I am a Finance Director, not a Prophet!
Some say its the toughest job in business (although business development guys might disagree!) and it’s functions have expanded over the years. No longer straightforward bean counters, FD’s have become the central control function of a business..nothing happens without their involvement.
From finance to strategy, from purchasing to fund raising, from board liaison to accounts presentation to investors, from M&A to corporate insurance protection there is an apparently never ending list of tasks to be completed. Everyone makes demands on their time, everyone expects them to have the correct answers or wisdom. The pressure can be enormous.
So as an FD how is your corporate insurance knowledge stacking up and just how much time do you spend on this subject?
Corporate insurance seems rather dull, even we agree with that! However, we all sometimes lose sight of what its value actually is. Its ultimate role is to provide reassurance to you, the board, the investors, the customers, the employees and any other stakeholder that your business has the financial protection to see it through a difficult time. It is a risk transfer mechanism that in return for a small premium against the value potentially at risk, an insurance company will take your assets and liabilities at risk on to their own balance sheet.
Simple eh? Or is it?! We got our heads together as a team to chat through the areas where we see FD’s, often as a result of time pressure, miss important cost saving or risk protection issues. Sometimes over confidence plays a part of this. If you have never suffered a large loss that caused a major business interruption claim your attention to the detail may not be quite as focused as those who have.
So here are 10 key areas of business risk to look out for during a corporate review/audit:
1. The devil is absolutely in the detail. Believe it or not, Insurers don’t really want to pay out on big claims. The evidence comes in the form of the 28,000 words on average they insert into policy wordings. This is legal jargon and over the many years we have worked in the industry claims almost always get declined because of something in the small print. This means you need absolute clarity over what is and isn’t covered.
2. Business interruption cover can be critical so get it right. This is a major area of under-insurance (meaning insurers reduce the amount they pay out) and hits businesses badly. It is after all replacement cashflow but we often find woefully incorrect sums insured caused either by using a gross profit figure from your accounts (insurers work this out differently) or a broker not having enough knowledge to help you set the correct figure.
3. Companies miss out on Business Interruption beneficial extensions to policy protection because they haven’t thought through the knock on consequences of supply chain disruption
4. Research & Development costs are often missed out of business interruption calculations. This needs to be noted as a separate item in your policy
5. Understand the mumbo jumbo! Excess liability policies with different limits, cover and excesses, efficacy exclusions, cross liabilities and indemnity to principals clauses, pollution vs environmental cover, entity cover within your D&O policy and so much more
6. Cyber risk is very real, it truly is. Don’t get caught out without insurance protection as back up it provides a host of additional benefits
7. Claims management – the status of claims paid and outstanding will effect premium levels. Reassess the values held on long outstanding claims under liabilities policies
8. Some brokers simply take too much from your premium as commission payments. This seems odd for a broker to say but we come across many cases where earnings outstrip workload by a long way. If you are spending upwards of £50,000 in premium the use of fees by a broker is better for all. It reduces your Insurance Premium Tax bill, brings transparency to work v reward, and will probably lower overall costs
9. Make sure you understand the importance/difference of ‘jurisdiction’ cover and ‘geographical’ cover under your liability covers. Under professional indemnity check things like costs inclusive/exclusive and retroactive dates. These all make a crucial difference when a big claim comes in.
10. Find the right broker and THEN the right insurer. The use of several brokers in an audit creates confusion with underwriters and negates good competition among them to win your business. We know you want to reduce costs, its important, but you don’t want to do that at the expense of weak policy cover because a premium is cheap. The trick is have a conceptual review carried out by maybe two or three brokers, appoint the one that offers the best, reassuring advice then let them create competition among insurance companies to win your business. That will drive down costs and improve benefits and policy cover.Excess liability policies with different limits, cover and excesses