Corporate Insurance - Key Buying Considerations
Introduction:
Insurance procurement and claims management are rarely within the remit of procurement. However, considering that a single claim could have significant impact on the bottomline of any company, should an insurance firm reject a claim. Therefore, in some organizations, the procurement team is mandated to tackle procurement of all insurance policies, as well as negotiate claims to broker the right deal with clients/customers and with insurance companies. This is particularly prevalent in companies with service core.
Depending on the nature of business, the insurance spend is anywhere between 0.3% to 1.7% of the total revenue and this is excluding employee medical insurance. While not significant in spend, the nature, terms and model of buying has significant implications when the liability risks materialize.
The following are key liability policies that need to be secured by any global business:
Key Liability Insurance Policies:
General Liability Insurance: Covers a wide range of liabilities, including bodily injury, property damage, and personal injury (such as slander or libel) that occur on business premises or as a result of business operations.
Professional Liability Insurance (Errors & Omissions Insurance): Protects professionals (such as consultants, lawyers, doctors, etc.) against claims of negligence or failure to perform professional duties adequately. This insurance is specifically critical for companies that offer services to customers.
Directors and Officers (D&O) Insurance: Provides coverage for directors and officers of a company against lawsuits alleging wrongful acts, errors in judgment, breaches of duty, or misleading statements that resulted in financial loss to others (shareholders, employees, etc.).
Employment Practices Liability Insurance (EPLI): Covers employers against claims made by employees alleging wrongful termination, discrimination (based on age, sex, race, disability, etc.), harassment, or other employment-related issues.
Cyber Liability Insurance: Protects businesses from losses due to data breaches, cyberattacks, or other cyber incidents that compromise sensitive customer information or disrupt business operations.
Product Liability Insurance: Covers businesses that manufacture, distribute, or sell products against claims of bodily injury or property damage caused by their products.
Property Insurance: As the name suggests, this insurance protects businesses against damage to their property, causing business interruption. This would be critical policy to zoom into for any large manufacturing setups or service companies, which are prone to natural calamities.
Cyber Insurance: Protects businesses against cyber attacks through compromising high end corporate firewalls, usually through phishing, IP or domain spoofing, introducing a ransomware towards Denial of Service attacks etc. Cyber attacks often cause partial to complete activation of business continuity protocols due to immediate business interruption. The insurance will protect your organization against appropriate diagnostics and remediation measures.
Crime Insurance: Protects businesses from financial losses due to criminal activities such as theft, fraud, embezzlement, and other crimes. This insurance helps mitigate the impact of crimes committed by employees, third parties, or even external hackers
Kidnapping & Ransom Insurance: Protects businesses from financial losses and other consequences related to kidnapping, extortion, and ransom demands. Usually companies take this insurance for top management/board members or extremely critical management/technical personnel(in scientific field for example), specifically if there are frequent business travel to high risk countries..
Insurance Value Chain:
Before getting into the key considerations in procuring each of the above insurance policies, a quick primer on the value chain of insurance. Insurance market globally has three key participants i) Brokers ii) Insurers iii) Re-Insurers.
Brokers are the companies which facilitate/stitch policies together. Usually for large policies brokers identify the primary and excess providers. Brokers also service their customers by answering policy queries, guiding customers on applicable policy for a given claim, and help support with necessary documentation that would be required by an insurer to assess a claim. More importantly, Brokers negotiate on behalf of customers with insurers and reinsurers. The top spot of being world’s largest broker by revenue ($22Bn+) is held by Marsh, which has a mesh of subsidiaries and operating units across the globe. Based on book of business that a broker generates, brokers soon command a premium and circle of influence in Insurance and reinsurance markets. Most large brokers these days have inhouse actuarial teams to create a desk quote or to assess risks of a given customer from an Insurer lens. Brokers business is usually organized into lines of business based on the portfolio (employee benefits, Property, Marine, Liability etc) and further classified by industry (IT&ITES, Healthcare, Media, Telecom etc). Depending on policy, broker get a commission from Insurers anywhere between 7%-20%.
Insurer is the key party which underwrites the risk. Depending on assessment of risk through deep geo-political, technology, economic etc underwriters build models to assess macro risks. Risks specific to a specific policy with a specific corporate are further assessed based on ongoing and past claim history, contractual prudence, client profiles, nature of engagements taken up by your company and thereby potential liability that each of the top 50-100 contracts carry, together with any settlements that have been entered into by your company over the past years. Unlike medical insurance, liability insurance does not fully depend on loss ratio, but pricing of policies has significantly more weightage on macro factors and specific measures undertaken by firms to contain exposure.
Re-Insurer is the king-pin in taking primary risk on policies. Based on the nature of risk, you may find that there are only a handful of re-insurers who have the necessary funds and capacity to underwrite.
Insurance Sourcing and Negotiation:
From a sourcing and negotiation perspective, your first step as a procurement professional should be to look internally within your organization and determine ownership by policy. A good sourcing process, specifically for Insurance portfolio, would require you to start the preparation at a minimum of six to eight months ahead before the next renewal. Some of the key decisions early in the process would be as follows:
i) Determining the renewal calendar to bring your local and global policies in sync: While getting all your liability insurance to a single date sounds right to drive leverage across the whole cross-section of policies, there are multiple reasons this might not be the right direction. The exercise to renew a policy requires consideration of any macro economic factors, geo-political factors and specific financial objectives of parties in the insurance value chain, to drive the best outcomes. It is also important to operationally plan obtaining the certificate of insurance from your insurers(through broker on record). Consolidating all liability policies into one calendar date for renewal will also lead to reduced organizational focus on policies of lower premium value. For procurement of a commodity or a category, the 80-20 rule might seem a valid approach, however, considering the risk exposure in even lower premium insurance policies, every policy will need due focus and attention to ensure that the procurement team drives the right terms & commercials. Many companies follow a twice yearly calendar to plan renewal of large liability insurance policies, while the smaller ones are spread-out through the course of the year.
ii) Analyze the current broker landscape – are you using too many or too few brokers for policies that you need to secure for different types of risks. There are pros and cons of too much consolidation for multiple years vs too much fragmentation vs frequent changes of brokers across policies. The role of a broker becomes critical, especially when the in-house risk management teams are lean, often relying on broker expertise and relationship with the insurer to consider claim settlements. Brokers usually charge between 5% to 10% as commissions, depending on the deal size. If your broker landscape is too fragmented, it is recommended to consolidate whilst continuing strong relationships with other brokers of similar size. In the next section, we have provided some of the key attributes important in broker selection.
iii) Analyze your current policy structure, in terms of deductibles/aggregate deductibles, geography scope, sub-limits, selecting the right broker. A cross-functional team is often required to assess the impact of each of the key terms and take the right position as a part of the negotiation discussions with the brokers/insurers. The policy wording is usually held tightly by the insurers to limit their exposure in the event of a claim,however, there are many potential areas where underwriters are flexible to change the wording to cover specific risk scenarios. Preparing a clear proposal to evaluate alternatives and discuss with insurers is critical to ensure that right terms are incorporated into the policies.
Broker Selection and Negotiation:
Broker relationship is crucial to maintain continuity in claim support. Based on type of policy, you should plan to commit to the selected broker for the subsequent 3 to 4years. Below are some of the key criteria in broker selection:
i) Business understanding of your company: Crucial for the broker to cover companies similar to yours. This is important as the broker needs to have their own teams who can understand a claim and assess the exact situation
ii) Risk Assessment potential: Broker should have good understanding of the need to create tailored liability policies, incorporating appropriate coverage limits, exclusions, endorsements, and terms to ensure comprehensive coverages
iii) Team strength & subject matter expertise: Look for combination of a strong/responsive team and specialized expertise to ensure that brokers can meet evolving needs of your company
iv) Claims Servicing: Size and quality of claims management team within the broker organization will often determine how well you use your policy. Guidance from broker claims team will help in positing the claimed amount effectively with the insurer, providing detailed documentation in support of the claim.
v) Contract review & Service levels: Establish clear service levels and guidelines on how the broker will support in reviewing your critical contracts with clients/customers.
Once the broker or a shortlist of brokers is selected, organizing roadshows, with the help of selected broker together with insurers and re-insurers will enable underwriters across teams to get deeper understanding of the residual and potential risks in your company. This is a critical exercise for underwriters to accurately price your risks. Without sufficient understanding of enterprise risks, your company could be potentially paying significantly higher risk premium purely due to lack of enough information. We have seen a minimum of 10%-15% lower premiums when business risks are clear to underwriters.
Mandate letters: For some of the policies requiring larger limits, brokers may ask for a written mandate letter, giving them exclusive rights to secure quotes and stitch the market for the specific policy. While this is useful in cases where you have a handful of re-insurers or insurers with ability to underwrite your risks, tread strategically to build markets rather than sticking to the same combination of insurer/re-insurer.
Completing the above steps will enable you to fill in the proposal forms appropriately, declaring the right inputs and disclaimers. Ensuring that Proposal forms are correctly filled is often a tedious exercise requiring multiple stakeholders across the organization to provide timely, relevant and accurate inputs. Any clear discrepancy in facts could alter Insurer’s decision at the time of a claim. It is often a good practice to maintain a multi-functional task force with appropriate support from a c-level executive to get validated inputs provided to the brokers. Also, maintaining good relationship with broker could let you take assistance from brokers to consolidate similar/same questions across proposal forms and let your stakeholders respond to them. Broker could also complete multiple formats across different insurers with responses obtained from internal stakeholders, reducing the amount of effort invested by your insurance procurement team. With this, the insurers will often revert with policy terms and premiums that include broker commissions
Selecting the right coverage/terms on above policies:
Some of the key terms in responses from a quote comparison report provided by your broker should include the following:
1. General Liability Insurance
Coverage Limits: Maximum payout for covered claims. Ensure that any geo/business specific sub-limits are called out explicitly.
Deductibles: Amount the insured pays before coverage applies. Deductibles are often set based on the geo and nature of activity performed by your organization. A change in deductibles/retainer could directly impact premiums.
Exclusions: Specific risks not covered (e.g., intentional acts). Watchout for any specific exclusions that could significantly increase residual risks for your organization.
Additional Insured: Allows third parties to be covered under the policy. Many service organizations need to ensure that the insurer is fine to add customer names as additional insured. Many customers require this to be the case on insurance policies to maintain policy continuity
Occurrence vs. Claims-Made: Determines when coverage applies – is it applicable when a claim is made or when a risk has materialized. This is an important term in the policy and should be well understood within the management team.
Defense Costs: Coverage for legal expenses associated with claims. To what extent/limits can the insurer permit your organization to use legal counsel without prior approval of the insurer. Most insurance policies/insurers will mandate taking prior approval on defense costs to ensure that the legal panel selected by the insurers at the rates negotiated by the insurer are leveraged for any claims from policyholders.
2. Professional Liability Insurance (Errors & Omissions Insurance)
Coverage Limits: Maximum payout for claims related to professional services. Critical to determine your average contract value across your clients if you are a professional services company to determine the extent of coverage. Many customer contracts will require service providers to carry E&O insurance for designated amount
Claims-Made Policy: Coverage effective only if the claim is made during the policy period. This is usually a non-negotiable from a policy standpoint.
Retroactive Date: Date from which claims are covered. Negotiate the retro date to protect yourself against unknown past claims. More the retro date, the better you are.
Defense Costs: Coverage for legal fees in defending against claims. Refer above
Exclusions: Specific situations not covered (e.g., criminal acts). Important to zoom in and have absolute clarity on exclusions. Some of the exclusions such as penalties/damages not covered under E&O policy is standard to ensure that service providers do not claim insurance for contractual breaches
3. Directors and Officers (D&O) Insurance
Coverage Limits: Maximum amount for claims against directors and officers.
Some of the key watch-outs on key terms include,
Side A Coverage
Indemnification Limits: Ensure that the policy covers all instances where the company cannot indemnify the individual due to insolvency, legal restrictions, or corporate bylaws.
Exclusions: Be aware of exclusions that might apply, such as fraudulent or criminal acts, which could leave individuals without coverage in certain scenarios.
Retention/Deductibles: Check if there are deductibles that apply to claims under Side A, as this could impact the individual’s financial exposure.
Policy Limits: Confirm that the limits of liability are sufficient to cover potential claims against individuals, as these can vary significantly.
Non-Disclosure: Review the policy for any obligations to disclose certain facts; failure to do so could void coverage.
Side B Coverage
Company Indemnification Requirements: Understand the specific circumstances under which the company is required to indemnify its directors and officers, as policies may have strict definitions.
Reimbursement Process: Be aware of the process for reimbursement, including timelines and documentation required, as delays can create cash flow issues.
Limitations on Coverage: Ensure that Side B coverage is adequate, particularly in cases where multiple claims could arise simultaneously, potentially exhausting limits.
Exclusions: Just like Side A, Side B coverage can have exclusions (e.g., intentional misconduct), which could leave the company exposed to significant financial loss.
Claims Made vs. Occurrence: Verify whether the policy is claims-made, which requires that the claim be made during the policy period; this can impact the timing of coverage.
Side C Coverage
Securities Claims Scope: Understand what constitutes a “securities claim” under the policy, as definitions can vary and may exclude certain types of claims.
Limit of Liability: Review the limits specific to Side C coverage, as they may differ from those for Side A and B, and ensure they are adequate for potential exposures.
Interplay with Other Policies: Be mindful of how Side C interacts with other policies, like general liability or errors and omissions (E&O) insurance, to avoid gaps in coverage.
Shareholder Actions: Be aware of how coverage responds to derivative actions brought by shareholders, as these can complicate claims.
Policy Triggers: Ensure clarity on the triggers for Side C coverage, as certain conditions must be met for the policy to respond.
General Considerations
Policy Language: Always scrutinize the language in the D&O policy for clarity, especially around coverage triggers, definitions, and exclusions.
Consultation: Engage with an insurance broker or legal advisor familiar with D&O insurance to navigate the complexities and ensure appropriate coverage levels.
Regular Reviews: Regularly review and update your D&O insurance policy in light of changes in corporate structure, regulations, or business operations.
5. Cyber Liability Insurance
A number of queries from Insurers come in prior to renewal, related to not just how well protected is your IT infrastructure but also on how deeply are systems networked. Inter-dependencies across your manufacturing systems and your corporate network increase the risk, and thereby the premiums. Regular training of employees, simulation exercises to identify and mitigate potential breaches, evidence of disaster recovery exercises, when there is a potential catastrophic cyber security event provide sufficient objective evidence around security posture and helps in mitigating premium rises.
Some of the key terms include:
Coverage Limits: Maximum payout for cyber-related claims.
Data Breach Response: Costs associated with responding to data breaches.
Business Interruption: Coverage for loss of income due to cyber incidents.
Privacy Liability: Protects against claims related to unauthorized data access.
Cyber Extortion: Coverage for ransom payments due to cyber extortion.
Network Security Liability: Coverage for liabilities from security breaches.
Regulatory Fines and Penalties: Coverage for fines due to breaches.
Forensic Investigation Costs: Expenses related to investigating cyber incidents.
6. Product Liability Insurance
Coverage Limits: Maximum payout for product defect claims.
Exclusions: Specific risks not covered (e.g., design flaws, misuse).
Claims Made vs. Occurrence: How and when claims are covered.
Defense Costs: Coverage for legal fees and settlements.
Types of Claims: Manufacturing defects, design defects, and marketing defects.
7. Property Insurance
Coverage Limits: Maximum payout for property loss or damage.
Replacement Cost vs. Actual Cash Value: How losses are compensated.
Exclusions: Specific risks not covered (e.g., flood, earthquake).
Perils Insured Against: Types of risks covered, such as fire and theft.
Contents Coverage: Coverage for physical assets and inventory.
8. Kidnapping & Ransom Insurance
Coverage Limits: Maximum payout for ransom demands.
Crisis Management Costs: Coverage for expenses related to crisis response.
Negotiation Costs: Expenses incurred for hiring professional negotiators.
Exclusions: Specific situations not covered (e.g., internal conspiracies).
Emergency Response Services: Coverage for immediate response measures.
Term comparison:
Once the quotes are obtained, it is important to do a side-by-side comparison of the terms in detail. Often, minor changes could significantly increase the risk for companies. Collaborate with the chosen set of brokers to do a term comparison and sensitivity analysis of change in premiums as a result of changes to different parameters (eg: deductibles, thresholds for legal or technical assistance beyond which you would need insurer’s consent etc)
Negotiating policy premiums
Balance risk vs costs. Especially in liability renewals, your focus should be to take the right risk position for your company, rather than purely zooming into the costs. Based on the relationship with the broker, you could also obtain fantastic benchmarking reports to compare your proposed premium to prevailing rates in the market for similar business risks. Obtain these benchmark reports from more than one broker to ascertain the range of premium and terms comparative vs prevailing market conditions. Brokers usually are flexible in discounting their commissions, as their business model operates on the basis of book-of-business they carry. Higher the book of business, more influence they can drive with re-insurers/insurers and higher the influence, more the business.
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