Mark Elliott of Axiom says we need tighter financial controls and increased claims vigilance.
When the chancellor announces that Britain is facing arguably the worst economic downturn in 60 years, a slump that will be more profound and long-lasting than people had expected, you know some in the industry are going to have a rough ride.
It may be hard to see the silver lining, but a recession will rapidly reveal those insurance businesses with efficient accounting systems, effective cashflow management, robust claims procedures and disciplined coverholder audit and inspection. Companies without those qualities need to tighten procedures now, or they will find the operational flaws that were just an irritation in good times could become a drag on performance or even a threat to business survival.
A good starting point is to understand the impact of recession on the industry, as this can help insurers prepare for changed market conditions and risks.
One of the earliest signs will be a reduction of premium income and brokerage across the board. Falling asset values will inevitably be reflected in reduced premiums, so a realistic reassessment of estimated premium income will prevent a shortfall arriving as a shock. Bear in mind that the impact of recession will be on all businesses and markets so premium income anticipated from binders and other delegated underwriting authorities may not be written as expected – or payments may be delayed.
A downturn also brings an increased risk of intermediary failures, so audit and inspection become even more important. In particular, insurers need to consider the credit and operational risk associated with intermediaries with great care.
Robust credit control and cashflow management will be vital as income falls. Across the industry there are far too many instances of cash from premium collections, reinsurance collections and claims payments remaining unmatched in insurers’ and brokers’ books for months or even years.
“There are far too many instances of cash from premium collections, reinsurance collections and claims payments remaining unmatched in insurer and broker books for months or even years.
The cause is often a simple failure to ensure payments are consistently referenced between underwriter and broker. Tighter procedures will enable insurers and brokers to quickly identify where monies are late or missing, and will also prevent them from incurring the wrath of the FSA for failing to allocate monies to an insurance broker account promptly.
The overall cost of claims is likely to increase – there are plenty of horror stories about cash-strapped businesses experiencing convenient fires during a recession. But planning for recession is about far more than increased vigilance against fraudulent claims. Falling sales at insured companies will mean their inventory levels are likely to be far higher. We’ve all seen fields full of unsold cars and warehouses may also be housing higher than usual stock levels. Any loss is likely to be greater than it would be when sales were booming and stock levels were low. A glance at the newspaper headlines on problems in the banking and financial sector suggests that professional indemnity underwriters (and those in similar lines of business) in particular may experience additional claims as financial institutions suffer.
There is also a risk that staff reductions or cost-cutting at insured companies will mean maintenance and repairs are less well undertaken, leading to more breakdowns and increased claims. Insured companies may even fail to undertake regular plant inspections, such as sprinkler systems, that are required by warranties.
Brokers and insurers will need to work together to ensure there is a proper understanding of how the impact of recession may change the underlying risk – and adjust premiums or implement additional checks or warranties to compensate.
Tighter credit control, audit and inspection and claims management will help brokers and insurers to ride out the recession unscathed. But for the unprepared, a downturn could prove to be a very difficult time.
Mark Elliott is managing director of the Lloyd’s division at Axiom.