Just as the insurance market had softened and premiums were coming down, Katrina, Rita and Wilma turned up. Now the picture’s a bit more complicated.

1 The effects of catastrophe.

As soon as it became clear that Hurricane Katrina would hit the Gulf Coast of the US, it was obvious that catastrophes would have a serious effect on the insurance industry this year. “In terms of the market in 2005, up until Katrina it was softening,” says Ken Davey of international insurer FM Global. “The jury’s still out on what kind of impact the hurricane season will have on the market as a whole. But it is a huge insured loss, somewhere up around £60bn. And it will take a long time to settle all the claims since there is a political element to it.”

But will the devastating series of hurricanes really impact UK businesses? Robert Brown of Aon believes not. “People need to understand that the energy sector is
separate,” he says, referring to the biggest claims that will come from coastal oil producers in the Gulf of Mexico. “The losses and disruption are pretty much ring-fenced after Katrina. So FDs needn’t worry too much about that event in particular.”

So opinion is divided. But it seems almost inconceivable that that level of loss for the insurance market won’t have any bearing on your decisions around insurable risk in 2006. Which makes advice from experts and fellow FDs all the more useful.

2 Get in front of the underwriters.

This is all about understanding the value of differentiation. Whether it’s demonstrating good practice in managing a specific risk or representing the business to the underwriters, try to avoid the pitfall of becoming just another account number.

Brokers are a still a key part of most companies’ insurance strategies (see point three). But there’s a limit to what they can do for you. After all, it’s the underwriters that set the rates. So you should consider organising a face-to-face with your main underwriters.

According to Jane Harte-Lovelace, insurance coverage partner at law firm Kirkpatrick & Lockhart Nicholson Graham, more FDs are requesting these sort of meetings. “These days, there’s increasing scope for the well-managed company to get a dialogue going with its underwriters to highlight the good things it’s doing,” she says. “You feel more comfortable as an underwriter if you get a talk to clients direct – it becomes more about well-informed judgements, as opposed to reading reams of paper.”

So unless you’ve got a strong relationship with both your broker and underwriter, you can simply become just another file number. Ken Lever is FD at FTSE 100 engineering group Tomkins. With many different businesses within the group, he’s got to handle an unusually complex combination of risks – and small savings on premiums are magnified across the company. “We always have face-to-face conversations with the underwriters,” he says. “Some insurers are happy to have a dialogue with you, but most won’t push for it. That’s largely because they don’t want to jeopardise their relations with brokers.”

Gary Head is an underwriting director at Hiscox Euro Retail. He agrees that
personal rapport with clients can make a difference: “It’s never a bad thing to look people in the eyes. The underwriter will want to do the same thing, to see that you’re managing risk in a sensible way. And, of course, that you’re generally a well-run business.”

3 Manage your broker.

“Brokers are still important: they have a good feel for the market and they can keep you informed,” says Lever. But you’ve got to work hard to get the best from them. So what should you be looking for when appointing (or retaining) your broker? “For a start they need to demonstrate a good level of sector understanding,” says Hiscox’s Head. “And you need to work with people you can trust. So you do need to ‘go with your guy’ sometimes when you’re thinking of re-tendering. You need to feel personally comfortable with your broker.”

Robert Brown, head of UK Property, Liability and Motor Placement at Aon, says a good broker should meet you half way. “We want to try and put our buyers in a position of control,” he says. “We want to give them options. We try to get a three-way discussion going. It’s crucial for everyone that that triangle gets set up.” This means you’ll need to make the broker’s job of getting you the best policy as easy as possible. “The contract or policy is based on material exposure, so you need to make sure you provide all the necessary information,” says Head.

Harte-Lovelace agrees: “Choice of broker is important – and if the FD doesn’t feel the broker understands the business, then they should kick up a fuss and speak to the client relationship manager. And if they’re not happy with that, change brokers.” But, she says, you reap what you sow in this relationship. “The broker is only as good as the instructions he receives. It’s not easy to go into that level of detail on what you’re looking for and how you like to manage risk. But it’s usually well worth it.”

The brokers we spoke to tell us it’s not unusual for the client’s attention to detail on this issue to fall short of the optimum level. “You do get extremes,” says Head. “It’s not that unusual to see the policy documents scribbled – literally – on a piece of paper and handed in six hours before the old policy expires.”

4 Do your research.

“It does amaze me that people are prepared to lay out large sums of money to protect their key assets without doing much research or benchmarking,” says Gary Head of Hiscox. “You will get what you pay for. Remember: you’re still buying a service when you sign up for insurance cover. So if it’s dirt cheap then the chances are it’ll probably turn out to be poor.”

It pays to get started on the research three months before any non-standard policy is up for renewal. Kick off the conversations with your broker at this point to leave enough time before the renewal that you can mitigate obvious risks and drive a harder bargain on premiums.

5 Read the small print.

Jane Harte-Lovelace has spent the last six months talking to her clients about the need to make sure they’re actually buying the right cover for their needs. “I find it shocking that so many corporate policy-holders don’t know about their policy beyond the headline,” she says. “How many other major commercial contracts are there where you can be paying tens of thousands of pounds, yet you don’t know who the parties are or even what the big terms are?”

Harte-Lovelace spends a lot of her time talking to FDs and risk managers about the need to get specialist help in sorting out the detailed provisions of their policy. Again, without necessarily upsetting them, it pays not to rely solely on your brokers to point out all the provisions.

“The brokers aren’t lawyers, so they’re not remotely interested in the back
section of the policy,” she says. (Although, being a lawyer, you might argue that she would say that, wouldn’t she.) “They’re mostly interested in the headings and the price. So you need to say ‘I really don’t like these provisions and I’m worried about them, could you go back and talk to the underwriter, or shall I do it?’ That will usually get them thinking a bit harder about it.”

6 Do a risk management audit.

It’s the oldest cliché in the book, but prevention really is better than cure. There may be times when the insurance market’s moves are such that no matter what you do, your premiums will increase. (A great example was two years ago, when we highlighted many readers’ complaints about the hardening of the market for employers’ liability cover. Premiums soared regardless of claims history or verifiable risk.) But in the current climate, demonstrating a commitment to managing risk will get you credit with insurers.

Kevin Higginson is FD of plumbers’ merchants BSS Group. “All you can do is try and present the best possible case to the insurers, to convince them that you’re taking this stuff seriously,” he says. “We place huge store by health and safety – the nature of our business is such that it’s the number one item on the agenda at every board meeting. That’s obviously because it’s good business practice generally. But it’s also because it demonstrates our commitment to managing risk to the insurers.”

Ken Lever is adamant that comprehensive risk management pays dividends. “You’re simply auditing the risk you are prepared to mitigate,” he says. “But you can take a step back and see if you can remove the risk in the first place. That also links into health and safety, of course. But if you manage those risks well, it will reduce the cost of claims. We work closely with our brokers on this: they do a survey and recommend improvements, which we then comply with. That certainly reduces costs quite visibly.”

It’s reassuring to know that the same rules apply from the FTSE 100 down to the lowest level. “If you prove you’ve got deadlocks and a burglar alarm then your premiums should go down.” says Lever. “But you do need to instil good practices across the group. As FD or any senior manager or as a finance function, you can set the tone – and hopefully people will follow your lead.”

Mind you, the Tomkins FD doesn’t take any chances. The group has set up a system to ensure that it’s not just the top team that takes the issue seriously. “We have a bonus system: if the managers fail to demonstrate they are taking risk management seriously, and there are too many claims coming out of their area, then they will be hit. We monitor it and take the results seriously.”

7 Beware new-fangled cover.

The insurance market is just like any other: it’s always trying to persuade you that you need a new product you’ve never heard of. But beware: despite what your broker or insurer may tell you, do you really need “reputational damage cover” or any of its exotic brethren?

Robert Brown at Aon says you need to take time to investigate exactly what it is that you’re being pitched. “Take ‘brand protection insurance’ for instance,” he says. “What does that mean? What are you covered for? Would it cover a product recall? Or reputational damage? And how can you put a monetary value on that? How do they put monetary value on it? FDs need to be wary of this kind of thing, because some of these forms of cover are packaged in quite a confusing way.”

One group of policies to be wary of at the moment are all forms of “cyber insurance”. This is cover relating to email viruses, internet attacks, web fraud and so on. It’s a growth area – and there are real risks for your business online. But there is an element of scaremongering out there, with some insurers trying to convince us that the threat of cyber-crime is nothing short of apocalyptic.

The other big one at the moment is in the “business interruption” arena. Since the July 7 attacks on London, many businesses are looking into upping their cover against “man-made” catastrophes – terrorism, basically. But you need to get the details absolutely spot on, as Jane Harte-Lovelace points out. “There’s a gap between what you and I might think of as ‘terrorist acts’ and what Pool Re – the industry-funded reinsurer that covers the market in the event of a terrorism – defines them as,” she says.

“As far as Pool Re was concerned, for example, the London attacks of July 7 were not. Terrorism, in this context, has a very narrow definition, involving ‘an intention to overthrow the government’. And, particularly in the City, if your assets haven’t suffered physical damage, but you aren’t allowed back in your building, then you’ve got a problem: you’re probably not covered, despite the disruption. Perhaps the market will cover it in the future, but you need to understand what exactly you’re getting.”

8 Don’t be afraid to re-negotiate.

Renewal time isn’t simply a case of ticking the boxes and re-signing a contact. If you handle it right, and start making a few demands of your insurers, you can drive some serious costs out of your insurance activity. FD Kevin Higginson says he always takes time out to review his arrangements. “You need to ask yourself two things: has my business – and the risk it carries – changed? And has the risk environment changed since last year? If your premium has gone up by three per cent, is that still an acceptable rise? Or does that just tip it over into territory where you don’t want to insure? You should know your limits.”

Harte-Lovelace agrees. “Like any other supplier, insurers try to put their best position in the contract and if you agree to buy, they say ‘thanks very much’. On the other hand, if you say you’re interested, but you don’t want a ‘precedent to notify’ immediately, for example, or if you say ‘give me something without that clause’, they’ll huff and puff and argue that the re-insurers won’t like it. But they tend to do a deal in the end – they need some certainty on their own re-insurance programme in terms of what claims might be coming in.” Existing clients with a proper claims history are more of a known
quantity, after all.

And if you’re not so happy with your provider? Make a change. “We moved to Fusion as our insurer last year,” says Andrew Litchfield, FD of AAC Group. The company suffered a major fire at one of its plastics factories in May. “They handled the claim very professionally and swiftly. And they have definitely shown a desire to work with us on improving practices. That should be reflected in lower premiums. They seem to have a more long-term attitude and were far more approachable than the previous insurers.”

But effective re-negotiating with insurers also relies on you following the rest of our advice: know your business; know the market; talk to suppliers; act early; and read the small print.

Employers' liability revisited

Just over two years ago we heard from a reader who had seen his employers’ liability premiums rocket from £3,500 to £18,000 in one year. It sparked a flurry of similar responses from other FDs, telling us they had seen their premiums increase sharply.

The industry told us we were in a “hard market” and that premiums were simply in a process of price correction. Then in November 2003, the DTI held an investigatory hearing where it was concluded that the compulsion for all firms to purchase EL cover should not be waived, leaving some businesses with a hefty bill. So how has the market developed in the two years since our campaign began?

Back in 2003 we spoke to Andrew Litchfield, FD at AAC Group, about this issue. Since then his view of the system hasn’t changed. “I haven’t yet seen anybody start to address the real issues,” he says. “In my opinion courts should have some teeth and employers should not be accountable for everything. Accidents happen.They always have and they always will. Why does somebody always have to be liable?”

We also heard from Mark Pettit, who was then FD at business technology experts Cambridge Consultants. His experience of rising premiums was broadly similar. “The position was costly for employers because claims were certainly rising in some sectors. Some of those premium increases by underwriters have been down to increased risks that employers are exposed to. It feels to me as if it’s more under control now. But my advice is watch for the weasel words in the exclusions... that may be the way that premiums are being kept under control.”

Broker: commission or fee

Steve Careford is group development director at Alliance Insurance. He reckons many more of his clients are asking for a fee-based relationship, moving away from the traditional commission arrangement for insurance brokers. “The main benefit for the client is transparency,” he says. “They know exactly what they are getting and what they are paying for it.”

Careford acknowledges that a level of scepticism has built up in client companies over how brokers earn their commissions. “There is the feeling, sometimes, that in order to earn a decent commission you need to keep the premiums up at a certain level, so we are trying to change that.”

Switching to a flat fee can save you significant sums. “You see what you get for your money, for one thing,” says Careford. “We draw up an SLA and outline how many visits you’ll receive, what kind of surveys you’ll get, and so on.” That means there’ll be fewer surprises come renewal time.

If, however, you decide to stick with a commission agreement, the Association of Risk Managers and Insurers has come up with a few questions to ask your broker:

  - Can they give you a breakdown of exactly what revenue they receive from your premium? You need to make sure they include basic commission from the insurer; commission contingent on volume or profit; and any other revenue they receive.

  - Will they provide this information automatically at every renewal?

  - Are there any further services they provide to their insurer that you should know about?

  - Is any aspect of the broker’s business financed by the insurer?

A full list of questions that you ought to ask your brokers, plus a range of other useful guides and publications on insurance, can be found at www.airmic.com

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Related tags: insurance brokers, insurance renewal, underwriters, risk management audit, insurance premium, employers liability cover, hurricanes,