Insurance is bigger than the small print
First published in the Financial Times on 7th January 2014.
Chief executives should learn the core aspects of how the market functions
There is nothing like a personal calamity to remind one of the importance of the right insurance. Just before Christmas one of our restaurants burnt to the ground. Luckily no one was hurt but the cost of reconstructing the building will be huge. The machinery of an insurance claim clanked into action after a few hours, with adjusters and forensic experts crawling all over the smouldering ruins, examining our policy compliance and assessing the damage.
Insurance is a product we all buy but hope never to use. It is a vast, highly regulated, long-term undertaking that relies above all on mutual trust, overlaid with complicated legal structures and systems. A mark of an advanced society is one that has a highly developed insurance industry. More than three-quarters of global premiums are paid by just 15 per cent of the world’s population – which is why MunichRe reckons annual international uninsured losses are four times insured losses.
I think there are only two types of insurance worth buying: cover that by law you are obliged to purchase; and catastrophe insurance – meaning cover for large losses that would be devastating if they occurred. Some years ago I learnt the value of decent safeguards, when our Covent Garden branch of Belgo – a 500-seat restaurant – was virtually ruined and temporarily closed down owing to water and fire damage. Thankfully the insurer met our claim. Had it not, we might have gone broke.
Like property or finance, every entrepreneur needs business insurance of various kinds. It might be for buildings, public liability, motor, directors and officers’ liability, business interruption – there are dozens of possible categories. Ambitious chief executives should learn the core aspects of how the market functions, just as they should become familiar with the basics of property and accounting.
The seven overriding principles of insurance – utmost good faith, insurable interest, indemnity, contribution, subrogation, mitigation and proximate cause – have been cornerstones for hundreds of years, and provide a legal framework for almost all insurance policies. It is worth discovering what they mean in practice. I was involved with a business called My Kinda Town where we had a dispute over insurance coverage related to the death of the founder. Luckily the company’s claim succeeded.
A competent finance director possesses a thorough knowledge of their company’s coverage and policies. They know the premiums, excesses, exclusions and limitations of the various contracts in place. Never rely entirely on brokers, although many do a solid job. Directors should take care: fine print can void a policy and lead to bankruptcy. Mactavish, an insurance research boutique, suggests that a majority of companies do not even check their own policies or submissions to insurers. I met a gentleman last year whose property caught fire: his insurers refused to pay out because disclosures about his past were incomplete; and so his company almost failed. Inevitably he is litigating, but that is always a painful process, and fraught with uncertainties.
After all, insurers have enormous legal departments, and play the long game. They do care about their reputations, and pay legitimate claims. But insurance fraud has become a multibillion-dollar activity worldwide, ranging from arson to induced vehicle accidents to bogus disability claims. Consequently, insurers are tougher in repudiating suspicious claims, using onerous clauses when they can.
The underwriting sector is dominated by huge institutions that are conservatively run. They are not renowned for innovative strategic thinking. Technology – from data analysis to online distribution – has transformed the industry, but profitability and productivity have not increased markedly.
Insurance can appear a dry subject. It is anything but. Not all policies and insurers are the same – products should never be selected on price alone. Entrepreneurs who are unfamiliar with the insurance world’s rules and mechanisms might one day regret their lack of awareness – especially if they suffer a loss and find they are underinsured, or their policy is void. Like signing a lease or loan agreement, it pays to pay attention when taking out insurance.