Insurance from a Corporate Perspective Chartered Institute of Management Accountants

28 July 2015

Content• Typical Insurance Practices before Canterbury Earthquakes• Impact of Canterbury Earthquakes• Best Practice

– Policies– Deductibles– Limits– Insurers– Broker Remuneration– Service Agreement/Plan– Broker Tenders– Internal Insurance Processes

Typical Insurance Practices before Canterbury Earthquakes

• Once a year “fill in the forms” exercise• Typically not a “material” expense• Policies purchased driven by broker suggestions –

little formal link to risk management• Deductibles and limits often driven by “history”• Limited or no diversification of insurers• Lack of developed internal insurance “processes”• Lack of knowledge over how broker remunerated

Impact of Canterbury Earthquakes

• Significantly higher premiums• Cover often insufficient• Actions of corporates could have invalidated policies• Lack of understanding of policy terms and what was

covered

Best Practice - Policies• Should align to an entity’s risk profile and risk

appetite• Should not be seen as the only answer – may not be

the best solution– Prospectus Liability– Crime– Terrorism

• Is your broker incentivised to sell you additional or more expensive policies?

Best Practice – Deductibles• Often historical or given little thought• Can be imposed by insurers• Should be considered in relation to risk appetite• Many sound reasons why deductibles are less than

risk appetite– Premiums cheap – be careful of administration– Legal/contractual requirements– Aggregation risks

• Consider self-insurance mechanisms

Best Practice – Limits

• Limits need thought– Often inadequate– Modelling– Benchmark– Case Law

Best Practice - Insurers

• Have credit and diversification criteria for banks – why not insurers?

• Many use one insurance market and sometimes one insurer – maybe appropriate for small insurance programmes

Best Practice - Insurers• Issues to consider when considering overseas

markets:– Sufficient scale or complexity of risk– Cost– Developing and maintaining long-term relationships– Many rushed to London following Canterbury quakes– Little benefit in just sending off “presentation”– Offshore markets tend to be less volatile– Can take advantage of competition and different market

cycles

Best Practice – Broker Remuneration

• Brokers remunerated either by way of commission or fixed fee

• Commission:– Rates varied significantly– Often undisclosed– Inappropriate incentives for brokers

• Often contingent commissions or similar

Best Practice – Broker Remuneration

• Best Practice:– Fixed fee– Or at the very least disclosure of commission element in

invoicing– Statement that receiving no other income from insurers

relating to the placement of your business– Includes any portion placed by broker overseas

Best Practice – Service Agreement/Plan

• Important to have understanding of what services broker will deliver

• Fees – and what is included/hours• Timetable• What is included and excluded (e.g. claims services,

risk management)

Best Practice – Service Agreement/Plan

• Term of agreement• Termination clauses• Conflicts of interest• Confidentiality of information

Best Practice – Broker Tenders

• Only undertake one if “open to considering change”• Otherwise expensive and time consuming exercise

for everyone involved• Carefully consider what would make you change

broker

Best Practice – Broker Tenders

• Ensure broker tender questions are appropriate and targeted– Merit in asking for premium quotations– Merit in referees

• Understand how you will evaluate them• Carefully consider what an external independent will

add to evaluation process

Best Practice – Internal Insurance Processes

• Have other risk policies (e.g. treasury) – why not insurance?

• Very few entities have developed insurance processes

Best Practice – Internal Insurance Processes

• What should it cover?– What to do in the event of a claim– Who can sign-off insurance information/strategy– Process for disseminating insurance information following

renewal– Protocols for contract works insurance– Required credit quality for insurers– Ability to do multi-year deals