There is nothing like a hard market to sort the professional brokers from the commission agents. When premiums are relatively low, risk can be transferred simply by paying the required amount to an underwriter. In a soft market underwriters jostle for space, meaning the process does not place excessive demands on the skills and resources of the broker.
As rates harden, bigger premiums become tougher to swallow and insurers become more discriminating about the business they will write. The broker has to explore ways to keep the costs manageable for the client, while still presenting an attractive proposition to the underwriter.
Brokers can succeed by introducing risk management into the equation. The elimination, reduction and control of risk will dovetail with purchased indemnities to produce a complete solution to the client’s needs. The cost of cover will be reduced (something which can off-set the cost of risk management work) and the overall efficiency of the operation will increase as claims and the disruption associated with them fall in number.
The insurer, meanwhile, should appreciate the quality of management at the insured company, as well as the sophistication of the broker. It should recognise the potential for a long-term, mutually-rewarding relationship and set its terms accordingly.
In a hard market, it pays the broker to examine why insurers are pushing up premiums. Armed with this knowledge, the broker can discuss suitable courses of action with the client and make the risk more attractive. For example, there is a growing contention that, at least as far as material loss is concerned, the industry is suffering because it is failing to use policy excesses as a means of controlling spiralling claims costs.
In other words, the high volume of small commercial claims ‘ around 80% of claims are worth less than £2,500 ‘ is adding significantly to insurers’ administrative costs. This is eating into profits and reducing reserves. This means that when the major claims inevitably arrive their impact is disproportionate.
Insurers are leaning heavily on reinsurers to underpin the market and reinsurers are responding with higher premiums and more restrictive terms. This added cost is bouncing back to the primary market and fuelling the hard rating conditions.
The standard excess for most policies remains at £250 per claim, a figure set in the early 1980s. Setting the level of excess at a more realistic level seems sensible but we are unlikely to see insurers act in concert. Who would want to be the first to break ranks and double their standard amount to £500, or push it even further?
This does not mean there is no scope for the broker to seize the initiative, however. Brokers can use the policy excess as a means of reducing premiums and tackling waste and inefficiency. Once again, excesses alone are not the solution. Risk management must be factored in so the policyholder sees a reduction in losses.
Clive Owen, of Hull-based broker Rixon Matthews Appleyard, believes higher deductibles are a useful weapon in the broker’s armoury.
‘If you can use the level of deductible to secure a reduction in premium, all well and good,’ says Owen. ‘You will often secure better terms if you can reduce the frequency of claims but you have to back up this strategy with risk management action, so you reduce the number of incidents that are effectively self-insured.
‘You also need to keep a close watch on how things develop,’ says Owen. ‘If the client opts for a higher excess than the norm, then that higher amount must not be allowed to become the norm over the years. In other words, it must remain a negotiating tool with the insurer. And you have to ensure you keep track of the cost to the client of the incidents that fall within the excess amount and relate them to the premium saving. The entire process must remain cost-effective from the policyholder’s perspective.’
Imaginative and constructive use of deductibles or policy excesses confirms a broker’s professionalism. If the broker presents the risk and explains how the higher deductible will improve the loss ratio, the insurer knows the matter has been given serious thought. The broker is using experience and expertise to devise the best all-round solution.
After all, why insist on a £250 excess when your client has an annual turnover of £25m? It is much better to relate the excess to the assets of the company and the client’s appetite for risk retention. The deductible can be capped on an annual basis in cases where the client is worried about carrying too much of the risk themselves.
If the circumstances are appropriate brokers could also consider captive arrangements, combining self-insurance with risk management and giving the business ultimate control over its own destiny. However, there is a limited market for this option ‘ opinion is divided over the precise figures but it seems fair to say it will rarely prove economic for companies paying less than £500,000 in annual premiums.
Regardless of how the self-insured portion of a risk is managed, risk management must be brought to the fore. Can the policyholder justify or afford a full-time risk control officer? Does the broker have sufficient expertise and resource in-house to offer its own risk management service? If not, does the broker have contacts with insurers willing to deliver first-hand advice and support to the client?
Disaster recovery planning is an essential part of the overall management of every commercial risk. The inclusion of a structured disaster recovery plan will again demonstrate to the underwriter that the broker is committed to the long-term welfare of the client.
Investment in disaster recovery makes sense by itself, but it also brings insurance benefits. The better the recovery potential, the lower the likely claims cost, which means the more favourable the terms on offer from the underwriter. Or at least that is the theory.
There has been far more talk than action with disaster recovery yet it is such a basic, common sense action to take. If we are going to achieve a stable and sensible insurance market, insurers and brokers alike need to promote recovery planning.
An obvious change among larger insurers in recent years has been the creation of ‘centres of excellence’ and call-centres for commercial underwriting. No doubt designed to improve service to brokers and policyholders, these have not met with universal approval.
Many brokers bemoan the disappearance of genuine expertise and suggest there is a growing tendency not to look at each risk as a unique proposition, even on quite large ticket cases. The desire to do everything over the phone, ticking off a check-list or filling in a template of details and gauging the insurability according to a simple rule-book means brokers cannot discuss the risk in detail. Problems can arise when companies refuse to consider a risk simply on the basis of the trade sector in which it is involved.
When it comes to the possible red-lining of certain commercial sectors, insurers have an old saying: the management is more important than the trade. In other words, a good risk in a difficult sector is more attractive than a poor risk in a good one.
A well-managed, risk-conscious company is likely to achieve a superior loss ratio ‘ especially if it benefits from the services of a professional broker which can communicate effectively with the underwriter.
Given plummeting returns on investment reserves and a distinctly edgy reinsurance market, there seems little prospect of the market softening quickly and returning to pre-11 September rates.
Insurance premiums will remain high and policyholders will continue to resent the amount they are having to pay for restricted cover. But professional brokers will identify opportunities to reduce expenditure without jeopardising levels of protection. It is not always easy to do ‘ if it were everybody would be doing it.
Kevin Pallett is managing director of Fusion Insurance Services
Fewer claims can mean better terms, but it needs to be backed up by a risk management strategy.
Relate the excess to the assets of the company and the client’s appetite for risk retention.
For larger companies, it may prove economical to combine self-insurance with a risk management strategy.