Serious flaws in corporate insurance policies

14 March 2011

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14 March 2011 | Angeline Albert

Purchasers are prioritising low broker fees, above other criteria, which is exposing their organisations to major losses from poorly arranged insurance contracts. 

'Serious flaws in the arrangement of corporate insurance policies’ was the conclusion of a report published today by Mactavish and PwC. The study is based on consultations with customers, insurance brokers, policy makers and underwriters over the past three years.

Contract flaws related to inadequate disclosure; buyers being ignorant of insurance law; and the failure of organisations to gather relevant information.

The report said: “Above all else, low and declining transaction costs, i.e. broker fees” are prioritised. It went on to say: “This means relatively little time is devoted to getting the customer a reliable contract. This is understandable given the need for all businesses to keep costs in check. However, it ultimately leads to a low level of contract certainty.”

Bruce Hepburn, CEO of research firm Mactavish, said: “What we see today is a system that has prioritised low transaction costs above reliable insurance policies. 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.”

The study said most UK businesses assumed that secure insurance coverage was in place despite evidence indicating that there are costly and damaging gaps.  

The research found that some 87 per cent 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. The report recommended buyers seek clarification before renewal.  

Purchasers have no way of vetting an insurer’s understanding of key operational risks, the study said, resulting in the wrong cover being secured, pricing being inappropriate and coverage remaining unclear. The report recommended a rigorous risk assessment prior to renewal.

In a post-recession, post-volcanic ash, post-tsunami world, the report found two thirds of buyers (65 per cent) at large companies do not review materials used to arrange insurance to reflect business changes and their impact on operational risks.

Almost every document reviewed in the study, used to explain companies’ risks to insurers, contained errors or omissions that could directly lead to a large claim being questioned. 

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