Insuring against the worst

For a mul­ti-bil­lion-pound indus­try, busi­ness risk insur­ance as a whole has strug­gled to mod­ernise as we’ve moved into a dig­i­tal, glob­alised mar­ket­place.

While tra­di­tion­al areas of busi­ness risk – prop­er­ty dam­age, lost goods, direc­tors’ and offi­cers’ cov­er, and even ter­ror­ism – are all suit­ably cov­ered, the multi­na­tion­al and increas­ing­ly cyber-affect­ed way in which we do busi­ness is bring­ing some alarm­ing defi­cien­cies to the fore.

In April, Aon, one of the world’s biggest insur­ers, revealed cor­po­rate lead­ers were strug­gling to even iden­ti­fy the major risks fac­ing their organ­i­sa­tions.

The finan­cial cri­sis has focused busi­ness lead­ers’ minds in one place – the eco­nom­ic slow­down and sub­se­quent risk of slow recov­ery to the future of their busi­ness. Aon’s Glob­al Risk Man­age­ment Sur­vey of 1,415 com­pa­nies from 70 coun­tries ranked this as their top con­cern, fol­lowed by reg­u­la­to­ry and leg­isla­tive changes, increas­ing com­pe­ti­tion, and dam­age to their rep­u­ta­tion or brand.

As com­pa­nies become glob­al, it’s more impor­tant to obtain multi­na­tion­al insur­ance poli­cies

Much fur­ther down the list came cyber crime, includ­ing the risk of being hacked or hit with mali­cious virus­es, coun­ter­par­ty cred­it risk, loss of intel­lec­tu­al prop­er­ty and data, social media, and pen­sion scheme fund­ing. All these, says Aon, should be far high­er up the risk agen­da.

But can these new risks be insured against? And how far can busi­ness­es real­is­ti­cal­ly expect their poli­cies to cov­er them?

Air­mic is the UK’s asso­ci­a­tion for risk and insur­ance man­age­ment pro­fes­sion­als, and rep­re­sents 1,100 risk man­agers and cor­po­rate insur­ance buy­ers at 500 busi­ness­es, includ­ing 75 per cent of FTSE 100 com­pa­nies.

Paul Hop­kin, Airmic’s tech­ni­cal direc­tor, says there are “gap­ing holes” on the risk map that insur­ers just aren’t pro­vid­ing ade­quate­ly for.

“Insur­ance cov­ers a small­er per­cent­age of the risk map than has ever been the case,” he says. “Even where new prod­ucts have been made avail­able, they’ve typ­i­cal­ly had lit­tle take-up because they are con­sid­ered exces­sive­ly oner­ous and hedged around with con­di­tions.”

The good news is insur­ers claim to be will­ing to try and find solu­tions for risk prob­lems. And while it may be more dif­fi­cult to place prop­er­ty insur­ance in, say, an earth­quake hotspot, it won’t be impos­si­ble – just expen­sive.

Sim­i­lar­ly, most busi­ness sec­tors will man­age to find insur­ance poli­cies to suit their needs, although some sec­tors may require spe­cial­ist under­writ­ing that most insur­ers won’t have the appetite for; these include nuclear oper­a­tions, petro-chem­i­cal com­pa­nies and min­ing.

Sec­tors which utilise insur­ance poli­cies well to man­age busi­ness risk tend to be the larg­er, old­er ones who insur­ers com­pete to have as clients; sec­tors such as auto­mo­tive, food, trans­port and phar­ma­ceu­ti­cal tend to be well looked after.

But even for these big com­pa­nies, there are two areas which are near­ly always under- rep­re­sent­ed and under-insured – glob­al­i­sa­tion and busi­ness inter­rup­tion.

As com­pa­nies become glob­al, it’s more impor­tant to obtain multi­na­tion­al insur­ance poli­cies. Get­ting the right sort of poli­cies though is lit­tered with com­pli­ca­tions.

Busi­ness inter­rup­tion cov­er is crit­i­cal for com­pa­nies, but get­ting it right is not easy

Today, more than 90 For­tune Glob­al 500 com­pa­nies are head­quar­tered in emerg­ing mar­kets, where­as in 1996 there were none.

Only a rel­a­tive­ly small num­ber of insur­ers have the scope to han­dle a glob­al pro­gramme effi­cient­ly and deliv­er con­tract cer­tain­ty.

There are two options for firms: either place poli­cies in each juris­dic­tion or acquire a multi­na­tion­al pol­i­cy cen­tral­ly.

David Cor­ri­g­an, prop­er­ty under­writ­ing direc­tor at RSA, explains: “A multi­na­tion­al insur­ance pro­gramme is formed with the issue of local poli­cies by the offices of the lead insur­er or its net­work of insur­ance part­ners in each coun­try where the com­pa­ny has expo­sure.

“A sin­gle mas­ter pol­i­cy is issued cen­tral­ly, usu­al­ly in the coun­try where the com­pa­ny is head­quar­tered, by the lead insur­er, which sits above these local poli­cies to pro­vide con­sis­ten­cy in glob­al cov­er­age.”

How­ev­er, not all poli­cies can be set up in this way; prop­er­ty dam­age, busi­ness inter­rup­tion, engi­neer­ing, lia­bil­i­ty and marine work well, but com­pen­sa­tion arrange­ments, employ­er lia­bil­i­ties and motor are often placed inde­pen­dent­ly due to the glob­al vari­ance in legal and com­pen­sa­tion frame­works.

Busi­ness inter­rup­tion cov­er is also crit­i­cal for com­pa­nies, but get­ting it right is not as easy as you might think.

Airmic’s Mr Hop­kin says that, despite the best efforts of insur­ers to pro­duce new prod­ucts, buy­ers remain scep­ti­cal. The Ice­landic dust cloud in 2010, the Japan­ese tsuna­mi and Thai floods saw pol­i­cy­hold­ers gen­uine­ly sur­prised at how dif­fi­cult it was to make a suc­cess­ful claim.

“Anoth­er issue is that it can be com­plex to deter­mine whether busi­ness inter­rup­tion has tak­en place and then to quan­ti­fy the impact it has had,” he says. “For exam­ple, one insur­er dra­mat­i­cal­ly scaled back a claim for loss of prof­it after a fire at a Lon­don restau­rant in 2005, argu­ing that the Lon­don Trans­port bomb­ings of that year meant peo­ple would have stayed away any­how. With grey areas such as this, mak­ing a claim can con­sume a lot of time and gen­er­ate dis­pro­por­tion­ate legal expens­es.”

Get­ting busi­ness inter­rup­tion poli­cies, which cov­er every ele­ment of your sup­ply chain, can also be dif­fi­cult.

RSA’s Mr Cor­ri­g­an says the chal­lenges for busi­ness­es often lie in being able to describe and quan­ti­fy prop­er­ty-loss sce­nar­ios to third par­ties, which cause busi­ness inter­rup­tion loss­es for them, such as sup­ply chains.

“Insur­ers are very pre­pared to engage in grant­i­ng spe­cif­ic cov­er­age exten­sions, but will be wary of pro­vid­ing unspe­cif­ic cov­er­age,” he says.

Find­ing the right poli­cies for busi­ness risks will involve invest­ing time and mon­ey, which in today’s fis­cal­ly con­strained times may seem too much to ask. But the bot­tom line is loss pre­ven­tion – and cov­er today will ensure resilience in future.

For a multi-billion-pound industry, business risk insurance as a whole has struggled to modernise as we’ve moved into a digital, globalised marketplace.