Uncategorized

As a commercial property owner (or, as is more commonly described, a [Commercial] Landlord, you’re acutely aware of how important risk mitigation is to your bottom line, to protect your income-generating assets. There is a number of potentially crippling risks associated with renting out a commercial property that you’re likely not eager to shoulder.

That’s why most landlords turn to insurance—and there is a specific insurance product designed to cover those losses.

Commercial property insurance, also known as commercial landlord insurance (CLI), or just Landlord cover, is a type of insurance that covers rental property aimed at commercial uses. It’s different in a few key ways from residential property insurance.

In this article, you’ll learn all about Landlord insurance and why you might need to consider it.

What Does Commercial Property Insurance Cover?

Three areas of coverage are typically included in a Landlord policy.

1. Loss of Rent

Any rental property is susceptible to catastrophic damage that renders it unsafe for use. The building may remain unusable for several months or even years, thereby leaving you unable to generate income. Landlord insurance typically includes loss of rent coverage that makes up for the rent you weren’t able to collect during the “indemnity period”, that is, how much lost rent you are covered for; typical indemnity periods are 12, 24, and 36 months.

If your loss of rent continues beyond this period, the insurer won’t be liable for it. Loss of rent insurance is an instrumental part of a Landlord policy and you should carefully consider the length of your indemnity period. Of course the longer indemnity period you want, the higher the premium.

2. Property Owners’ Liability

To understand property owners’ liability, it’s necessary to first be clear about what you (the property owner) are liable for. As a landlord, you’re responsible for the safety of third-party users of the building, even if these users are present in the course of business with your tenants. If the third-party user sustains injuries or losses as a result of your failure to provide safe conditions, you may be liable for those injuries.

In other words, if (say) a delivery person were to sustain injuries from slipping and knocking his or her head, you might be held liable in a compensation case.

Cover limits for this type of liability typically fall into the £1 million to £10 million range. You may need to craft a specific level of insurance based on your specific situation. For example, if your building houses students, individual claims can reach c£20m (loss of future earnings for the brightest students, if catastrophically injured on your premises)

3. Buildings Cover

To many landlords, Buildings cover is the keystone of Landlord cover. It’s the part of the policy that covers the cost of rebuilding some or all of a commercial property or repairing damage to it.

The worst-case scenario for some landlords may be a complete rebuild as a result of a catastrophic event. However, this may not be a level of coverage you need, and negotiating over the exact terms of your building insurance is an important way to arrive at a more favourable premium. Commercial building insurance cost is directly tied to the cost of re-building, not the market value of the property.

Some insurers may include clauses in the building insurance to reduce your allowable claim if you’re underinsured, known as “average”. Others may pay your claim in full, but charge you an additional premium in the future. These and other such restrictions are worth going over with an insurance advisory service to understand why and how insurers work them into policies.

Other Coverage Options

In addition to loss of rent, owners’ liability and Buildings cover, other common coverage options include:

• Landlord’s contents – This encompasses the loss or destruction of the landlord’s property in the building. The loss can be a result of natural disasters, theft, or other causes, and will or will not be covered depending on the terms of the policy. However, normal wear and tear isn’t covered by this kind of insurance. For instance, the cost of replacing parts of a commercial kitchen as a result of regular use won’t be insured.
• Accidental damage – Some types of damage aren’t covered by standard policies, such as accidental damage to glass, mirrors etc. However, you may choose to make it part of your policy, albeit Accidental Damage cover comes at substantial additional cost.
• Malicious damage – Damage caused intentionally by your tenants can also be part of your policy. However, it needs to be expressly included in the wording.
• Legal expenses cover – Should tenants refuse to vacate your property, you may need to resort to a court ruling to force them out. Legal expenses cover is an option that will cover legal costs associated with tenant enforcement and removal.

Things to Consider Before Purchasing Landlord Insurance

When you’re choosing your level of coverage and optional add-ons, consider the following factors.

Who pays for accidental damage to rental property is directly tied to the wording of the policy, as explained above. Moreover, insurers protect themselves with exclusions to the types of damage the policy covers. Make sure you understand exactly the level of coverage you’re receiving.

Unoccupied commercial property insurance is not the same as standard Landlord insurance because unoccupied properties are generally more susceptible to losses and damages. If your property remains unoccupied for an extended period, consider converting your policy to unoccupied commercial property insurance, since cover may be excluded from your original policy whilst it’s without a tenant.

Further, failing to live up to your commercial landlord responsibilities (such as statutory Health & Safety requirements) might invalidate parts of your policy. Understanding the risks associated with your specific property and insuring it accordingly is necessary in most cases.

Lastly, you shouldn’t be too eager to save on the commercial building insurance cost by under-insuring, since failing to provide adequate coverage could trigger a “condition of average” clause. These clauses can reduce the amount you’re allowed to claim (to amounts below what your policy states) if you’re insured for significantly less than the realistic cost of a rebuild.

Landlord Insurance and Your Bottom Line

Commercial property insurance is a pivotal part of renting commercial property. As a landlord, it’s your responsibility to know the types and levels of insurance you might need for each part of your property.

However, you’re also responsible for keeping an eye on the profitable operation of the property. Balancing these two can be challenging, and engaging a professional insurance advisory service is an excellent way to achieve it.

At InsuranceInspect Services, we help you tailor your insurance policy to your exact needs, reducing your insurance premiums Substantially, Safely, and Strategically.

If you’re a construction contractor, you’re all too familiar with the inherent dangers of the work you do. That danger can translate into massive losses in the form of claims from your clients (or other affected third parties) for property damage and other compensation claims.

However, it’s difficult to protect against every eventuality on a construction site—there are so many things that can go wrong.

As a result, insurers offer contractors’ all-risks insurance (CAR) to avoid going you through the excruciating process of analyzing every risk individually. In this article, we’ll give you an overview of CAR cover (not to be confused with car insurance, which insurers actually call Motor Insurance!) and how it plays into your position as a contractor.

Understanding Contractors’ All-Risks Insurance

All-risks insurance policies are a non-standard type of insurance product designed especially for contractors. They provide coverage for property damage claims and third-party (injury and damage) claims.

These two types of claims are the most common claims associated with construction projects, and consequently the main sources of damage payouts for contractors.

Unlike some other kinds of insurance, CAR insurance policies are usually jointly requested by employers and contractors. Other parties, such as organisations financing the construction, also have the option of being named on the policy. Alternatives to CAR cover can be setting up funded escrow accounts jointly controlled by the lawyers to all of the parties.

Since several parties are involved in most construction projects, and since they may all stand to suffer losses in case of a claim, they all retain the right to file a claim against the insurer. CAR insurance is meant to protect everyone associated with the construction project, not just contractors.

CAR cover may even be extended to protect the interests of suppliers and manufacturers tied to a project. Even business losses as a result of a delay in opening a property can be included in the CAR policy, at an additional premium cost, of course.

What Does Contractors’ All-Risks Insurance Cover?

Since the parties protected by the coverage are so diverse, all-risks insurance cover may include a broad range of claims. Flood, fire, and weather damage to the construction site are some of the most common types of claims covered.

If there are any unforeseen events that result in work on the construction falling behind or needing to be redone, CAR policies may encompass that as well. Damage to the surrounding area and loss of business claims by adjacent businesses can also be a part of the extensions of CAR coverage.

As the name implies, all-risks insurance can be as broad-reaching as necessary to ensure that virtually all risks associated with a construction project are adequately covered.

What Doesn’t It Cover?

As broad as it is, CAR insurance can’t cover absolutely every event. In general, things that are typically covered by other types of insurance, such as employee liability insurance, aren’t a part of CAR policies.

Any losses as a result of design flaws in the construction or poor planning are also typically not included in CAR policies.

CAR Cover – Frequently Asked Questions

Q: If I own a building that’s already insured, do I need to take out separate CAR insurance for renovations and upgrades?

A: Typically, standard Property insurance policies don’t cover claims resulting from construction. That includes refurbishing, rebuilding, and upgrading your property. You’ll need a separate, non-standard CAR policy to be protected from those losses.

Q: Will CAR insurance cover general liabilities, such as employee injuries?

A: No. The purpose of a CAR policy is (in theory) to cover liabilities that aren’t explicitly covered by your standard contractor’s insurance. Think of it as an added form of coverage to the insurance you already should have as a contractor.

Q: Does CAR insurance extend past the end date of the project?

A: In most cases, CAR policies have a specific term, and usually, end upon the completion of a project, when the owner of the building assumes occupancy, or when the property is sold.

Q: How do insurers determine the risk involved in a CAR policy, ie the premium I will be charged?

A: Like all insurance policies, CAR insurance involves complex actuarial modelling to place you into a category of risk. To reach an accurate estimation, the insurer’s actuaries and underwriters will consider the scope of the project, the exact terms of the policy, and the location of the work. Policies are typically rated by Turnover, including machinery costs (Plant – either Owned or Hired-In).  Typical high-risk factors include working at height, working with heat and working on groundworks/foundations.

CAR Policies—Completing the Insurance Needs of Contractors

A contractors’ all-risk policy is exactly what it sounds like—it mitigates all the risk that isn’t covered through other more standard policies. Depending on the project, the risks can be diverse and far-reaching, and a good CAR policy will attempt to cover any claims that would be catastrophic to the parties involved.

More so than some other types of insurance policies, CAR insurance policies require careful consideration of the potential risks and liabilities involved, to meet the needs of the various project stakeholders. Otherwise, they could lead to significant additional expenses that might jeopardize a project.

Working with InsuranceInspect Services, you can ensure you’re getting the coverage you need, not the coverage insurers want to sell you. We’ll help you reduce your insurance premiums Substantially, Safely, and Strategically.

As a new or even experienced business owner, insurance needs are often among your top priorities.

Many business owners see insurance as a safe form of risk transfer, with few downsides beyond the costs. However, that’s not necessarily the case. Insurers can and do fail and insurance premiums can be difficult to reduce without a good grasp of your business needs.

Before you ask “What insurance do I need for my business?” it’s worth the time to understand why you might need it in the first place, as well as what types you need by law and what types you don’t.

Below, you’ll find a useful guide to the most common types of business insurance, to help you in your business insurance buying journey.

Why Do I Need Business Insurance?

As a business owner or insurance buyer, sometimes it may not be clear why you need business insurance at all. After all, if you know you’re a good risk, and you have excellent risk management policies in place, why would you need outside insurance?

Do I Need Business Insurance?

In short, yes. Some policies are legally required and, unless you are exempted by statute, there’s no real way around them.

Additionally, sometimes it’s not a question of business insurance being required or not, but whether it’s obviously in your interest as a business owner. It would almost unwise to put your business at risk of ruinous claims, if there is insurance available – or if your clients, Regulators etc require insurance.

What Are the Different Types of Business Insurance?

Not every type of business insurance is meant to apply to every business. Your specific business needs will dictate the type and degree of coverage that you’ll need. Knowing the different types of business insurance and which types are best suited to your organisation will have a substantial impact on your insurance expenses.

Employers’ Liability Insurance (EL or ELI)

This is one of the (very few) types of business insurance usually required by law. If you employ any staff in your business, you’re probably required to have employers’ liability coverage. There are certain exemptions to this legal requirement; if an organization only employs close family members, is carrying out a statutory function or is a public body, it is exempt from the legal requirements.

In essence, EL insurance covers any claims resulting from injuries or diseases sustained by your employees in the course of their employment. Something as simple as an employee’s sprained ankle might fall under into this category, but EL insurance could also extend to cover costs and awards from employee lawsuits, for example class action claims from a group of injured employees.

It is often confused with Employment Practices Liability (EPL) insurance, which, in essence, covers any claims resulting from the (legality of) contracts you have with employees and whether those contracts meet statutory requirements eg equal pay, discrimination etc, rather than actual injuries or diseases whilst employed.

Public Liability Insurance (PL or PLI)

The other side of liability insurance is coverage that extends to members of the public (or other third parties) who have contact with your business. The losses associated with public compensation claims from clients, business partners, or other members of the public can be considerable.

For some types of businesses, such as shops and restaurants, this type of insurance may be a requirement of your licence to trade, and simply makes financial sense, since you are highly likely to deal with public liability claims, due to slips/trips etc. Additionally, some businesses require their clients or suppliers to have a certain level of PL coverage to even enter into a contract.

It is often confused with Public and Products Liability (PPL) insurance, which is PL insurance which also includes making good/repairing defects in any products you manufacture and any consequent losses that may cause (eg if you manufacture a defective pipe, which bursts causing flooding, then that is a loss caused by your Product, and would be covered by PPL insurance but not PL insurance).

Professional Indemnity Insurance (PI or PII)

Any business that offers professional services to individuals or other businesses should consider professional indemnity insurance; indeed some professions (such as solicitors) require minimum levels of cover. PI insurance covers any costs and compensation awards your business incurs as a result of providing inadequate services/advice to a client. This includes the legal costs associated with the defence of your business as well as any damages/remediation costs awarded to the injured party.

This can encompass a large variety of claims, from a simple error in a calculation (causing a small financial loss) to incorrect architectural advice (causing a building collapse).

Business Buildings and Contents Insurance (Property)

If your business operates out of a building, even if it’s a home office, Buildings insurance will cover damage to the structure of the property. It’s important to note, however, that as a renter you may not need Buildings insurance if your landlord already provides it – and many types of damage (eg accidental) come at a considerable extra cost.

Furthermore, you may choose to insure the Contents of your premises, as well as the Buildings (structure). Typically, Contents insurance covers the loss or destruction of equipment and tools from your office but does not extend to inventory or loss of revenue/business. The most valuable form of Contents cover (Personal Possessions) – covering your belongings away from the office eg whilst your are travelling – usually comes at a considerable extra cost.

Business Interruption Insurance (BI)

Whilst Building and Contents insurances can cover the losses of your property, they don’t cover the associated loss of business/revenue/profits. In some cases, the cost of business lost stemming from property damage could be significantly higher than the cost of repairing or replacing the property itself. That’s where BI insurance comes into play.

BI insurance covers income loss as a result of being unable to continue the normal course of business, due to a physical event (eg a break-in or water damage). Office space becoming unusable is just one example, but business interruption can encompass numerous causes and may depend on the exact nature of your activities. The most typical form of BI cover only covers interruptions to your business arising out of a related Buildings or Contents claim, ie physical damage to your building or its’ contents. BI cover for, say pandemic events, usually comes at a considerable extra cost.

Stock Insurance (Stocks/WIP)

To complement contents insurance (to replace/repair contents owed by you and not for sale), you may consider Stock insurance to cover the costs of replacing contents/stock owned by you but intended for sale in your business premises. For some businesses, the loss of some or all of their saleable inventory may amount to catastrophic losses.

However, if you manufacture goods for sale, only those items ready for sale are covered by Stock Insurance. If you want partially completed items (works in progress) included also, then you need to extend the policy to include Work in Progress (WIP) cover.

Business Legal Protection Insurance (LEX)

Just about any business is vulnerable to legal action – from disgruntled clients, suppliers, creditors and Regulators – which may incur considerable legal expenses (or LEX, for short). These legal proceedings can result in significant losses for your business and LEX cover is one of the types of business insurance you can use to cover those losses.

Great care needs to be taken to ensure that the cause of the claim is covered by the policy. For example, HMRC enquiries into your tax affairs are usually excluded, and require specialist “LEX-Tax Investigation” (or similar) cover.

Less Common Types of Business Insurance (E&O, D&O, PA, CAR, PSTL etc)

There is also a myriad of other, less common, types of business insurance you may come across for your specific situation, for example E&O (Errors & Omissions), D&O (Directors’ & Officers), PA (Personal Accident), CAR (Contractor’s All Risk), PSTL (Pension Scheme Trustee Liability) and so on. There is no “one size fits all approach” to these specialist covers; many business owners fall into the trap of thinking over-insuring is better than under-insuring, and end up paying more for insurance than they need to.

How to Choose the Right Business Insurance

The key thing to remember when buying insurance is that it’s not about the past. It’s a key factor insurance buyers often fail to consider.

It’s why many insurance buyers end up confused about their premiums. They insure far more than they need to and adopt the wrong position when configuring a policy (and negotiating the premiums), focusing on past claims experience, rather than potential future claims. Moreover, many businesses will find that their insurance claims are actually immaterial to their total operations, ie that they can safely operate with much less insurance – or even none at all, if they are exempt.

The coverage and type of insurance you need should be based on what you expect to happen in the future, and you should only insure the things that would lead to catastrophic failure. Insurance claims are more predictable than most business owners think, and with the help of an insurance advisory service, you may be able to significantly reduce your premiums.

A Holistic Approach

Above we have discussed the principal types of insurance available for businesses. There are many more, but that’s not to say you need to start insuring everything on your balance sheet. Nor do you have to remember all of the acronyms! We can help you with that.

We take a holistic approach to insurance that considers your real risk tolerance and quantifies risk in a way that’s easy to understand. At InsuranceInspect Services, we offer a consultancy product that looks at your balance sheet as a whole and helps you reduce premiums Substantially, Safely, and Strategically.

Buying personal insurance can be bliss. You have insurers fighting hand over fist to insure you, price comparison is a breeze, and you can get coverage with a simple internet search when you need it.

In contrast, buying insurance for large commercial risks can be a complete nightmare.

You have to fill out specialised forms; there’s no straightforward way to compare prices; insurers insist on going through brokers; the list goes on.

And you have to do it every year!

But there’s a way to make the process much easier. Keep reading to find out how.

Why Corporate Insurance Renewal Is Such a Pain

There are many reasons why organisational buyers find themselves at their wit’s end trying to keep up with insurance needs.

1. Data Collection Is Endless

The data collection process to present your organisation in a good light is monumental. Some large organisations with a multinational presence can take many months to collate all their data and translate it all into usable information for the insurance company.

To add insult to injury, there’s no transparency as to what insurers even do with the information. What are they taking into account? What should you focus on more?

Sometimes this data collection and presentation process needs to start just a few months after your last renewal. Effectively, you’re locked into an endless cycle of collecting data and arranging it at the mercy of insurance companies.

2. Premium Calculations Are Hidden

Do you know where your premium came from? Chances are the insurance company provides little to no information about how they calculate premiums.

Even if your risks haven’t changed since your last renewal, you could find that your premiums grew. That can be extremely frustrating if you don’t know why or how it happens.

And, there’s often little or no time to challenge the premium anyway. It can almost feel like insurance companies are giving you no room for negotiation with a “take it or leave it” approach.

Getting reasons for premium increases that aren’t at all valid is even worse. Insurers might try to convince you that your loss ratio is high, or blame the market, or even say you have the largest claim in your industry.

None of those are valid reasons for premium increases.

3. It’s a Massive Cash Sink

Insurers often require you to pay in advance, requiring huge amounts of cash on hand. The cost to raise that capital for some organisations is simply astounding. It makes more financial sense to use the cash, bit by bit, to reduce claims in the first place rather than pay for them in advance in a lump sum.

These and other reasons can start to make it seem like insurance is often just a mandatory cost that doesn’t make much financial sense, especially if you’ve had few claims in the past.

To get ahead of the game, you have to put yourself in the insurer’s shoes. If you think like an insurer, you’ll have a much easier time navigating all these obstacles.

What InsuranceInspect Services Can Do for You

For starters, you can get much better premiums and save money by focusing on what insurers want to know and dropping the rest. Contrary to many opinions, insurers don’t care about your past nearly as much as you might think. Past claims have already been paid for out of past premiums.

You also need to understand the real reasons for your premiums going up. That’s the only way to challenge a premium that’s offered to you with any real authority. If you have the actuarial facts that matter to hand, you’re much better prepared to negotiate.

To get better premiums and to make your renewal process more manageable, you’ll have to focus on many things, such as:

• When you present your renewal information makes as much of a difference as how you do it.
• Presenting expected maximum loss data (potential future claim scenarios) is imperative.
• How much you spend to present your renewal is a factor.
• Market losses that don’t affect your business do affect your premiums.

Flying Blind Will Get You Nowhere

The truth is that the insurance renewal process is only as bad as you want to make it. You’re probably trying to prove the wrong things to an unreceptive audience (insurers).

Instead, let InsuranceInspect Services help you take charge of your renewals. We’ll show you everything you need to know to think like an insurer, including where your premiums come from.. And, we’ll help you shorten and simplify your data collection process by getting rid of inessential tasks which add little value to your insurance submissions.

It just doesn’t make sense.

You’ve done everything you need to do. Your risk management is top-notch; you know what coverage you need and under what terms. You know you’re a good risk.

So, why is it so difficult to find an insurer that can provide the coverage you need at a premium you can work with?

Where are all the commercial insurers?

That question is a little trickier to answer than it may seem. However, this article will attempt to do just that. Read on to find out how many commercial insurers there are and why you might be having trouble finding one.

What Is a Commercial Insurer?

Before you can even start tallying the number of potential commercial insurers available, you need to know what a commercial insurer is. More importantly, you’ll need to know how a commercial insurer differs from other insurers.

An insurer, in the general sense, is a type of regulated legal entity. It’s authorised now or has been before to write insurance contracts. If an insurer is no longer authorised to or not selling new policies, it’s said to be in “run-off”.

Reinsurers are a different type of entity. Reinsurers only offer financial protection to other insurance companies. When an insurance company takes on risk that is too large to manage single-handedly, they enlist the help of a reinsurer.

Essentially, this allows insurers to write policies even if they don’t have the cash/capital on hand to cover potentially catastrophic losses.

Another classification is the captive insurer. When a non-insurance business owns an insurer that exclusively accepts the risks of its parent company, that’s a captive insurer. Captive insurers are also excluded from the standard definition of commercial insurers.

Finally, you have commercial insurers. They behave much like ‘high-street’ insurers except for only selling policies to businesses, never individuals.

What About Lloyd’s of London?

Lloyd’s is a special case. Technically falling under none of the categories listed above, Lloyd’s is an insurance and reinsurance market, not an insurer itself.

It’s made up of syndicates, which are small groups of members that specialise in a specific type of insurance. There are over 100 syndicates, and the members (investors) are either individuals or corporations.

These syndicates work through brokers to sell insurance policies. When you go to a broker to buy insurance, that broker takes your insurance to Lloyd’s. Then, the syndicates decide how to split your risk.

Each syndicate takes on a small part of risks that they specialise in. That allows insurers to spread risk much more effectively and safely.

For Solvency purposes, Lloyd’s is traditionally counted as a single insurer even though it’s technically the individual investors in the syndicates who take on the risk.

Some insurers use Lloyd’s syndicates in parallel, running alongside their ‘normal’ insurance operations. That is to say, if you buy an insurance policy from them, you may technically be insured by two insurers at the same time (each one taking a different % of the risk, adding up to 100%).

How Does Brexit Change the Maths?

Before Brexit, EU-based insurers could sell UK policies and vice versa. Therefore, you might have had access to an insurance policy from an insurer from the EU. That’s no longer the case.

So, what does that do for businesses that have risks in the EU and in the UK? Well, your risks in the UK will be insured by a UK insurer and those in the EU by an EU insurer. So, some insurers in the UK, but not all, have now set up EU subsidiaries (and vice versa), to enable them to keep insuring UK risks.

But not all insurers have gone through this expensive legal process; that somewhat limits the number of insurers you have access to compared to the past.

There are at least 100 active insurers selling commercial employers’ liability (EL) and public liability (PL) policies in the UK. These are the two most requested types of commercial insurance.

That leaves the question of why you’re getting so few insurers quoting for your risk. There could be several reasons.

Your Excess Is Too Low and Your Cover Limits Too High

The lower your excess, the less risk you’re retaining. If you claim to be a good risk but don’t want to retain much of your own risk, you can see how that raises a red flag.

Your excess is the first thing you want to look at. By increasing your excess, you’re likely to receive the attention of far more insurers. Increasing your excess will not necessarily translate into a large premium reduction; if you have very high cover limits (per claim), premium reductions can be minimal, which puts many policyholders off. In this case, it is the high cover limits (per claim) which are the problem, as well as the low excess!

Your Insurance Renewal Submission Is Not Solvency II-friendly

Solvency II changed a number of things about what insurers like to see in your renewal submission.

Past claims add very little value, and basing your risk on them is the wrong way to go. If you undergo a risk assessment from the standpoint of the insurer, you could find that you’re not as good of a risk as you think.

Also, if you’re adding policy wording that doesn’t align with your insistence that “you are a good risk”, it sends a bad message to insurers. Long-term agreements and profit shares, for instance, are off-putting to insurers.

You’re Buying Insurance While Exempt

Essentially this boils down to a simple question:

Why are you buying insurance if you don’t have to?

From an insurer’s standpoint, it makes more sense to self-insure if you’re a good risk. You’ll need to work harder to convince them that you’re actually a good risk, if you are not willing to keep the risk for yourself.

How We Can Help

As you can see, the problem isn’t that there aren’t enough insurers. The problem is likely that you’re probably not thinking like one.

If you want to change insurers’ perceptions of your risk, you’ll need to speak in terms they understand. InsuranceInspect Services can help you do that.

We can show you how to evaluate your risk effectively and prove to insurers that you’re actually as good of a risk as you say you are.

Under Solvency II, insurers must publish their Solvency & Financial Condition Reports. But do you know why this is important for you, as an Insurance Buyer?

As it turns out, there’s a veritable treasure trove of information for Insurance Buyers in that document, you just need to know how to use it.

What Is a Solvency and Financial Condition Report?

SFCRs are documents that make information about an insurance company available to its’ stakeholders, including You, as Insurance Buyers.

The SFCR’s goal is to make information accessible and understandable for the average policyholder without a background in financial analysis. To that end, SFCRs often include flow charts and other tools that help you grasp key points easily. While the information that must appear in an SFCR is pursuant to regulatory guidelines, there’s no established wording in which it must be presented. However, there are general directions that it be “understandable to policyholders and beneficiaries”.

Most insurers use a standard format that makes it easy to compare these documents, shown in the Appendix.

Key Advantages of the SFCR for Insurance Buyers

The primary benefit of the SFCR for Insurance Buyers is the simple fact that it’s a document plainly exposing how an insurer runs its business.

Without it, it would be much more difficult to accurately assess whether you should work with an insurer or not. Remember that insurance isn’t a risk-free form of risk transfer. Insurers can and do fail, so it makes little sense to insure with a company less stable than your own organisation, unless you are 100% protected by the FSCS (all public bodies, such as local authorities, are exempt from such protection).

The key takeaway from the SFCR is the Capital Coverage Ratio (CCR) of a company, more formally called the SCR (Solvency Coverage Ratio).

There are several types of coverage ratios. But, the SCR measures how well a company can meet its financial obligations, in its bespoke situation. It takes into account the company’s entire balance sheet so it’s an excellent heuristic for judging an insurer’s stability.

At a minimum, an insurer should have a SCR of 100%, with most aiming for 150% or more. However, if an SCR is too high, this can lead to increased premiums for reasons outside the scope of this article.

Accelerated Reporting

SFCRs are published within four months of an insurer’s year-end. Published accounts, while quite detailed, are required within nine months of year-end in the UK. That makes SFCRs much more relevant as a tool that’s readily available.

Besides providing current information about an insurer’s financial strength, SFCRs also provide:

Information about strategic moves the company is making. Information about decisions made at the operative levels is often present in the SFCR, as well as the justification for those decisions. Special considerations will also be addressed if they have a material impact on the strategy.

An insurer’s business performance will be in the SFCR as well, with underwriting results often separated into relevant categories. Net earned premiums and investment returns are also part of this section.

Perhaps most importantly, the company’s risk profile will be laid out in simple-to-understand terms. Market, credit, underwriting, expense, etc. risks are explained in the context of the insurer’s risk management system.

While companies are required to disclose information about their governance, there’s often little actionable information to be found in the Governance section. It’s usually presented on a matter-of-fact basis without much insight discussed. Canny buyers, however, will note some important points such as the location of outsourced providers that must be disclosed.

A Powerful Document

Even a cursory examination of an insurer’s SFCR can give you a lot of valuable information if you know what to look for.

If you only have time to look at one point of data, make that the Solvency Coverage Ratio (SCR). It’s the single most important metric that will help you judge an insurer’s financial strength and stability.

Of course, there’s a lot of context around it that must be taken into account but it’s an excellent starting point. If you’re trying to purchase insurance from a reliable insurer, let us help.

InsuranceInspect Services can provide all the published Solvency II information for the insurer and help you understand what it means in the context of your organisation.

Appendix: Typical SFCR Contents List

• Executive Summary
• Company Overview
• Summary of material changes during the reporting period

• A. Business and performance
  • Nature of The Business / Underwriting performance / Investment performance
  • Performance of other activities / Any Other information
• B. System of Governance
  • Fit and proper requirements / Risk management including Own Risk & Solvency Assessment (ORSA)
  • Internal Control System / Internal audit function / Actuarial function / Outsourcing
  • Adequacy of the governance structure / Any other information
• C. Risk Profile
  • Underwriting risk / Market risk / Credit risk / Liquidity risk / Operational risk
  • Other material risks / Any other information
• D. Valuation (of Assets and Liabilities) for solvency purposes
  • Balance sheet / Assets / Technical provisions / Other liabilities
  • Any alternative methods used for valuation / Any other information
• E. Capital management
  • Own funds
  • Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR)
  • Differences between the Standard Formula and any Internal Model used
  • Any Non-compliance with the MCR and SCR / Any other information

• Independent auditors’ opinion
• Post balance sheet events
• Quantitative Reporting Templates (QRTs)

The key Solvency Coverage Ratio (SCR) can be found in Section E: Capital Management

Full SFCRs are available to our clients, free of charge.

Imprudent insurance practices, unchecked, could cause a catastrophic collapse of insurers in the UK.

In part, that’s why the UK signed up to the Solvency II directive in 2016, along with other members of the European Union.

The Solvency II directive now governs many aspects of insurance buying. It’s in your interest, therefore, to know how it can be used to help you. In this article, you’ll learn what Solvency II is, and details of the many advantages that it provides to Insurance Buyers.

Solvency II Explained

In short, Solvency II prescribes regulatory requirements for insurance and reinsurance companies in the EU. It applies to all but the smallest insurers in the UK.

It came into force in the UK in January of 2016. Post Brexit, the rules still apply and are likely to remain, to ensure comparability and competitiveness with EU insurers.

The key takeaway is that Solvency II is a risk-based system. That means it focuses on exposing the risks that the insurance company faces and attempts to allocate capital accurately (and charge premium) in accordance with those risks.

The Three Pillars of Solvency II

With such a functional definition, we can’t move into what Solvency II can do for you. To do that, it’s best to start by describing the three foundational pillars of the system.

• Pillar I: Valuation of liabilities, assets and capital requirements: how an insurer is required to demonstrate that it can meet its liabilities. Put simply, it makes sure insurers have enough money to pay claims as they arise, in all but the most extreme circumstances.
• Pillar II: Rules of governance and risk management for insurers: how insurers should monitor and manage the risks they’re exposed to. Because insurance is ultimately about risk transfer, insurers need to maintain a high standard of risk mitigation.
• Pillar III: Transparency and disclosure requirements for insurers. It establishes all the information insurers are required to disclose publicly.

What Does Solvency II Do for You?

If you examine Solvency II, you’ll come to a vitally important piece of information: insurance premiums are set by looking at future events, not past ones.

Why is this important for you? It gives you a roadmap for presenting your risks in the most favourable way to reduce premiums. Understanding risk in this way allows you to better negotiate your insurance.

When negotiating, here are the factors you should focus on:

Cover Limits, or How Much Cover You’re Buying

The more coverage you purchase, the bigger your premium will be. Therefore, you must understand precisely what you’re paying for.

Say, like some Local Authorities these days, you purchase EL coverage with £100m of coverage per occurrence. In effect, you’re paying for £100m worth of coverage on the potential of the event happening every day throughout the policy year, no matter how impossibly remote that scenario is; but you’ve bought the cover, so you must expect the impossible to happen, otherwise you wouldn’t buy it. That’s over £3 bn of potential claims that the insurer may have to payout over the policy year. That’s what a £100m per occurrence wording means.

That’s enough to bankrupt most insurers who need to charge a premium commensurate with that risk for their shareholders. How much would you charge for taking over someone’s risk that could bankrupt you?

The upshot is that you should always decompose the cover you ask for into:

• Per claim: cover for each and every claim/claimant
• Per event: cover for all claimants from a single event (occurrence)
• Per year: cover for all events in a single year

When presented like this, the amounts involved can be eye-opening.

For example, in the Local Authority example above, the £100m per occurrence wording actually means:

• Per claim: £100m
• Per event: £100m
• Per year: no limit

Instead, buy cover for what you could expect a reasonable worst case to be over the insured period, plus a safety margin to cover the unexpected. For example, how many claimants at £25m each, £10m each, £1m each etc. For a typical local authority, even a single EL claimant for just £1m is very rare.

A typical local authority has 2-3 EL claims per year per 1000 headcount, so even the total number of claims is usually small. The largest local authorities, with perhaps 30,000 employees, typically have 50-100 EL claims per year, averaging £10,000 each; the total cost of all of their EL claims in a single year rarely reaches £1m, let alone £1m per claimant.

What Exactly Is Covered

If you want to make endorsements or extensions to your coverage, be prepared to treat them the same way as the rest of the policy. An endorsement to a policy is essentially an amendment that extends or restricts cover or clarifies some part of the policy.

You must understand what you’re asking for when creating an endorsement. In a perfect world, your policy would cover the broadest possible spectrum of events for the lowest price. But that’s not realistic. Every endorsement that’s made presents a new risk for the insurer. Therefore, it will carry an added premium adjustment that corresponds to that risk, not the original policy’s risk.

Furthermore, even simple extensions to a policy can carry a significant amount of risk. In the Local Authority example overleaf, extending cover to say School Governors, adds another layer of potential bankruptcy to the insurer.

It helps if you consider what the endorsement or extensions change in terms of future events, not what has happened in the past. Many insurance buyers are shocked when they realise how much seemingly innocuous changes to coverage affect their premium.

The Policy Excess (Deductible)

A larger deductible indeed makes an impact on the premium, but most clients are surprised at how small the impact is. The mismatch comes from a fundamental misunderstanding of how insurers calculate risk (and hence premium).

Returning to the example above, say your organisation’s EL cover is £100m per occurrence, but with a £100,000 deductible (per claim). An insurance company sees this as a potential pay out per claim of £99.9m, for every single claim.

If you increase your deductible to £500,000, the insurer will still be liable for a every potential claim up to £99.5m. So, you can see how this does precious little to affect the premium.

To make a real difference in the eyes of the insurer, with cover of £100m per occurrence, you’d have to increase your deductible by several million pounds.

Therefore, the practical way to impact your premium effectively is via a split limit policy, such as £5m per claim/£100m per event. However, this type of policy is usually only available through specialist brokers and insurance actuaries.

In Summary, Focus on the Future, not the Past, When Crafting Your Policy

By now, you should have a better understanding of how Solvency II should impact your insurance buying process.

The critical paradigm shift of Solvency II is in how risk is calculated. Insurers have little benefit from looking at past events when calculating premiums, so neither should you.

Instead, focus on how you can present your organisation as a better risk for the future.

For help crafting a policy that covers all your needs at the smallest cost to you, contact InsuranceInspect Services. We provide a structured and vendor-neutral approach to designing an insurance policy that’s optimal for your bespoke situation.

We have designed our Healthcheck products so that they do not need you to provide any claims data, policy documents etc. So how do we assess your situation without this information?

Overleaf is an extract of the first few questions in both our “Initial Healthcheck” and “Full Healthcheck”:

In “Your Past” we ask a total of 11 questions (tick boxes) in 4 key areas (8 questions/3 key areas shown above)

An Initial Healthcheck is c20 questions (tick-boxes) in 16 key areas.

A Full Healthcheck is c60 questions (tick-boxes) in 40 key areas.

2. Questionnaire
3. Your Past

Purpose: Robust understanding of historic risks and claims data, essential as a sound basis to understanding future risks, your risk financing options and their risks/benefits.