed by boards and business units as just another cost overhead, where value is judged by securing the lowest premium,” the paper argues. In such cases, it warns that businesses “fail to appreciate the value of insurance in supporting the overall strategy” and as a result policies can be “unfit for purpose”.
Julia Graham, Airmic’s technical director, explained: “Not all insurance is the same. If a policy is meant to provide cover against events that could lead to balance sheet damage or even threaten the viability of a business, it is strategically-critical and it absolutely must pay out as and when expected. The challenge is for policyholders to convey this to their board, and for underwriters to design and market their products in a way that supports claims certainty.”
Alpesh Shah, director at PwC who worked with Airmic on the report, commented: "Today's rapidly evolving business environment is a great opportunity for insurance buyers and risk managers to raise their profile at board level. To facilitate better conversations, insurance can be considered in the context of other financial metrics which drive a business forward."
The paper, which builds on the report Efficacy of Business Insurance published by Airmic last year, has a strong practical element designed to help risk mangers categorise individual insurance covers and demonstrate to the wider business the importance of mapping business-critical insurances against the context of key corporate financial thresholds.
It also makes the follow six recommendations for insurance buyers:
- Select appropriate limits and sums insured;
- Undertake legal review of policy wordings;
- Scenario test anticipated events and the policy wording;
- Agree an effective disclosure process with the insurer;
- Agree claims handling procedures and protocols;
- Establish crisis management and rapid response plans.
Download the report here.
Georgina Wainwright, R&D manager: Business-critical insurance in 40 seconds