Multinational insurers face premium exodus as customers grapple with budgets

Julia Graham, Airmic deputy CEO and technical director

Insurers and brokers must understand that risk managers do not have bottomless budgetary pits as they continue to warn corporate customers that the market will harden for some time yet.

Julia Graham, deputy CEO and technical director of Airmic, was a participant in the final panel discussion during Commercial Risk’s Global Programmes Asia 2020 virtual conference.

Ms Graham and fellow panellists Franck Baron, chairman of Parima, and Peter den Dekker, head of insurance and risk management at Dutch multinational Philips, pointed out to insurers and brokers that, while they appreciate carriers need to make a profit, their strategy of undercharging for cover for years and then suddenly ratcheting up the price is not good enough.

The risk managers also said insurers and brokers that want to continue to play in the high-value global programme market need to seriously improve the quality of service on offer. They need to focus on getting the basics right and deliver true contract certainty as they also invest in new technology, agreed the risk managers.

Former Ferma president Ms Graham said insurers seem to think that their customers will just meekly accept the spiralling insurance costs and pay up. But, as she pointed out, it is very difficult for risk managers to explain to their finance directors why the cost of cover has suddenly spiked at a time when they themselves are under intense cost constraints.

Risk managers are clearly looking at their options as they seek to meet their own budget targets. This is inevitably leading to high interest in captives and greater self-retention. The longer-term danger for insurers is that this premium will not return when conditions improve and the insurability gap widens further.

“I get disappointed when we talk about expensive and cheap cover. I think the answer is the right advice for the right price, which is not the same as cheap. There is a bit of a frustration going on with risk managers who are insurance buyers at the moment, where there’s an assumption in the market that they have bottomless budgets and are being advised to go back to their company for an extra 25% for next year for their insurance programme,” said Ms Graham.

“I don’t think the market has got the message yet that sometimes there isn’t a bottomless pit. If you’re working for a treasurer or financial officer who says that your budget for insurance for this organisation is X and make it work, you’ve got a number of things to do to make it work. There’s no magic wand. So, you either have to cut your cover or you have to cut your limits, or you have to do it yourself. There are more people turning to captives for more of their risks. They’re being driven to do that in some cases, not necessarily because it’s the right thing to do for the business, but because it’s the right thing to do for the budget constraints that they operate within,” continued Ms Graham.

“Clients have budgets, [the same] as insurers and brokers. They have bottom-line targets they have to achieve. So, it’s not a case of doing something for the lowest price, it’s doing something within the budget parameters that you’re given to play with and being able to manage those,” she added.

But she stressed that despite challenges in the commercial and corporate insurance market currently, global programmes remain a powerful tool to help risk managers manage their risks.

“I never had a problem when I was practising in placing a global programme, I did it for many years and did it very effectively. But I had to kiss a lot of frogs before I found the right people to place it with and I did that through knowledge and experience of the market and where to go. It was always a great opportunity for me to sell a global programme to my local businesses as we could demonstrate to them the fair allocation of premium, not just the correct allocation of tax. So it was a true risk-based allocation,” she said at the event supported by Parima and sponsored by AIG, AXA XL, AXA Climate, AXCO and TMF Group.

“It is very different to when a local business wants to do its own thing and place the cover with its favourite local broker. It [the global programme] served many purposes, not just one of tax efficacy. It was a really great marketing tool and I still think it is today. But insurance industry beware. I do think there’s a bit of a running away from risk… and the way [risk managers] run is to do their own thing if they can and I do see more evidence of risk professionals doing that. The growth in captives is evident. I want to see a lively and vibrant insurance market. It’s an incredibly important vehicle. But I think it has lost its way a bit and it is driving people to do certain things. Bottomless pits for budgets do not exist. I’m not sure that is always understood,” added Ms Graham.

Mr Baron, who is group deputy director of risk management and insurance at International SOS, agreed that global programmes remain an essential tool for many risk managers.

He pointed out that with the addition of new risks such as employee benefits, and continued globalisation, multinational programmes will inevitably continue to grow. But the Parima chairman said current insurance sector behaviour in the rapidly hardening market is damaging the core value of partnership, which is so important with such a complex tool. He also said insurers and brokers need to seriously focus on improving the quality of service offered and very basic elements such as invoicing and settlement of claims.

“The hardening market we have been in for the last 12 months and the behaviour we have witnessed [from the insurers] are not helping the partnership. Obviously, I’m not disregarding the responsibility of insurance buyers and risk managers but, let’s face it, you cannot base the global programme on long-term partnership… when the appetite and pricing of your partner is completely changing. That’s a key aspect of it. That’s a threat to global insurance programmes. You cannot have a programme that is very resource-demanding without having a true long-term partner,” said Mr Baron.

“The appetite for global insurance programmes [among insurers] is still there because with globalisation this market will continue to grow, but it’s a bit challenged with the pandemic. There is still a future for this solution but I do question the delivery of it and the long-term partnership that’s supposed to be a foundation of it,” he added.

Mr Den Dekker, himself also a former Ferma president, agreed with Mr Baron that quality of service needs to be seriously improved. Insurers need to once again question why they have such differing and often conflicting approaches to the construction of global programmes and compliance in particular, as well their often “irresponsible” pricing strategies, he said.

“Ten years ago, when president of Ferma, I raised these issues about global programmes at a Commercial Risk conference – and there’s still no consistency in the way that insurers manage their programmes. We ask: ‘Can you confirm the status of actual payments received?’ It’s amazing that the majority of our global insurers cannot answer immediately with one push of a button,” he added.

Mr Den Dekker said that a lot of confusion and inefficiency in the market is caused by the fact leading insurers and brokers have spent a lot of time and effort developing their own individual systems, and yet still the customer has to build their own and rely on their own data.

“I would say let’s stop reinventing the wheel. Insurers all trying to issue their own systems, brokers the same. We need to be in charge of our own data. If we, at Philips, were to increase our prices by 25% overnight, it would not be possible. This is irresponsible behaviour,” he said.