Businesses should be willing to pay higher insurance premiums for contract certainty, according to the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) in a report on the importance of business-critical insurance launched today at its annual conference in Liverpool.
Produced in conjunction with PwC, it urges policyholders and insurers to raise awareness of the strategic value of certain types of insurance.
The report stated that insurance policies fall into three categories: mandatory insurance, which is required by law or a regulator; optional insurance used to reduce risk exposures if the risk/reward trade-off is appropriate; and business-critical insurance which underpins the company’s operations.
The paper said that more needs to be done by all players in the market to recognise these distinctions and, when dealing with business-critical insurance, to make contract efficacy the prime focus of negotiations.
“Insurance can be viewed by boards and business units as just another cost overhead, where value is judged by securing the lowest premium,” the paper stated.
In such cases, it warns that businesses “fail to appreciate the value of insurance in supporting the overall strategy” and as a result policies can be “unfit for purpose”.
Julia Graham, AIRMIC's technical director, explained: “Not all insurance is the same. If a policy is meant to provide cover against events that could lead to balance sheet damage or even threaten the viability of a business, it is strategically-critical and it absolutely must pay out as and when expected."
"The challenge is for policyholders to convey this to their board, and for underwriters to design and market their products in a way that supports claims certainty.”
The paper, which builds on the report Efficacy of Business Insurance published by AIRMIC in 2014, describes the three types of cover in detail, sets out a framework for categorising individual insurance covers, and demonstrates the importance of mapping business-critical insurances against the context of key corporate financial thresholds.
Alpesh Shah, director at PwC, commented: "Today's rapidly evolving business environment is a great opportunity for insurance buyers and risk managers to raise their profile at board level."
"To facilitate better conversations, insurance can be considered in the context of other financial metrics which drive a business forward."
