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Commercial insurance ‘not fit for purpose’

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14th Mar 2011
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UK businesses are exposing themselves to significant and unnecessary losses due to 'serious flaws' in the way their corporate insurance policies are arranged, according to a new report.

The new Mactavish/PwC study of commercial risk reveals serious deficiencies in how corporate insurance is arranged and the role of boards in governing those arrangements. According to the research this is leaving companies vulnerable in the event of a large loss and subsequent dispute with their insurer.

Bruce Hepburn, chief executive of Mactavish, said: “The deficiencies the report reveals in how insurance is arranged are disturbing. What we see today is a system that has prioritised low transaction costs above reliable insurance policies.

“This approach is not fit for purpose for the environment we are now moving into. UK businesses, especially medium-sized companies, are putting themselves unnecessarily at risk and in today’s economy are far more exposed if a major insurance policy fails to pay out. Customers, brokers and insurers must all start to invest adequate time into securing appropriate insurance.”

The main findings reveal that 87% of insurance buyers do not understand the extent to which the duty of insurance disclosure is their responsibility or the consequences of failing to meet this duty.

In addition, 65% of those at large companies do not review the materials used to arrange their insurance, and almost all have inadequate discussions with insurers and brokers regarding coverage.

The report also shows that insurers are taking a much tougher line on claims. It suggests that reform is not only urgent but highly achievable, if insurance buyers, brokers and insurers work together to improve disclosure and the practices used to arrange insurance.

The report is based on consultations with more than 600 companies, 100 insurers and brokers and detailed case studies. It reveals an alarming picture of inadequate disclosure, widespread ignorance of a very challenging insurance law framework, managerial failure to gather relevant information, deeply uncertain policies and a lack of understanding of how large claims are processed.

Richard Sykes, governance, risk & compliance lead at PwC, said: “Many UK companies are unaware they are facing costly and damaging gaps in their insurance coverage. The risk that an insurance policy won’t pay out is not being recognised by boards.

“The lack of quality and in-depth information around risk exposure provided by companies to their insurers is currently inadequate and has left many businesses with unreliable and inappropriate cover. Companies need to make more informed decisions about how much risk they should retain or transfer, rather than simply seeking to minimise insurance expenditure. Insurance needs to move up UK companies’ agendas and become a more important part of their wider risk and capital-management plans.”

For a full copy of the report, Corporate Risk & Insurance: The Case for Placement Reform, visit the PwC or Mactavish websites.

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