Avoiding a false economy in tough financial times

As economic uncertainty continues, Mark Armstrong, managing director of corporate insurance broker Todd & Cue, looks at why reducing insurance coverage can prove to be a false economy.

 

While the economy has officially avoided recession, the pain of inflation has proven to be more stubborn than perhaps anticipated.

Inflationary costs impact all areas of business, and this can create a conundrum specifically within the insurance sector.

Understandably, we all remain mindful of cost, exploring every opportunity to minimise the cost of purchase wherever possible.

It is a time when many businesses might start to look at where savings can be made on the cost base.

Some may be considering scaling back on insurance coverage, perhaps viewing some aspects of their programme as an unnecessary outgoing in the face of other pressures, or simply reducing cover across the board.

But, argues Mark Armstrong, managing director of Team Valley–based Chartered independent insurance broker Todd & Cue, it is in times of such uncertainty that businesses need to make sure their coverage is at its strongest, to avoid the risk of being under-insured and ultimately being penalised in the event of a claim.

And the firm is on hand to work closely with clients, to fully understand their business, the risks they face and how Todd & Cue can best work with them to mitigate risks.

Mark says: “Inflation has proven more stubborn than we’d all hoped, and this in turn impacts the levels of insurance cover businesses might have.

“Many businesses will benefit from index-linked policies, meaning their respective sums insured will be increased in line with inflation.

“Indexation as applied by insurers has been running at between ten per cent and 15 per cent.

“This automatic increase of sum insured is beneficial to the business but, of course, also immediately impacts the costs of the insurance programme.

“Additionally, not all policies will be index-linked and, if businesses do not review and amend their sums insured where appropriate, they may find existing levels are inadequate.

“The cost of machinery, plant and materials continues to rise, and this needs to be reflected in the values being insured by the business.

“Our constant aim at Todd & Cue is to ensure the coverage is continually reviewed and amended accordingly, so clients are not potentially putting themselves at risk of under-insurance and being penalised in the event of a claim.

“It is up to us as their risk advisors to make sure they are buying the products that are necessary, that we can explain why they are necessary and then source these products at competitive terms.”

An ever present challenge faced by the sector centres around providing cover and aligning it with the cost expectations of the client.

 

• Mark Armstrong, Todd & Cue managing director

 

Mark says: “We recognise the need for clients to manage costs during economic uncertainty.

“Fundamentally, our role is to make sure that, in the event of a loss, any claims are paid as expected, which allows them to return to daily activity in the same position as they were pre-loss.

“And we feel we are well placed to have those discussions, thanks to the industry knowledge we have across our team and the insurer relationships we have within the marketplace.

“Every client has bespoke requirements and we work to understand these and help them navigate the challenges ahead, mitigating the risks along the way.”

Another area where organisations need to be aware of the risks of under-insurance, says Mark, is business interruption cover.

Business interruption insurance generally comes with an indemnity period of anywhere between 12 and 60 months.

A client’s loss of revenue or profit will be protected for the duration of the indemnity period.

The risk, though, says Mark, is that as global supply chains are stretched and lead times for plant and machinery, in particular, get longer, firms can potentially leave themselves without a long enough indemnity period to cover replacement times.

He adds: “We will discuss indemnity periods on business interruption with all clients ensuring they fully understand the impact of underestimating lead times and recovery times.

“If a manufacturing firm loses use of a key piece of machinery, it needs to order a replacement.

“And something they previously might have been able to source within six months, might now be as much as 18 months.

“In such a landscape, are they adequately protected to make sure their policy will protect them over that duration?

“If they can’t replace the kit in the policy window they have available to them, then there is the potential for significant financial impact on the business.

Mark adds: “Despite the uncertainty, the business community continues to demonstrate a resolute approach to moving forward and we are keen to work with clients – existing and prospective – to address challenges and find solutions.

“They expect us to source a product set that’s fit for purpose at a reasonable cost.

“In maintaining continual and detailed discussions, we are intent on avoiding the nasty surprise during our pricing reviews.”