The COVID-19 pandemic and challenging insurance market have impacted the insurance industry, resulting in rising premiums and declining insurer appetite for underwriting certain risks. As a result, global brokerage Gallagher has released a guide to help financial officers balance risk and insurance costs.
According to Gallagher, securing optimal insurance protection is now more challenging than it has been in recent years as it requires longer lead times ahead of renewal discussions. However, the firm pointed out that evaluating and challenging your current insurance program could help you identify the gaps in your cover that you can address to financially protect your business and ensure a positive insurance outcome.
Here are Gallagher's tips to help financial directors balance risk and insurance costs:
The global brokerage said insurance is only one part of a risk finance and risk management process.
“Wherever possible, risks to the business should be mitigated or ideally removed. The majority of risks can usually be transferred to insurers as part of a risk management exercise, while others can be managed through the balance sheet based on your business's capacity to do this,” Gallagher said.
If there are changes to the insurance cover's scope, Gallagher advised financial officers to check the policy wording as part of any review or renewal of their insurance program.
“For example, insurers may elect to charge for cover extensions which previously had simply been included in standard cover. Understanding what this means for your business is a critical part of discussions with both your insurance broker and the insurer to give you the information you need to assess whether to adjust or remove some elements of your insurance,” it said.
“Also consider the range of innovative insurance products available that may enable you to improve the cash flow position on your balance sheet, such as risk finance and contingent liability insurance cover.”
Gallagher advised financial directors to scrutinise the level of coverage required by their business annually as they may differ from when they were set initially. They should also establish how their insurance program should be structured to obtain the necessary limits at the best price.
“Explore insurance products that you may not have considered before that are appropriate for your business (e.g., trade credit insurance, which enables a business to feel secure in extending credit to their existing buyers or to pursue new buyers that would have otherwise seemed too risky),” it said.
“While care needs to be taken that loss limits are suitable, it may not always be necessary to insure to full values or existing levels of cover. Review the impact of furloughing staff in relation to your employer's liability coverage, as this may need to be reflected differently in the way your cover is arranged.
“One area to focus on is the potential impact on the business following a major loss, considering potential mitigation factors and contracts with suppliers and customers. Loss limits adjusted to fit risk tolerance and financial scenario planning can both have a positive impact on overall insurance costs.”
The global brokerage advised financial officers to robustly defend employers' liability (EL) and public liability (PL) claims, access the services of in-house qualified loss adjusters who can represent them in the event of a large property or business interruption claim, take a proactive approach to motor claims, and improve chances of a faster resolution to avoid common pitfalls.
“As market conditions force higher deductibles on organisations, never has it been more important to work with a broker with in-house claims expertise to help manage costs and support you through every stage of the claims process,” it added.
Gallagher identified three ways to enable a positive discussion with insurance brokers and insurers:
“In the current market environment, a close partnership with your insurance broker and insurers is more important than in recent years. As insurers place increased scrutiny in renewal discussions, early planning and preparation makes a significant difference,” Gallagher said.
Gallagher said looking at spreading insurance premiums over several instalments (either via a monthly premium option or through a formal premium financing arrangement) could improve cash flow.
Other options include adjusting the scope of insurance cover based on estimated figures (turnover, wages, and gross profit) onto an adjustable basis and setting minimum and deposit premiums as less than 100% of the estimated cost, which will help the initial up-front costs.
