Tough times economically for UK businesses could be further hampered by a hardening of the insurance market, and the timing could not be worse for troubled clients looking to reduce costs. A robust relationship has never been more important, explains Ana Paula Nacif
As the outlook for the UK economy continues to deteriorate, insurers, brokers and corporate insurance buyers will need to make sure their relationships are stronger than ever to cope with the tough times ahead.
Economic pressure may lead some buyers to fixate on price, while others will try to get the most out of their long-term partnerships. Historically, insurance and economic cycles have not coincided. But some in the market are already predicting a hardening of the insurance market which, given the economic climate, could not happen at a worse time for commercial organisations already feeling the pinch of raising oil and energy prices, inflation and a slower economy.
"In times of economic slowdown some buyers will focus even more on price, trying to achieve cost savings," says Nigel Bamber, head of client relationship management in the UK for XL Insurance. "However, the commercial market in which we operate is, to a large extent, based on long-term relationships. While we can't ignore the economic pressures our clients face, they appreciate the stability we offer throughout the cycle."
And according to Paul Maynard, UK broking director at Willis UK and Ireland, although businesses tend to look for savings and reductions in their premiums in times of economic pressure, "this is a process that has been going on for quite some time as a result of the soft market".
He explains that some large clients may choose to retain more risk themselves, which makes them less vulnerable to the ups and downs of the insurance cycle. Regarding smaller buyers, he says that even though these entities do not have the same resources as large companies, they are still interested in getting more from their brokers and insurers than just the cheapest premium. "They do not wish to see things changing all the time; they are equally interested in some form of relationship with their brokers and insurers."
It seems robust relationships are the key that will enable insurers, brokers and clients to keep it together when the going gets tough. Paul Howard, head of insurance and risk management at Sainsbury's, says that, regardless of the economic environment, open and transparent relationships are vital: "If there is a recession, the value of robust relationships may really come to the fore."
He highlights three crucial aspects of such relationships - communication, capability and consistency. "Communication is vital and we need to keep the channel open so everyone is aware of what is going on and there are no surprises," he explains. "Capability is also crucial, particularly when it comes to continuous investment in insurers' and brokers' key resources, such as people and training. And, finally, consistency is something we always look for. If you have those three things, you can ride through the storms."
From a large commercial organisation's perspective, Mr Howard explains that a recession may not necessarily make a difference to how these companies buy insurance. "It is always a balancing decision as there are many other things you can spend money on," he says. "You need to think about what gets the most value for the organisation. But there is a huge caveat; as a large commercial organisation we tend to only purchase catastrophe-type cover. We are not really involved in the transactional end of the market where insureds are trading pounds with their insurance companies."
Although recession may not change the insurance buying habits of large corporates, John Hurrell, chief executive of the Association of Insurance and Risk Managers, points out that it could, in fact, lead some companies to enhance their insurance portfolios as a way to deflect risk.
He explains: "Recession in itself does not affect the way companies buy insurance. But as their finances come under pressure they may become even more risk averse and buy more insurance. They may decide to self-insure less as they can't afford the volatility, particularly at this stage of the cycle where capacity is readily available and cheap."
On the other hand, some experts believe that economic pressure may result in companies cutting corners when it comes to risk management which, in turn, could have an impact in claims and premiums.
"Risk inspection, survey programmes and risk training tend to be delayed and hiring additional resources in the risk management area tends to take a back seat," says Mr Hurrell.
Julia Abrams, director of account management for property investors at RSA, agrees that cash-strapped companies could potentially cut corners on some risk management issues. "We would then see more claims, which would highlight the need for higher premiums."
She believes that current rates will have to go up anyway. "We have already achieved a modest increase, which can be a difficult message for some clients, but the rates are rock bottom, which is not sustainable."
But according to Philip Bird, director of small to medium-sized enterprises and non-motor underwriting at Groupama, the commercial market remains highly competitive and it has been difficult to achieve higher rates with new clients. "We have seen some rate movements in renewal business. But new business is still very competitive and an economic slump will add to that pressure."
The insurance market may well have started to harden and clients will have to bite the bullet and pay more for their insurance. However, Ms Abrams emphasises that, when things are not going so well in the wider economic environment, the industry can really demonstrate the value it brings to clients. "We work with clients and brokers to keep consistency in both our standards and rates. We talk on a regular basis to really understand each other's business and their direction. In a recession, clients might want us to be a bit more innovative with their cover."
She adds: "To me, when you have a recession, relationships come into their own and clients who treat insurance as a commodity - taking whatever is available at the time - may find it tough in hard markets."
When clients are more interested in transactional relationships, they may not be in such a good place when the market turns, especially if they let risk management issues slip, according to Jon Houghton, head of strategic development at Endurance. "The economic and insurance cycles are not in the same continuum, but historically there have been plenty of examples when the rates went up when clients were suffering an economic decline."
He adds: "The softening commercial market has meant that clients have had less incentive to manage risks. They can reduce their premiums without addressing the underlying risk issues but then the market turns and they have these issues to address as well as rising insurance costs - with no bank of goodwill from a long-term relationship with their insurer or broker to fall back on. This is the worst-case scenario for a client."
The view that clients will move risk management to a lower place on their priority list is not shared by everyone. As Mr Maynard explains: "I don't think economic pressure will have an impact on risk management as most businesses recognise risk management as part of the way they do business, and I don't see that changing."
Mr Bird does not believe business will cut corners when it comes to health and safety, but feels they might reduce the scope of their policies. "Also, some unscrupulous people may make fraudulent claims or exaggerate their claims. In the past recessions, we saw fire and arson claims going up and there is every chance this could happen again."
But, given that clients have different needs according to their size and line of business, what should risk managers be doing to prepare themselves? And should they be concerned about insurers getting stricter when it comes to paying claims?
Julia Graham, incoming chairman of Airmic and chief risk officer at law firm DLA, emphasises that as institutions continue to write down losses, risk managers need to look at the context in which they operate and predict how this might affect them. "There are some obvious and some less obvious ways to do that. One is to monitor how your insurers and brokers are performing to ensure they do have financial stability."
She adds that insurers are now regulated to a greater extent and thus more stable, which means the environment is intrinsically different from the one seen during the last recession. "Insurers have toughened and sharpened up their act a lot and they are generally better managed and positioned to continue when times are not as good. Also, I'm not seeing any material change in the market at this point in time in terms of rates or retention limits".
Regarding insurers' willingness to pay claims, Ms Graham believes risk managers have nothing to worry about on this front. "Insurers scrutinise policy wording all the time and it would be an insult to them to believe they would use this opportunity to avoid paying claims."
But not everyone agrees. John Bell, head of claims at Aon Risk Services, explains: "We have noticed that we are still seeing reservation of rights and strict application of policy wordings at the moment, which is not always in the spirit of treating customers fairly. Sometimes we feel these are being applied overzealously."
He adds: "The vast majority of claims are dealt with in a reasonable manner. But it seems that as soon as a large or high-profile claim comes along, insurers spend a lot of time deliberating. Often one gets the feeling they are deliberating on how not to pay the claim as opposed to looking for the best way for the policy to respond."
Consigned to history
For his part, Mr Hurrell believes "the days insurers would pay claims that weren't covered are long gone". However, he points out: "It is not only a question of insurers keeping their promise but the way the promise is kept. There are issues concerning our members and one of them is reservation of rights. Insurers reserve their rights even though there are no grounds to do so at that particular stage. Airmic is looking at insurers to get some agreement on what is appropriate practice. This is not related in any way to recession or economic trends; it is related to good business practice."
Insurers are quick to fight their corner when this issue is raised, saying that claims will get paid regardless of any business pressures. "Policies will get paid," says Ms Abrams. "Some carriers pay absolutely the pennies they have to and no more. This has never been our ethos."
Mr Bamber adds: "XL Insurance's claims-paying philosophy remains the same, even in a softening market; we will always aim to deal with any claims fair and fast. Consequently, a possible recession or softening market has no impact on how we would handle claims; we remain committed to the contract we sign."
Whatever happens with the economic or insurance cycle, it seems there could be an opportunity for insurers and brokers not only to deepen their existing relationships with clients but also show their partners they can be transparent, consistent and capable, as Mr Howard puts it.
"When the going gets tough it is possible to test the mettle of all partners in the relationship," Mr Howard concludes. "Then, if you do have good quality partners, they come to the fore and that is when insurers and brokers can really cement their relationship with clients - especially if there is a claim. If, as in our case, you only buy catastrophe cover, you hopefully don't need to call on your insurer that often and it is in this type of situation that good insurers really differentiate themselves."
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