Corporate memories can be very short…a breeding ground for risk-aversion…
Learning from the Past I
- Do you regularly look back at your previous data to see what’s relevant for your next renewal?
- Historic data can be very relevant, especially, if like public bodies and charities, your business does not change much from one year to the next
- If you have regular M&A activity, it is even more relevant to separate your “core” claims experience from any mergers or acquisitions
- Of course historic data needs to be adjusted for inflation etc, but this can be complicated into a real smoke-screen – the basic facts are usually quite plain:
- Large claims are usually rare
- If you have not had a large claim for a few years, it does not necessarily follow that one is due (next year, ie you don’t need a low XS)
- If you have recently had a large claim, the risk of another one (ie the premium) should fall, not rise, as less likely to re-occur (lessons learned etc)
- Our thorough process starts with “Your Past” – is your potential exposure to large claims so large and volatile that insurance is desirable in the first place?
- Of course, the past is not necessarily a good guide to the future, but it is a good starting point, and the only one we have
- If the future was so unpredictable, the insurance industry would not exist!
Learning from the Past II
- Do you regularly look back at your previous renewals to see if, with hindsight, “Project Fear” turned out to be real?
- You buy insurance usually (when not statutory) to protect your balance sheet from “Project Fear” (ie all sorts of nasties which may happen)
- Do you review your purchases at the next renewal to see if these nasties actually did happen? If not, perhaps there is a better way to finance them?
Informing Your Future
- Our thorough process continues with “Your Future” – what is your exposure to potential nasties and how material would they be?
- In many cases, for large companies, they are not material at all to either your P&L, Balance Sheet or Investor Metrics
- If they are material, they are often too remote a possibility to justify spending public money on (public bodies/charities).
- If they are material, and justifiably insured, how do you know that your insurer can withstand the loss, if you can’t?
- We have seen many cases, particularly in the public sector, where large local authorities are transferring risk to very small insurance entities
- Since insurers are certified to 1/200 year event insolvency, it is more likely that the local authority (constitutional permanence) would survive the claim than the insurer!