Resilience under pressure – Mactavish report

Nine out of ten companies expect the war in Ukraine to reduce their resilience, according to a report from insurance buyer and claims resolution firm Mactavish.

Sixty percent of businesses with more than 250 employees have already reported an insurance claim in some way related to the Ukraine crisis.

Commercial insurance pricing jumped 20% in the first quarter of 2022, putting added financial pressure on businesses seeking risk transfer, according to the report, entitled ‘Managing risk and safeguarding business resilience in a time of crisis’.

Disruptions arising from the Ukraine crisis can have many effects on the risks that companies face, some of which aren’t always obvious, noted the study.

The paper cited one example of a charity facing wide exclusions on a renewed policy.

“For example, a worldwide charity received an exclusion detailed in such broad language that it would exclude any loss indirectly involving a Russian dual citizen, even if that individual was living outside the country and the claim had nothing to do with Russia.

“Exclusions such as these, which specify that they will not pay out on any claim involving a ‘Russian Person’, were designed to exclude claims arising from an organisation’s activity in Russia, but the wording can have a more far-reaching impact.”

For insurers, aviation, marine and energy classes are expected to be most affected. Global insurers have announced $1.3 billion in direct losses from the Ukraine crisis in the first quarter of 2022, but some estimate that eventual losses could exceed $20 billion, the Mactavish paper said.

No skimping on risk management

One in five firms are still unaware of the effects of sanctions and war exclusions on their business, Mactavish warned.

Some 74% of businesses with more than 250 employees report assets being impacted by sanctions placed on Russia and Belarus. The finance, aviation and technology sectors are most affected.

In response, there is growing pressure on policyholders to step up and build in-house expertise to ensure the viability of their insurance programmes, the paper suggested.

One in five businesses do not feel confident that they have disclosed all new emerging risks properly in order to comply with fair presentation obligations, Mactavish warned.

“If the value of assets is understated when placing insurance (much more likely in a high inflation environment with asset categories affected unevenly), it is likely to lead to a reduction in insurance claim recovery, or even outright dispute of the entire claim.”

All of this elevates the role of risk management, the paper underlined. Most firms have, for example, reinforced their business continuity plans in the past year, the study noted.

“In this high-risk operating environment, there’s simply no excuse for any board to either skimp on risk management or to view insurance as a commodity purchase. Insurance is a key financial component of a company’s capital mix and one which has tremendous value, but it also requires attention to structure properly and ensure reliability.”

One in five businesses do not feel confident that their insurance will cover their business given the risks and operational shifts arising from the crisis, according to Mactavish.

“In light of the increased exposure organisations are facing, boards have a responsibility to embrace insurance as a strategic product to finance high-severity risks and not as a mere commodity,” says Heidi Carslaw, Managing Director, Mactavish.

“The insurance market must, in turn, accelerate its transformation to propose adaptable and viable solutions to increasingly volatile risks, demonstrating a partnership approach that helps protect against the unpredictable and reduces client risk over time.

“Strong collaborations between policyholders, brokers and insurers, and good faith are key to effectively identify, disclose and cover new emerging risks, and protect corporate and national resilience,” she adds.

The report warns about a potential loss of confidence in the market for insurance buyers.

“Trust and reputation are paramount, and this period of uncertainty must be used to rebuild and refocus. If not, the irreparable reputational damage will continue to be felt for many decades to come,” Mactavish added.