PROPERTY INSURANCE POT HOLES

Avoiding Them Will Reduce All-In Costs and Improve Coverage Too

The cost associated with global property insurance is for most companies—especially manufacturers—the largest spend in the insurance portfolio, often comprising fully half of all insurance costs. Because of its complexity, it is also often the least understood in the C-suite. This is unfortunate since catastrophic property losses, and their concomitant business interruption/lost profits losses, are larger and more likely to happen to most global companies than a very large liability loss.

Why is it so unattended?

For one thing, global property insurance involves not one insurance contract, but often dozens, depending on the number of countries in which assets are owned or leased. The “paper challenge” alone is daunting. Once a “master policy” is decided upon and purchased in the United States, foreign counterpart policies need to be issued in nearly all foreign jurisdictions in order to comply with the laws and insurance regulations of those places, which normally require that a separate policy be issued “in country”, and that it comply with local insurance requirements as to terms, conditions, language, and taxes.

Second, the property policy is the least standardized in regard to terms and language of all commercial insurance. Property policies for large companies are truly “manuscript” policies with individually negotiated terms, conditions and endorsements. No two are alike, and even fundamental concepts can differ wildly from one policy to another, even when issued by the same insurer. And the policy will always be the lengthiest contract in the portfolio, perhaps exceeding 100 pages when amending endorsements are included.

Unintended consequences

For these reasons, we usually find very heavy reliance by companies on the judgments and decisions of brokers when it comes to the structure and terms of the property insurance program. While all of the brokers with whom we have worked have skilled personnel well connected to the many markets and want to do a good job for their clients, there are two common issues that crop up time and again:

  1. Brokers cannot possibly understand your varied global operating risks as well as internal managers and executives. And, importantly, they do not deeply understand the “profitability map” of the company—which sites are contributing what kind of profit stream to the overall entity. For example, it may be that several of your plants process and fabricate materials using expensive cutting equipment that incorporate precious metals for their functionality. Many insurers consider precious metals that are part of machinery to be “Excluded Property” altogether. You can be sure those plant chiefs are aware of this manufacturing fact. But is your broker, especially one located in India who is working as one of 20 from his organization procuring and placing foreign policies? And, we almost always observe anomalies in the reported values for estimated business interruption, which must be reported on a site-by-site basis for purposes of computing the policy premiums, both domestic and foreign. A CFO reviewing a list of reported values will surely note that something is wrong when a very small site, say in Malaysia, is listed as having a very large lost profits estimate equating to 20% of global EBITDA. But will the broker, who relies on what he has been told, often year after year, on a schedule that is really not carefully srubbed. (For every over-estimated dollar of lost profits, you are paying premium that you should not be paying.)
  2. Global brokers face global pressures—from within their own organizations and from the insurers. Inside their own firms, they are pressed to produce more placement activities for their foreign colleagues. For this reason, we are beginning to see large companies choosing to have their broker handle all of the foreign property insurance placement activities, instead of paying a modest “fronting fee” to a global insurance company to be responsible for getting all of the foreign policies issued and documented in an integrated global master control program, which they are well staffed around the world to do. In our experience, when the broker rather than the global carrier performs this administrative function, it in all cases results in much larger costs associated with the foreign policies. And it also may—and often does—result in the broker securing policies from other insurance companies, causing inevitable non-concurrency in terms and creating the possibility that the principal domestic insurer will not be responsible for a primary layer of property insurance purchased abroad from a different company that chooses to reject a claim.

The Solution

We find that companies that take the time to put a careful eye to the structure, content and costs of their global property insurance programs nearly always find important areas for improvement in terms and lower all-in costs. For companies with global premiums exceeding $3 million, these savings can approach 7 figures on an all-in basis (premiums, fronting fees, engineering fees, inspection fees, broker fees and commissions). An independent fresh set of eyes in this exercise can be a big help too, and is likely available to you for a very small percentage of your customary brokerage fee. Your internal risk or legal group, fortified by an independent consultant, can likely deliver immediate impact to the company’s bottom line by substantially lowering global insurance premiums and associated costs and fees.

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