FOR the past two years the insurance industry has been characterised by premium increases, more restrictive cover and stringent underwriting requirements.
As a result it is increasingly difficult and expensive for businesses to rely on insurance to manage their risks.
This is a big change from the decade prior, when insurance was a cost effective and broad ranging risk transfer tool.
In this environment, Marsh State manager Geoff Ferguson recommends that businesses should look at the whole spectrum of risk management tools available.
“Relying solely on insurance to manage your operational risks is increasingly difficult and expensive in the current hard insurance market,” Mr Ferguson said.
He suggested that managers should go back to fundamentals to assess the significant operational risks in their business, to help them decide which risks should be insured, which risks can’t be insured, and what alternatives are available.
This process would include an assessment of the appropriate deductibles and limits.
In practice, there isn’t a right and wrong answer. The preferred approach depends on the assessment of management.
OAMPS Insurance Brokers State manager Max Bailey illustrates this point by reference to two clients in the same industry.
He said one business had insurance cover for full machinery breakdown and consequential loss.
The second client doesn’t have the same level of insurance cover, but spent more on plant maintenance.
In other words, they have chosen to manage the risk internally rather than transfer it to an insurer.
Mr Bailey said OAMPS sought to assist the decision-making process by providing claims statistics so the clients were fully informed.
Mr Ferguson said small to medium-sized enterprises had to be prepared to know and understand the risks in their business.
“They need to know how much risk they can carry before it starts to hurt the business,” Mr Ferguson said.
This, in turn, will enable the business to determine how much risk they take themselves and how much they transfer to an insurer.
Options for businesses include reducing the scope of their cover or sharing the cover by offering much higher deductibles.
For instance, a heavy engineering business, which is traditionally regarded as high risk, may choose to offer higher deductibles on its professional indemnity cover.
Mr Ferguson said organisations with a comprehensive understanding of their risks and a detailed risk management strategy would do more than simply boost their chances of successfully renewing their insurance contracts.
They also would derive wider benefits, such as being able to identify opportunities and strategies to improve the management of key risks.
Increasing the level of risk awareness through the organisation, factoring risk into management decision making and assisting to achieve compliance with legislative requirements were other benefits.
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