Insurance & Corporate Treasury

The main topical insight was that, compared to the past three years or so, the market has ceased hardening, or is doing so more slowly. Experiences were mixed, but, even if premiums are still increasing, the rate of increase has slowed down. Pressure was significantly lower in the US property market, due to a less severe hurricane season, and D&O. Several participants also reported that the cyber market seems to be maturing. Even so, the environment remains challenging, with a net increase in premiums often happening, if only due to the rise in the value of the assets being insured. Real estate valuations are rising, while inflation and changes in supply chain structures are causing inventory values to rise.

A lot of the call was spent discussing structural and strategic questions. I strongly encourage people to read the detailed report, but the main items were:

• Where does insurance belong? Again, no simple answer, but one participant suggested it may depend on the company: it sits more naturally in treasury for asset intensive companies; while HR might work better for service industries.
• How much cover to buy, versus how much risk to keep in house? There is no magic formula. Most took the view that the cover purchased should not vary according to the cost of premiums, but it does happen in some cases. One suggestion was that the approach should vary according to the company’s ability and willingness to absorb risk. It is likely that a company which is owned by pension funds may tend to buy more cover to reduce earnings volatility, while privately owned companies may have a higher risk tolerance.
• This discussion also gets into using higher deductibles to reduce premiums: this is a common approach, which also improves operational awareness of risk.
• Whether to use a captive? Most view captives as beneficial, but some struggle to convince management of this. Interestingly, a majority of participants had their captives in the US – tax is clearly not the deciding factor in this decision.
• The benefits of brokers and risk advice? All participants spoke positively of the risk management advice provided by the brokers or the insurers themselves. This was particularly true of manufacturing companies, where the insurers (especially FM Global) conduct risk management inspections and provide recommendations on reducing risk, especially in areas such as fire. Cyber was also quoted as an area where risk management advice is essential. Brokers are very helpful with the benchmarking service they provide: this helps with deciding how much cover to buy.
• Reputational risk was also cited as a reason for buying insurance.
• How to get buy-in from budget conscious functions? This remains the eternal challenge, but participants find that incessant communication and demonstrating added value works. One even travels to many locations around the world with their brokers and insurers.
• Unsurprisingly, senior management and the board have a big influence.

Bottom line: insurance can often be something of an orphan child, as it does not incontrovertibly belong in any single function, and there is a constant struggle with budget pressures. However, it is clearly a key part of risk management, and the decisions taken have a significant impact on any company’s financial performance. Premiums have been increasing over the past few years, but pressure seems to be easing.

As was clear from this call, participants who get involved in the area quickly become passionate about it.

The brokers cited in the discussion were Marsh McLennan and Aon. The insurance company which was named most was FM Global..