A lack of thorough understanding and sufficiently robust negotiation of insurance contracts is leaving many British businesses at higher risk of overpaying – and having to access short-term credit at higher prices in crisis situations.
A recent study by PwC and insurance research outfit Mactavish, Corporate risk and insurance: the case for placement reform, finds that 87 percent of insurance buyers fail to disclose all the risks they face to an insurer when drawing up cover, and are not aware that omitting risks simply means they have no cover. It also found that two-thirds of insurance buyers at large companies do not review or discuss with their underwriters the policy wordings and loss scenarios in their cover, prior to making a claim. Many buyers simply are not aware that these documents even exist.
As a result, companies end up paying over the odds for insurance that does not cover all their risks, meaning that they face having to access credit to cover losses when debt and equity are likely to be expensive at best, or severely restricted at worst.
Figures from the Royal Courts of Justice (RCJ) confirm that corporate disputes affecting insurance are increasing. Between 2008-2009 there was a 45 percent rise in the total volume of corporate RCJ disputes (excluding bankruptcy), while corporate professional negligence cases increased by 131 percent.
Paying for complexity
Finance directors have mixed views on the research and where the blame for poor insurance coverage lies.
Andy Blackstone, company secretary and European finance director of advertising and marketing agency M&C Saatchi, says the fundamental problem is that insurance agreements are impossible to read.
“By the time you read through the policy and look at the definitions of terms and numerous appendices, you can’t remember whether the policy is covering what you want it to cover. As a result, we are reliant on the broker to interpret it all,” he says.
Neil Morling, chief financial officer at EC Harris, believes that companies get out of their insurance policies what they put in. “If companies do not know what they are buying, it is a bit silly to complain about it afterwards,” he says.
Lynda Lucas, director of secretariat and risk management at IT provider Fujitsu Global Business Group, says that each year she reviews at least one of the company’s major insurance policies in the presence of the broker and underwriter to make sure that they understand the policy’s terms, conditions and limits of coverage.
“About five years ago, I decided to have a meeting with the broker and underwriter and we went through policies line by line. It was a fantastic exercise as we struck out clauses that none of us understood and clarified all the detail,” she says.
PwC describes the quality of risk disclosures underpinning insurance as “at best poor, sometimes shocking”.