The idiom “better the devil you know than the one you don’t” surely has an application for insurance underwriters and risk managers and for their brokers.
It is much better to underwrite and or manage something you know and understand, even if it has some features that increase the risk, than to take on and hold risks that you do not fully understand. After all, if you know the features that increase the risk then there are loss control and financing measures that can be put in place to manage them.
Or, put slightly differently, to manage risks and underwrite properly (and profitably), insureds, their brokers and underwriters must know and understand the risks the business faces.
The move to electronic underwriting platforms where the broker enters details of the risks directly into the insurer’s underwriting system is subtly shifting the onus of underwriting towards the broker. It becomes the broker’s responsibility to ensure that the correct underwriting information is entered so the “smart” underwriting system can accept or refuse the business on the basis of the information provided.
This was clearly demonstrated in the recent Kotco Bread v Vero Insurance case in Queensland. In this case the broker placed the bakery’s insurance with Vero. The risk details were entered into the underwriter’s system in the broker’s office. When it came to the question of construction, the system offered several options regarding the percentage of Expanded Polystyrene Sandwich (EPS) panels used. The nil option was selected when in fact the building was largely constructed of EPS panels. Had the correct option of greater than 30% been selected the system would have declined to accept the cover.
A major fire occurred and when the construction came to light the claim was declined. The matter went to court with a judgement of $2.7 million being awarded – against the broker.
It is in situations such as these that a properly conducted risk survey offers a valuable and independent review of the risk and provides unbiased information about it. It can include information about:
- Construction of the building, including details of the presence of EPS and asbestos and any special or unusual features
- Exposures – both internal exposures from the insured business itself and the occupations of other tenants in the building and external exposures from neighbouring businesses and surrounding features. This can include possibility of flood, storm, burglary, malicious damage or vandalism.
- Housekeeping and management of the business, which can give a guide to the moral risk of the insured
- Manufacturing processes, any dangerous goods or hazardous processes
- A review of the electrical, maintenance and security systems
Armed with this information the broker can provide accurate and reliable information to the insurer or into the underwriting system.
A risk survey can be extended to include an assessment of the risk of underinsurance. It can include a review of the sums insured and advice on the estimated replacement cost of the building. Surveyors are not valuers but using accepted building cost guides they can provide an assessment of the estimated replacement cost of the building and identify the risk of underinsurance.
We all know that underinsurance is one of the major issues facing the insurance industry. In the event of a claim underinsurance can complicate the settlement, taking up a lot more time and incurring additional expense. It can leave a dissatisfied client, often with insufficient funds to rebuild his premises and secure the future of his business, and it does nothing to enhance the reputation of the insurance company and broker.
Throughout the course of a survey the surveyor can draw the insured to think about the replacement cost of the building, plant and equipment, stock and other contents and how he would be affected by a major loss.
A further important item can be a review of the adequacy of the insured’s Business Interruption cover. The surveyor can, using figures drawn from the insured’s accounts, provide a review of the adequacy of the BI sum insured and draw the insured into thinking about how he would survive in the event of a major loss and how he would go about recovering following a claim.
The risk survey is a valuable tool in arranging adequate insurance and can cover a number of issues, bringing peace of mind to the insurer and the broker alike.
Hugh Khull is a loss adjuster at Cerno and member of the Australasian Institute of Chartered Loss Adjusters.