Business stability - Tough calls in tough times

Maintaining, and even increasing, the level of insurance protection during an economic downturn may not be seen as a priority for most companies, but it should be top of the agenda, as Terry Whittaker explains

Given a UK economic upturn is not being forecast before 2010, maintaining business stability has to be a top priority at present. For many UK businesses, managing their way through the next two years will be as much about budgeting certainty as it will be about reducing costs and retaining business. Against such a background, smart brokers will be considering how they can turn this imperative into an opportunity to reinforce the value of their offering.

It may seem obvious, but the first and most important message to get across is that reducing insurance spend is not saving cost. Rather, it is transferring risk back at a time when businesses can least afford to be self insured. Indeed, it could be argued that far from reducing spend savvy businesses should, within the limits of commercial practicality, be thinking about insurance as a mechanism to 'recession-proof' their businesses.

Trade credit protection

Take, for example, trade credit receivables which on average represent 40% of UK company assets. Enhanced credit management not only protects a company's balance sheet, it also protects its cash flow. But when trading environments are difficult, enforcing the right credit disciplines can be a real challenge and any business that is not now tapping into credit management mechanisms, whether trade credit insurance, factoring or similar, is playing a perilous game.

But this is not the only role insurance has in recession proofing a business. When the going gets tough financially, the claims start flowing. From firms seeking to fund redundancies through long-term disability policies to the almost inevitable rise in arson or the increased propensity for customers or disgruntled employees to sue, claims will rise across the board.

This means businesses are more vulnerable to having claims made against them and, therefore, that having the right insurances is more vital than ever. Just as important, however, it also means that, while insurance markets are currently soft, they will not remain so.

Against such a background, being in partnership with an insurer that rewards policyholders that place value on continuity of pricing, rather than cost, is critical for budgeting certainty and those that insist on treating insurance as a spot market should be left in no doubt that they are running the additional risk of being left out in the cold when the market turns.

But sound though the continuity argument is, it only works if buyers can be that confident their insurance partner will be offering the same overall proposition in a few years time - and recent events in the wider financial services sector are likely to have done little to provide comfort on this front.

In fairness, not only is this far more of an issue for the banking and bond sectors than the general insurance sector but also the rating agencies themselves have always stressed that financial security ratings are only one tool in the process of assessing the potential strength or otherwise of insurers, hence the need for other assessment processes such as broker security committees. But it still seems likely that buyers will be seeking far greater reassurance about the quality of an insurer's security than was previously the case.

So what are the factors, other than ratings, that brokers could be considering when making a judgement call on which insurers to recommend? Obviously transparency of security and a record of controlled diversification into business areas that are properly understood are important, but so too are various other factors.

First is how well an insurer works at understanding what a client really needs - whether that be standard, fairly priced products for those businesses with straightforward products, processes or needs in terms of protecting employees, or a highly tailored product that meets particular issues or challenges. While this may seem a basic point, it is still a real differentiator in the insurance market.

Second is whether an insurer is asking a credible price for the risk. If the price being quoted is significantly lower than that being offered generally, the obvious question has to be "why?", especially as this plays straight back into the continuity question.

Similarly, it is also important to consider whether an insurer's appetite for certain business is seemly. While this is a relatively subjective measure, it is important as it goes to the heart of a company's ethos, culture and approach. Long term players are about building business over time that is based on mutually sustainable pricing. As a result, as and when circumstances dictate, they are just as ready to say 'no' as 'yes'.

Claims reputation

Last, but most definitely not least, is an insurer's reputation in terms of claims payment. All too often when times get tough financially, claims can become a major issue of contention, even though paying claims is what insurers exist to do. The ability to build and sustain a position as a fair and prompt payer is not just about continuity of service, it is about continuity of security and continuity of delivery into a chosen insurance market. The onus is on the insurer to make sure brokers understand their claims approach and philosophy but ultimately it requires a large degree of judgement by brokers, which can only be based on previous experience, as to whether their clients are going to get the claims support they need when they need it.

As risk management experts, a fundamental part of the broker's role is recommending appropriate insurance mechanisms that, by controlling the risks to which businesses are exposed, help clients to build stable operations over the long term. This is particularly important during tricky trading periods when having the right level and type of protection can make all the difference to business viability. Simply put, thinking about how a client's needs have changed, and being prepared to prioritise such factors as security and pricing continuity above cost, is one real demonstration of the value that a broker brings.

- Terry Whittaker is managing director - UK National, QBE European Operations.

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