Earlier this year, Mactavish published a
damning critique of how corporate insurance is arranged, setting out a wealth of evidence suggesting that companies are being left exposed by a system increasingly unfit for purpose.
This work sought to analyse many complementary drivers making insurance much less reliable today: hugely material shifts in business risk profiles accompanied
by declining standards of disclosure; heightened financial vulnerability post-crisis; a lack of effective board governance of insurance; and a much more challenging claims environment
increasing the chances of large losses being delayed or questioned. In short, a troubling context into which we proposed a series of seven key placement reforms, the Mactavish Protocols, aiming
to improve the insurance market’s ability to provide a more reliable product to its customers.
As we approach the festive season, nothing fundamental has changed. The insurance system is still failing most of corporate Britain, although only for the tiny
minority of companies where the worst actually happens will this failure ever come to light. Although what has changed is that, from our work with a range of companies, it is clear that with
dedicated attention from buyers to demand a better solution, these issues are solvable. Implementation of risk placement reform, as we have proposed, can be done, and without significant
distraction or resource cost.
“The insurance system is still failing most of corporate Britain, although only for the tiny minority of companies where the
worst actually happens will this failure ever come to light”
Our proposals were, and remain, wide ranging (see box 2) and we will only focus on a few for the purposes of this article. In full, the protocols range from
clarifying the enormous burden placed on customers under insurance law, to proper structured analysis of a business’s
financial dependence on insurance; and from re-engineering the mechanics of the placement process itself to allow greater analysis and meeting of minds on the
risks involved, to reviewing the basis of disclosure to make that analysis effective.
Above all, however, the reforms proposed several steps to agree and document what insurance actually provides when it’s being bought, rather than postponing
such discussion until after a claim – when an insured has nowhere else to turn. This could take the form
of explicitly agreed loss scenarios that a business might face, open discussion of the underlying intention and practical significance of esoteric policy
wordings, or resolving in advance what needs to happen when a major claim occurs. All of these are vital steps to protect a customer from uncertainty.
Insurance is unlike most products, in that its value is co-created by customer, capital provider and broker. If this configuration is substantially incomplete
when policies are placed, and left to the point of loss to flesh out, this value is undermined. And the basis of insurance law ensures the customer is the main loser.
BOX 1: KEY QUESTIONS FOR CAPTIVE MANAGERS TO ASK TO SUPPORT RISK PLACEMENT REFORM?
1. Is my best knowledge from the parts of my programme written by the captive fully reflected in disclosure for external placement?
2. Given the additional complexity of high severity risk, is the data I provide sufficient to avoid possible misunderstanding?
3. What does recent low-level claims experience show could be changing more generally about my risk?
4. What common risk factors apply more broadly across several lines of business, e.g. to product or professional liability and BI where losses don’t occur very
often?
5. How much do I know about major claims response from external insurers?
What else should I know?
Of course, this reform agenda applies to all companies, albeit becoming progressively more important the more complex are a business’s activities and risks.
What is the particular significance for those businesses also managing a captive? Very simply, running a captive gives a cadre of sophisticated insurance buyers the information and
opportunity to be at the forefront of driving such change, and to be more demanding customers of the insurers and brokers arranging the rest of the programme beyond the captive’s
borders.
First, companies with captives are likely to have a closer understanding of the underwriting process itself, the consequences of limitations in the data used to
understand and price risk – and ultimately the relevance of a much wider information set around risk drivers that are not contained within traditional insurance disclosure.
Second, the need for placement reform is most acute in respect of high severity, low frequency risk – i.e. typically falling outside the scope of captive
programmes, so the reform agenda applies just as much to companies with captives.
This is also where the data alone (by definition scarce) is less sufficient to understand risk, and uncertainty surrounding coverage is most acute.
Captive managers are well positioned to exploit deeper access to information on working level risk (e.g. claims trends, new or different types of risk arising from business changes), and are
better placed than other buyers to identify where external insurer perception of risk needs to be improved to avoid surprises. This obviously feeds into better risk disclosure but also sets the
agenda to agree at the placement stage with external insurers the key risk scenarios for which cover is being purchased (limiting scope for uncertainty later), and to review wordings up front to
avoid any potential misalignment between risk and coverage. These are things all buyers should do, but the knowledge and expertise of captive managers makes it incumbent on them to push brokers
and insurers hardest to drive change.
Third, the knowledge gained from regularly dealing with working level claims puts a captive manager in a privileged position to implement our final reform:
clarification prior to a large
claim of post loss services, the ultimate “product” sold by insurers. Given how few buyers have experienced a business threatening, catastrophic claim,
few feel comfortable knowing what questions they need to ask to be able to compare the services offered – from information
needed in the processing of claims to the key roles of third parties and reinsurers.
Again, the familiarity that comes with captive management takes away some of this mystery and enables buyers to make more specific demands of insurers –
before a claim places the holding market in a favourable monopolistic position. The thrust of our research was on
how few buyers today feel they have the knowledge or resource to demand better placement. A string of concerning statistics from more than 600 consultations across
the UK market support this: c.65% do not review their submissions; c.90% are unaware of their legal obligations; c.75% never discuss major claims processes; only 2% review wordings and
agree loss scenarios up front. Such cold statistics belie a huge scope to become more demanding as a customer body, and so elicit better service from insurers and
brokers alike.
Captive managers are uniquely positioned to spearhead this change, and stand to gain disproportionately through early adoptership. Protecting your business through
better external
risk placement is not an impossible task – it is readily achievable step by step, and delivers huge value in safeguarding the value of what remains a huge
premium and broker fee investment year after year.
BOX 2: RISK PLACEMENT REFORM – THE MACTAVISH PROTOCOLS (SEE REPORT)
1. Clarification of insurance law
2. More and deeper forensic risk assessment
3. Reformed, two-stage tender process
4. Underwriter presentation of risk understanding
5. Analysis of insurance materiality
6. Workshops on loss scenarios and policy wordings pre-inception
7. Loss response service planning
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Betsey 14/01/2012 12:18pm
I'm really into it, tnhkas for this great stuff!
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