Many advisors “dive straight in” to the policy documents and/or re-broke the existing terms, hoping for a better price.
This assumes that:
- insurance is the best solution and
- the existing policy wording (and XS/AGGs etc) are not far from the optimum for you.
These assumptions may be true, but, in virtually all cases we have seen over the past 20 years, no structured evidence has been gathered to validate them, and, in fact, they turn out to be false.
Understanding your historic claims experience is key, and is common to many advisors.
However, the key points which are often missed are:
- Identifying excessive balance sheet reserving for past risks, releasing funds for more future risk taking/less insurance purchase.
- Such reserving opinions require compliance with actuarial standard TAS100, which, uniqely, applies to non-actuaries as well.
- Your auditors will scrutinise such opinions carefully.
- We only give such opinions after thorough analysis and have declined to do so in the case of one public sector client.
- We have years of experience dealing with auditors and have never had any of our opinions rejected or seriously challenged.
- Helping clients understand core risk metrics (eg frequency of large claims) compared to “Project Fear”
- Large claims, whilst rare, are also predictable, occurring once every N years.
- In most cases, risk management improvements will reduce the risk of the same claim happening again.
- This is rarely factored into insurance decision-making.
- Helping clients understand the reliability of the data used for legacy issues (eg asbestos, child abuse) and how to “fill the gaps” to reduce safely the balance sheet reserves / increasing funds for more future risk taking/less insurance purchase.
- In most cases, data for legacy liabilities is sparse (eg historic headcounts for asbestos claims)
- Where there are gaps, it is prudent to carry higher balance sheet reserves
- We have years of experience help clients to “fill the gaps”, safely reducing the balance sheet reserves required, without compromising the security for your claimants
Understanding potential future large claims is key, but is rarely carried out. After all, you buy insurance to insure future claims, not past claims. The key points are:
- Large claims, whilst rare, are predictable, occurring once every N years
- Thus you do not need a low XS for every year, “just in case” a large claim happens.
- It is a common human trait to want a low XS when the large claim happens (ie “not on my watch”), but this is excessively risk averse.
- We have years of experience educating clients on how best to fund large claims without (low XS) insurance.
- Some risks are already indirectly hedged on the balance sheet – no need for insurance
- We often see clients asking for coverage for historic absestos claims/deaths
- Since these claimants will usually be Pensioner members of your pension scheme, increased asbestos claims/deaths (which are usually at relatively young ages for Scheme pensioners) is usually a benefit to the pension scheme.
- Thus insurance is not required.
- Furthermore, this also impacts on the cost/benefits of buying-out the pension scheme, since there is a natural on-balance sheet hedge (early asbestos deaths from the insurance fund) to absorb increasing longevity risks, the typical reason for considering pension fund buy-outs.
We assess all of the above as standard in our Initial Heathcheck, which covers an overview of your current state, and implications for the insurance premiums you are paying and consequent implementation recommendations, in the following areas.
- I. Your Past: Adequate reserves for historic risks, Internal and external data for asessing risk, core risk metrics/trends for each class, historic insurers’ solvency II capital coverage/policies still “fit for purpose”?
- II. Your Future: Your Risk appetite, Risk Financing timeframe and Risk exit strategy, statutory obligations / exemptions, Your EMLs (expected maximum losses), their cash-flow/term profile, Insurability, existing hedging, corporate context, non-insurance alternatives
Note that a Healthcheck covers an overview of your current state. Any Implementation recommendations for improvements, are covered in an Implementation Plan