Introduction
In the domain of insurance buying by Industrial and Commercial Establishments two methods are currently in vogue.
(1) As pecification is prepared of the various insurance covers required and quotes are called for from insurance companies. Based on the most feasible quote, purchase order is placed for the covers. This is preceded by a service provider evaluation and qualification process which assesses the overall competency and suitability of the insurance companies.
(2) From the buyer’s knowledge of the market and market availability of the products, insurance covers they are looking for are purchased. This is assisted in most cases by comprehensive technical product literature compiled by insurance companies, often with prices on diverse insurance covers.
Insurance buying is a somewhat typical process distinct from buying of other services like, for example banking or stocks and shares. Many buyers of insurance quite often prepare a specification for bidding in respect of an insurance program based on their understanding of the risk exposures in their organizations. But it is the experience of many insurers, insurance advisers and broking houses that such bids are deficient in many respects.
Most often organizations are not fully conversant with their risk exposures and secondly the bids most are not consistent with and many do not correspond completely with buyer specifications. Such discrepancy arises because of two major factors:
(1) Insurance product literature is limited only to certain products and even the available product literature does not always elucidate buyer needs.
(2) Many buyers of insurance, despite the efforts of a few insurers, do not carry out any worthwhile study of the hazards and risk exposures in their organizations and hence lack knowledge of the actual products they need.
It is here an insurance adviser’s or broker’s role becomes not only significant but weighty as well. A key part of an insurance adviser’s/broker’s responsibility lies in knowing the insurance market in detail, collecting and analyzing all the data and advising the client on their needs. The task is, no doubt, challenging and strenuous but obligatory in terms of IRDAI (Insurance Brokers) Regulations, 2002.
Insurance buying by custom and usage commences with the expiry of each policy. But before seeking renewal of the expiring policies, a comprehensive review of the various policies currently in force and the risk exposures is rarely made. Even for a new organization the pattern seems often to work on the basis of “what policies do we need” rather on a detailed scrutiny of the various risk exposures which should logically lead to determining the actual insurance covers needed. This problem could aggravate in companies who have plans for expansion of their manufacturing or marketing activities.
One would expect that any company would undertake an insurance review through an insurance professional who could be:
(1) An insurance manager of the company who could decide that the insurance program needs a thorough review;
(2) An insurance adviser or broker for an existing account or a prospective new account; and
(3) An insurer on a direct account.
Of the three given above, it is the insurance adviser/broker who is favorably placed because of his detailed knowledge of:
(a) The market with all aggregates relating to industrial/marketing processes, and hazards and risk exposures.
(b) Claims lodged with insurers and how they are dealt with.
(c) Risk management techniques employed and in particular selecting insurance as a preferred solution to risk situations.
Study Of an Insurance Program
The entire study of an insurance program in terms of the tasks could be brought under three phases:
1. Collection of data and account characteristics.
2. Review of the present insurance covers.
3. Development of alternatives, if the present program is found inadequate.
The account section divides into two sections – data about the company, their main products and operations and data in respect of their insurance covers. The data may not be forthcoming in every case and in the absence of actuals, approximates might have to be accepted. The quantum of detail required is a matter of judgement.
For a company with limited product range and diversity less information is needed. For very complex groups with a long range of products, the analyst might need to compromise with the extent of information available in order to keep the data at a manageable level. In addition, he/she might look for such information from similar risks elsewhere.
Insurance Program – Review Techniques
(1) The Account
(i) The Company, their operations and the products they market;
(ii) Asset breakdown and valuation;
(iii) Earnings breakdown and key dependencies;
(iv) Employees’ salaries with breakdown;
(v) Future plans;
(vi) Premiums paid, to be paid and refunds due, if any from the insurer;
(vii) Claims paid;
(viii) Claims outstanding – number (department-wise) and provisions made by the insurer;
(ix) Plans for future expansion.
(2) The Insurance Covers
(i) Lists of policies with cover including amounts insured and/or limits of indemnities, periods, rates of premium, insurer and current insurance adviser/broker;
(ii) Five year experience of premiums paid and claims recovered;
(iii) Approximate revaluation of assets insured including adjustment for inflation exposure;
(iv) Separate out and review large losses;
(v) Consider variability in frequency/total cost of overall losses;
(vi) Exposure to large losses and possible impact on experience and future buying flexibility;
(vii) Approximate investment income from the account.
(3) Present placing
(i) Review in depth;
(ii) Make sure of buyer and insurance adviser/broker thinking and strategy needed;
(iii) Make a list of client servicing needs;
(iv) Don’t nitpick as a means of advising/broking attack;
(v) List major strengths and weaknesses of current program;
(vi) Make perceptive and honest appraisal of buying and technical servicing.
(4) Future Response
(i) Before considering alternatives – see if there is there any ‘fat’ in the present program. (i.e. first get right price for present program so as to review alternatives fairly).
(ii) Will packaging of risks help? Examine possible disadvantages.
(iii) How would the program be priced and structured if reinsurance, in particular facultative reinsurance has to be placed?
(iv) How is the client’s financial and management philosophy? Get and keep client thinking on insurance in line.
(v) If any major change is envisaged in the program, can the client cope with it?
(vi) Always keep in view hidden cost of any change.
(vii) Make sure social relations and implications are understood well.
(viii) Make room for known, planned, likely and possible future changes in the business of the client.
(ix) Consider funding, if the program turns up high profit with good retained cash flow.
Full details of the client company’s current operations, earnings on assets, marketing functions and future plans on expansion are needed as a rough check on the appropriateness and adequacy of the present insurance program. A full review would need study and analysis of each policy but this might delay completion of insurance placement and might not usually be essential to determine strategy. A listing of policies of insurance with outline details would permit a rapid assessment of any major gaps or shortfalls in the cover limits as well as giving a broad appreciation of the program.
Many advisers/brokers prepare an up-to-date and adequate summary of insurance covers needed for client use. It might be necessary to call for additional information from the client – it’s always desirable to check back if the list is complete to obviate the possibility any omissions. It might also be a ready reference guide for departmental use and helps to remove from the list of covers needed by the client insurances handled elsewhere, e.g., cargo insurance on imports which are on CIF terms or exports which are on FOB terms. If no list is available, it would be necessary to prepare one by summarizing from the existing policies. Whilst this process could be tedious, it might not be convenient to use the existing policies themselves because of their cumbersome character. The list would be needed for analysis and of great value in presenting the adviser’s/broker’s recommendations to the client.
The next item, five year experience, might often be difficult to obtain, especially accurate data in respect of premiums and claims. The data on premium needs to take into account the changes in insurers, insured sums, premiums paid and outstanding and refunds, if any and covers obtained. There might also be variations because of new acquisition of assets and disposal of old assets which have outlived their purpose or could not be repaired or reconditioned.
The biggest problem with claims is that not all claims are paid directly to the client. For example, a third party Motor claim involving the client’s automobile in an accident is paid to the victim of the accident who is the MACT judgement decree holder. And many insurers are reluctant to make available to the client the list of claims outstanding both the number and the quantum thereof in the client’s account, on the plea that outstanding claims which are a charge on written premiums could not be disclosed to the clients as it was not the clients’ business and quite a few insurers cavil about the work involved and the time needed to prepare the list.
If no claim figures from the insurer were available or even after persuasion of the insurer the figures were given, they might be inadequate or suspect. In such an event, a great deal could be done by questioning the client who would recall most substantial fires or other accidents from his records of claims lodged with the insurer and the correspondence exchanged with the insurer. Assumed claim figures should be properly recorded and explained in subsequent work.
After securing the accurate or approximate five year figures, the data would have to be brought up-to-date in both exposure and monetary terms so as to put each year’s figures on a directly comparable basis and to make a definite assessment of a realistic premium that would generate a reasonable profit for insurers on the one hand and hopefully a saving for the client.
The exposure adjustment with all available parameters whatever they might be, are approximate and in particular have to take into consideration the following factors:
(a) Use of values must take into account additions/accretions or deletions to building, equipment, plant, machinery or other assets.
(b) The adjustment has to bring previous years on to the same exposure basis as the current year on an ‘as if basis’. It is not always appropriate to make this pro rata. For example, if a new subsidiary covers hazardous operations, it would be preferable to add actual figures for them than make a pro rata adjustment. On the other hand, where an automobile fleet grows in size with similar figures, it might be appropriate to pro rate.
The inflation adjustment is distinct from exposure and should relate to an approximate price index. Accidental damage repairs would inflate at a different rate as a result of court awards both for personal injury and property damage. The object is to calculate what past losses would have cost if they had happened in the base year used for analysis which might be the last year or the next year.
Next, any large losses during five years under review and any known large losses within the previous five years should be examined to ascertain their nature and likely significance. A large loss might be a total loss where a whole factory building or large sections thereof had been destroyed by fire or other peril or might be a partial loss where the loss or damage might have been not as bigger.
Was a particular motor loss related to the characteristic of the account or was its occurrence totally fortuitous? Review of large losses throws light on the client’s management philosophy and risk management in particular, which might be very relevant to future insurance buying strategy in terms of both loss vulnerability and risk handling capability.
The overall loss figures need careful study to establish recognizable pattern in fluctuation of frequency of loss or size of loss. Account would have to be taken of any sizeable increase in frequent occurrence of losses which exceed those related to exposure to loss and inflation factors. When considering frequency of losses, a small statistical population would often throw up sharp fluctuation without any statistical significance.
Losses and their Influence on Rating
It would obviously be necessary to separate out large losses in reviewing the pattern of regular loss occurrences. Large loss exposure is a frequent subject of confusion in rating. Very often doubts arise whether a large loss is a stray occurrence, or could such a large loss occur again. In the event it is unreasonable not to allow an addition to incurred claims cost to provide for large loss exposure when considering rating – one approach is to add an assumed reinsurance cost to take out all losses over a certain limit. If such an allowance is regularly included, it seems reasonable to take out excess cost of large losses. But it should be borne in mind that an insurer’s cost could be increased by revision of reinsurance price arising out of adverse loss experience.
When considering the underwriting profitability of a particular account it would be expedient to include:
(a) Adjusted claims cost to allow for exposure and inflation;
(b) Expenses;
(c) Reinsurance cost (which might have to be assumed);
(d) Investment income on premiums paid by the client until required for settlement of claims and compare the total claims with the premiums to arrive at an approximate return to the insurer. This return is his profit for assuming the risks insured and for use of his capital.
The actual (rather than adjusted) premiums and claims settled and outstanding total would (after allowing for commission and expenses) show the real historic return to the insurer. This would give an indication of the adviser’s/broker’s scope but the adviser/broker has to bear in mind that the stance of the insurer would also (and sometimes heavily) be dependent on the general market conditions and attitudes to the nature and types of risks.
At the end of the first stage the adviser/broker would have a feel for the account in terms of:
(i) It’s broad characteristics, e.g., desirable/undesirable in relation to the nature and type of risks, spread or concentration within the account;
(ii) The experience of the account;
(iii) The desirability or otherwise to the insurance market.
The current placing of the account could be considered taking into account the data accumulated in the first stage. The insurance program would have been placed by the adviser/broker and buyer with various objectives in view and it is desirable (if possible) to find out what these objectives have been and the thinking behind them.
Role of Insurance Advisers/Brokers in Placing business for their Accounts
A new adviser/broker reviewing an account on the invitation of a client would not have (and would not usually want) the opportunity to discuss it with the holding adviser/broker, if any. However it is in the adviser’s/broker’s interest to look sympathetically at the pattern of placement, taking into account advantages as well as disadvantages.
Many advisers/brokers might approach the task in a destructive mood either over confidence in their own superior competence or determined at all costs to pick holes in their competitors’ handling of the account. The result is often a “nitpicking” report which catalogues dozens of minor criticisms. Also quite often the client’s response to the intense annoyance of the attacking adviser/broker is to hand over the report to the holding adviser/broker with advice to rectify the minor faults.
A balanced survey would not only be more professional but usually carries more chance of success. Looking at standards of advising/broking performance, it is best to use a yardstick of reasonable competence perhaps against average performance on one’s own account. It is important to take into account such factors as:
a. The client’s specific servicing needs;
b. The style of the client, his business ethics and the compatibility with the adviser/broker and their style of operation.
Many industrial/commercial accounts are complex to handle and need a learning period, if the account changes hands,
After securing the accurate or approximate five year figures, the data would have to be brought up-to-date in both exposure and monetary terms so as to put each year’s figures on a directly comparable basis and to make a definite assessment of a realistic premium that would generate a reasonable profit for insurers on the one hand and hopefully a saving for the client.
The exposure adjustment with all available parameters whatever they might be, are approximate and in particular have to take into consideration the following factors:
(a) Use of values must take into account additions/accretions or deletions to building, equipment, plant, machinery or other assets.
(b) The adjustment has to bring previous years on to the same exposure basis as the current year on an ‘as if basis’. It is not always appropriate to make this pro rata. For example, if a new subsidiary covers hazardous operations, it would be preferable to add actual figures for them than make a pro rata adjustment. On the other hand, where an automobile fleet grows in size with similar figures, it might be appropriate to pro rate.
The inflation adjustment is distinct from exposure and should relate to an approximate price index. Accidental damage repairs would inflate at a different rate as a result of court awards both for personal injury and property damage. The object is to calculate what past losses would have cost if they had happened in the base year used for analysis which might be the last year or the next year.
Next, any large losses during five years under review and any known large losses within the previous five years should be examined to ascertain their nature and likely significance. A large loss might be a total loss where a whole factory building or large sections thereof had been destroyed by fire or other peril or might be a partial loss where the loss or damage might have been not as bigger.
Was a particular motor loss related to the characteristic of the account or was its occurrence totally fortuitous? Review of large losses throws light on the client’s management philosophy and risk management in particular, which might be very relevant to future insurance buying strategy in terms of both loss vulnerability and risk handling capability.
The overall loss figures need careful study to establish recognizable pattern in fluctuation of frequency of loss or size of loss. Account would have to be taken of any sizeable increase in frequent occurrence of losses which exceed those related to exposure to loss and inflation factors. When considering frequency of losses, a small statistical population would often throw up sharp fluctuation without any statistical significance.
Losses and their Influence on Rating
It would obviously be necessary to separate out large losses in reviewing the pattern of regular loss occurrences. Large loss exposure is a frequent subject of confusion in rating. Very often doubts arise whether a large loss is a stray occurrence, or could such a large loss occur again. In the event it is unreasonable not to allow an addition to incurred claims cost to provide for large loss exposure when considering rating – one approach is to add an assumed reinsurance cost to take out all losses over a certain limit. If such an allowance is regularly included, it seems reasonable to take out excess cost of large losses. But it should be borne in mind that an insurer’s cost could be increased by revision of reinsurance price arising out of adverse loss experience.
When considering the underwriting profitability of a particular account it would be expedient to include:
(a) Adjusted claims cost to allow for exposure and inflation;
(b) Expenses;
(c) Reinsurance cost (which might have to be assumed);
(d) Investment income on premiums paid by the client until required for settlement of claims and compare the total claims with the premiums to arrive at an approximate return to the insurer. This return is his profit for assuming the risks insured and for use of his capital.
The actual (rather than adjusted) premiums and claims settled and outstanding total would (after allowing for commission and expenses) show the real historic return to the insurer. This would give an indication of the adviser’s/broker’s scope but the adviser/broker has to bear in mind that the stance of the insurer would also (and sometimes heavily) be dependent on the general market conditions and attitudes to the nature and types of risks.
At the end of the first stage the adviser/broker would have a feel for the account in terms of:
(i) It’s broad characteristics, e.g., desirable/undesirable in relation to the nature and type of risks, spread or concentration within the account;
(ii) The experience of the account;
(iii) The desirability or otherwise to the insurance market.
The current placing of the account could be considered taking into account the data accumulated in the first stage. The insurance program would have been placed by the adviser/broker and buyer with various objectives in view and it is desirable (if possible) to find out what these objectives have been and the thinking behind them.
Role of Insurance Advisers/Brokers in Placing business for their Accounts
A new adviser/broker reviewing an account on the invitation of a client would not have (and would not usually want) the opportunity to discuss it with the holding adviser/broker, if any. However it is in the adviser’s/broker’s interest to look sympathetically at the pattern of placement, taking into account advantages as well as disadvantages.
Many advisers/brokers might approach the task in a destructive mood either over confidence in their own superior competence or determined at all costs to pick holes in their competitors’ handling of the account. The result is often a “nitpicking” report which catalogues dozens of minor criticisms. Also quite often the client’s response to the intense annoyance of the attacking adviser/broker is to hand over the report to the holding adviser/broker with advice to rectify the minor faults.
A balanced survey would not only be more professional but usually carries more chance of success. Looking at standards of advising/broking performance, it is best to use a yardstick of reasonable competence perhaps against average performance on one’s own account. It is important to take into account such factors as:
a. The client’s specific servicing needs;
b. The style of the client, his business ethics and the compatibility with the adviser/broker and their style of operation.
Many industrial/commercial accounts are complex to handle and need a learning period, if the account changes hands, for the new adviser/broker to develop sufficient understanding in depth of the business and the client and the client’s priorities. A careful balanced view of the major strengths and weaknesses of the account would reveal a professional assessment.
Sometimes, especially in a hard insurance market, it would be difficult to make a substantial improvement in such cases. Major omissions would be evident, or a new approach would present substantial opportunity for the client. It might be best to say that the facts and make the client a friend rather than risk getting the account on false promises which might be impossible of fulfilment and eventually losing the account.
The scope for improvement in price would tend to be related to the state of the market and the profit balance of the account. Major accounts tend to fall into two groups with either remarkably low overall loss ratio or remarkably high overall loss ratio taken over a number of years. In some classes the pattern of experience rating means there would be a little surplus left such as a motor fleet and employer’s liability (although it is always worth looking at outstanding claims and the level of investment income from them).
Other classes where claims are not that frequent would see much more variation. Assessment of this strength of the account is inevitably subjective, but where there is a good overall surplus, packaging of risks may provide a means of using the buying weight of the account effectively.
Insurers are naturally cynical about claims whether it is a good or special account and the likelihood that they would be able to earn a reasonable profit from it. Careful preparation, presentation and negotiation would be required to develop and place a good package. If a reasonably substantial deductible is in use or planned, it is worthwhile considering how the property portfolio could be priced, even if not substantially reinsured. If that reveals a big gap, it would indicate a method of attack. Economic reinsurance could be used to tempt an insurer at a new proposition sympathetically.
High levels of self-insurance might only be appropriate for clients who understand them and whose overall approach could embrace substantial risk retention. It is essential to recognize what would be involved for the client in any major change of program.
When we talk of Marine Hull (major hulls), what we refer to are passenger liners, bulk cargo carriers and tankers and super tankers of petroleum crude etc. Other than smaller vessels which ply along the coastal waters and through inland rivers, in short navigation systems which do not fall under the classification of Marine Hull (major hulls).
Passenger liners have long ceased to be major carriers of general passenger traffic, thanks to the phenomenal development and growth of airlines operating jet and broad-bodied jumbo jet aircraft in all parts of the Globe. The few passenger liners that are still plying are mostly luxury liners for vacation cruises and holiday voyages.
Hence in Marine Hull the main focus of the advisers/brokers is on cargo carriers comprising general cargo vessels, bulk carriers such as food grains etc., tankers carrying crude and other petroleum products and super tankers like VLCCs and ULCCs. Most of these carriers are massive vessels in terms of their GRT and DWT. A country’s trading capacity in respect of ocean trade is determined by its aggregate GRT and DWT of all ocean going vessels registered in the country. For the rate making exercise, the London market considers the aggregate GRT of the country in addition to the individual ship owner’s GRT.
So far Aviation Insurance is concerned, it’s not only the aircraft hulls that matter, but equally important are the liabilities associated with the operation of aircraft which are governed by international conventions such as the Warsaw Convention and The Hague Protocol further modified by the Montreal Convention.
With wide bodied aircraft pressed into by almost all airlines in their domestic and transnational operations, the liabilities are colossal and have acquired the same vigor as aircraft liabilities. In addition to this, managers of airports have to get an airport liability insurance cover.
In rating Major Marine Hulls and Aircraft Hulls and Liabilities, the front-line London Brokers call the shots. Hence insurance advisers/brokers, regardless of whether they have a license to transact insurance and reinsurance advising/broking, have to forge business connections with the London Insurance/Reinsurance market so that they have first-hand domain knowledge which would be handy in servicing Marine and Aviation accounts vis-à-vis the clients and fronting direct insurers in India.
Accounts comprising predominantly heavy machinery, manufacture of locomotives, rail wagons, rail coaches, road leveling machines, large boilers for factories generating power, petrochemical, bio-chemical, and pharmaceutical manufacturing, petroleum refining, electrical energy production and distribution composites, automobile manufacturing plants and such like are a distinct category of high valued risks.
The high capital investment in such colossal composites is mostly through consortiums of financial agencies such as development banks and other financing agencies apart from FDI and World Bank.
More often than not, Indian entrepreneurs and industrial conglomerates enter into turn-key contracts with their foreign collaborators for supply of both the technology and plant and machinery and the exercise is preceded by global tendering. In the pricing of the entire project insurance is a major component.
The turnkey contractors through their insurance advisers build into the contract the entire insurance schedule comprising marine cover for plant, machinery and equipment imported or locally procured and SCE cover as well. Some contractors ask for a composite MCE cover. Insurance advisers/brokers placed in India have a tremendous opportunity to play their professional role cheek by jowl by associating themselves with the turn-key contractors most of whom have their preferred advisers/brokers and insurers, some of them overseas, for expert advice on insurance.
Since most of such projects need substantial reinsurance placement overseas, mostly facultative, the leading project insurers in the London market and continental Europe such as the Lloyds of London, Royal Re, Munich Re, Swiss Re, Zurich Re and Asia Capital Re in Singapore and others get themselves fully involved almost from the drawing board stage. It, therefore, makes good business sense for Indian insurance advisers/brokers to establish early contacts with London reinsurers as well as with others in Geneva, Zurich and Singapore and be their extended arms in India even from the stage the projects are in the pipeline on the one hand and the financing agencies and the clients on the other, not to mention the fronting direct insurers in India.
All things said and done, basic domain knowledge in the field, particularly in green field projects, for the advisers/brokers would place them in a decidedly advantageous position. This most certainly calls for specialized knowledge, both technical and marketing.
Conclusion
Finally, for advisers/brokers it is advisable to understand all the social relationships and their significance. Few business decisions are entirely rational, logical, detached and made from pure business considerations. We are all influenced by past experience, our own approach to life and business and our friends and acquaintances.
Even the odd social benefit can confer some influence in securing accounts which may be dicey. Though such factors might not always determine business thinking, they are nevertheless significant when a choice is finally made. In most business decisions through the final say rests with the clients. Still the professionalism brought to bear on them by insurance advisers/brokers plays a very significant role.
