Sign In

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.