Companies looking to make savings in the current tougher economic market by cutting back on insurance cover, could end up paying more in the long run.
Rising fuel prices, a slowdown in the property market and a lack of available credit has meant many companies are looking to rein in any unncessary spending and consolidate their financial positions. However, looking to make a saving by lessening insurance cover can be a false economy.
When buying insurance companies must consider the balance between the likelihood of a specific event or accident occuring; the potential scale of that event and the financial impact that their business could reasonably afford to sustain. Only then can potential premium savings be safely considered.
Companies may often look at liability insurances, such as Public and Products Liability or Professional Indemnity, and reduce the limit. Cutting the limit from say £5million to £2million may not produce large premium savings and can instead leave a company over exposed as well as risking a breach of their own supply contracts. Customers, such as local authorities, will often insist on a certain minimum levels of cover and not having it could jeopardise your abililty to retain or win futher business.”
Employers’ Liability and Motor Third Party Liability are legal requirements and as such they cannot be cut out. However, in terms of Employers’ Liability, some companies may instead choose to save costs on health and safety management. This can prove to be more costly than expected. While Employers’ Liability insurance may pay for a claimant’s damages it does not cover the Health & Safety Executive awarding punitive fines or putting restraints of trade on a company, potentially more crippling that the claimant’s claim itself.
Property insurance is another area where businesses may look to make a saving by cutting back on cover. Deleting certain perils and claim causes, such as choosing not to insure against flooding, is another area that companies, particularly smaller ones, may look to save. Premium savings are often limited because insurers weight their premiums towards the higher risk perils. If they think that flood is incredibly unlikely then they are unlikely to give much premium back for deleting the cover.
On the flip side, if you delete a peril and insurers do give a large reduction, it often means they see it as a high risk peril for your business and you may want to think twice before deleting it. Firms may also delete cover for specific property, because it is seen to be unlikely to suffer a claim or is not business critical. But beware of underinsurance. Somebody that has £1m of assets but chooses to insure just £800,000 of them needs to be clear with insurers as to what is not insured. If not, then insurers will apply ’average’ in the event of a claim. This means that they will proportionately reduce the claim payment by the percentage of underinsurance. In this example, when the factory suffers a small £50,000 fire, insurers won’t have paid £50,000, they will have paid 8/10ths - just £40,000. So when choosing not to insure, be up front about it.”
Transit of goods, travel, employee benefits and business interruption are all areas where companies can fall foul if they cut back or under insure. Business Interruption is already an area that companies often misjudge - under estimating the time it can take to recover a business after a major incident.
David Armstrong, Associate Director at Belmont, says: “At present it is still a buyer’s market. Premiums continue to fall for those that investigate and negotiate with insurers, but insurers provide better deals when they have a good understanding of an insured’s business.
“This won’t last forever though. Insurance rates have been falling for some time now and the bottom of the cycle is upon us. It is widely accepted that insurance rates will start to rise, possibly in 2009, and as such getting the best possible deal now will be key to helping companies to fend of the threat of rising rates in years to come. Many insurers are still offering two and three year fixed rate deals which, if taken now, could save businesses money in the short and long term.”