Think you know the point of insurance? Think again.
By Bruce Hepburn
That might seem an odd question to be asking in Airmic News, but it’s one which doesn’t get much attention. Insurance is money. It needs arranging just like a bank loan or a share issue, or any other type of finance. If anything, it’s more complicated to arrange than most types of money, since you don’t actually have it. The circumstances under which a policy pays out must be defined and insurance contracts (once under their skin) are actually very complex in respect of coverage, obligations and disclosure.
Yet more so than other forms of money, insurance is taken for granted by senior management – a commodity that is either just assumed will pay, or assumed won’t pay based on a general suspicion of insurers: “they’ll find a way to wriggle out of it whatever we do”. But either way, the focus is cost, not what it is or how it is arranged – usually involving low arrangement fees, no lawyers and limited negotiation of coverage or terms. Few companies would raise £300m of debt without lawyers poring over all the details, but an insurance policy with £300m of protection isn’t viewed the same way, despite its complexity – an insurance arrangement paradox.
Whilst the start of the financial crisis is an increasingly distant memory, its effects are enduring. Insurance protection remains more important to most businesses today than many realise, illustrated by two simple questions:
- If you suffered a major loss (say 2/3 of your biggest limit) which was delayed or disputed for several years, how would the business cope?
- Is your insurance good value compared with other types of capital employed?
The answer to the first remains problematic for most, in terms of strategy if not survival – making this paradox odder still. The second is rarely considered but again for most vindicates a higher profile for insurance.
We work with companies to understand how important insurance is to them, and what this dictates in order to ensure it is reliable. More than most financial instruments, a reliable insurance “product” is co-created through the placement process itself - by the buyer, the broker and the insurer. So analysis should start with understanding its importance, but end with ensuring the right coverage is bought, that contracts are clear and fair, and that both the exposure and each party’s responsibilities are understood and defined – rather than shrouded in mystery to be argued over once the claim horse has bolted.
A lot of attention has, rightly, been given to the Law Commission’s work to highlight some of the most unfair terms in insurance contracts and propose statutory changes. Whether or whenever this legislation progresses, however, Airmic members must recognise that it is one small part of a broader story – it simply will not protect against many of the current sources of claims dispute.
Bruce Hepburn is CEO at Mactavish