Making the case with boards for business-critical coverage

LIVERPOOL, England — Insurance buyers must be able to effectively communicate to their company's boards which coverages are business critical and which, therefore, should not be bought solely on the basis of price, according to Airmic Ltd.

London-based Airmic, the U.K. risk management association, last week published a guide to help its members communicate to their top-level management that insurance should not be viewed as a commodity and is not simply an overhead cost.

“The true value of insurance is often only recognized as a consequence of a major loss,” according to the guide, “Business Critical Insurance: Identifying those insurances that support the business and its strategy.”

“The challenge for insurance buyers is raising the awareness of the value of insurance beyond that of a commodity and articulating how individual insurance covers can contribute to the financial strategy and financial modeling of the company,” according to the report.

“We wanted to give our members ammunition” for conversations with their higher-ups to help them resist pressure simply to reduce insurance costs for certain coverages that — if not adequate — could be catastrophic for the company, said John Hurrell, CEO of Airmic.

“We wanted to attempt to redress the balance and say insurable risk is important,” said Julia Graham, technical director of Airmic and chair of the federation of European Risk Management Associations.

“We are trying to give the insurable risk manager more tools in their armory,” she said.

The guide suggests that risk managers classify insurance coverages as optional, mandatory or business critical.

Optional coverages can be used to reduce risk if the risk/reward trade-off is appropriate, according to the guide, while business-critical insurance underpins the company's operation.

To evaluate whether a coverage is business critical, buyers can plot the size of a denied or delayed claim against key financial metrics such as gross revenue, shareholders' equity and operating cash flow.

This, said Mr. Hurrell, enables buyers to describe the importance of certain insurance coverages in terms understood by company boards.

Once buyers have determined what coverages are business critical, they should consider several steps, according to the guide.

Those are: selecting appropriate limits and sums insured; undertaking a legal review of policy wording; scenario testing anticipated events and the policy wording; agreeing on and establishing an effective disclosure process with the insurer; agreeing on claims handling procedures and protocols; and establishing crisis management and rapid response plans.

“Today's rapidly evolving business environment is a great opportunity for insurance buyers and risk managers to raise their profile at board level,” said Alpesh Shah, a director at PricewaterhouseCoopers L.L.P. in London, which helped Airmic prepare the guide.

“To facilitate better conversations, insurance can be considered in the context of other financial metrics which drive a business forward,” he said.