This article about how insurances with the same “brand name” can look the same to the untrained eye, how pressure to provide quotations often stresses brokers, how lucrative industries carry the highest risks, and how you can reduce them.
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No two businesses are the same
Recently I was asked for “professional insurance” by two distinctly different businesses. One business advised multinationals on which businesses they should merge or acquire, and the other helped people in the UK to buy a business by finding them and introducing the investor to the current business owner. Both thought they were in mergers and acquisitions. This is seen as a very high risk industry by underwriters, and very few insurance providers will provide cover for such a high risk area.
The first business specialised in Anglo-Chinese business relations and was introduced to me by an accountant who understood exactly what I did. The introduction was made after the business had received a quotation that amounted to 18% of their annual turnover. You might think that is ridiculous, and it is, yet I have seen solicitors charged 38% of their turnover for insurance because of the ridiculous way solicitors are made to buy insurance.
Pressure cooker environment?
In each case, there was pressure to provide documentation to 3rd parties who wanted to work with these companies, yet insisted that they had appropriate insurance cover first. This is not at all unusual, in fact, about 50% of my clients have insurance requirements imposed on them by third parties. Yet they were all able to explain why they needed it and when the deadline was. So we make time to provide real advice.
Some of those I have been able to help were initially tempted to get the first insurance they could find that “ticked the box” of those demanding evidence that they were insured. Lots of people tell others “my insurance costs less than yours”. Giving in to the cost saving temptation means that businesses have ticked “a box” yet not actually protected their assets, income or reputation. Insurance that isn’t fit for purpose rarely pays out. Unless you are very lucky.
It actually takes as much as 30 days to arrange some insurances, because the insurance underwriters that understand emerging risks are in such short supply. After all, it is not car insurance, which has been commoditised and is available at the click of a finger 24/7, 365 – if you have a debit card.
Why are rates so high?
When talking to business owners looking for protection we first assess their requirements and then provide them with some ballpark estimates of the annual cost of protections. We do this because we are experienced enough to have a good idea of the rates achievable, and we know that some business owners haven’t budgeted for bespoke insurance. Some are shocked at the scale of the investment and we are often explaining that the situation is nothing to do with them. So who’s fault is it?
Some sectors have suffered from enormous losses because of the lack of care, skill, or diligence of the people operating in those sectors. Once insurance companies have “taken a hiding” from a particular sector, they might withdraw. You’ve probably read about how flood insurance is in such short supply. It actually isn’t, we have plenty of underwriters who will provide cover in reputed “flood zones”. Yet the media paint a different picture, and people believe what they hear often enough.
What the media don’t report is the high earning sectors that have suffered huge losses do not have many underwriters vying for their business, even if it is unique. This means that their rates will increase because there is demand, yet not much supply. Insurers need to come clean about the issues they resolve in a sector if they are to build trust and reduce risk.
Wrap up: Even if you are in a sector that has suffered losses there is plenty you can do to achieve the most competitive rates available. The first thing is to investigate losses that have happened in the sector in the past, and then work out exactly how to reduce them, using risk management. If you are unsure how to do this contact us and we will help where we can, or point you in the right direction.
When thinking of diving into a new sector, always speak to a set of good advisers first because solicitors, accountants, business advisers, perhaps even insurance brokers, may have experience in the sector or, at least, are able to point you in the direction of those that do. By asking the right questions you will find out more than your challengers know. The tax predicament, propensity to litigate and insurance rates will have a bearing on the profits you are able to make in any particular line of business.