INSURANCE: Cover at a Premium

LIZA HELPS

An invitation to tender was issued in April this year as the insurance renewal needed to be completed at the end of June. The invitation was issued to four brokers, three large and one small local company.

In the event, three tendered. The tendering procedure followed the usual pattern; some detailed preliminary meetings and then full presentations. "In view of the prevailing climate, we were determined to demonstrate our sound approach to risk management and be flexible as far as the structure of our insurance policies are concerned,

says Jones.

WWF-UK had been maintaining a "risk register

since 1997 but in 2001 the charity decided to approach risk in a more sophisticated way.

"We acquired Risk Track software from consultancy Jardine Lloyd Thompson and produced a questionnaire, which allowed us to identify 30 risks and rank them by exposure and probability.

"The management team and trustees then debated the systems in place to minimise the risk,

he says.

This is well illustrated by our employees' travel to all parts of the world, which is a vital necessity of our work. As part of the risk exercise, travel was debated and we reviewed our policy and systems and tightened it up considerably.

Risk management is an essential pre-requisite of keeping premiums down, he argues. "The upshot of our exercise has been that we have managed the same level of insurance for a premium increase of less than 20 per cent in overall terms."

A further benefit of this approach to risk is the charity's claims history.

In exposed areas like travel, computer equipment and motor, it has managed risk over the years to ensure a good claims history. This was vital in ensuring value for money in the difficult prevailing climate.

"We were also flexible as far as the structure of our insurance was concerned,

he says.

"We really scrutinised levels and the extent of cover and also we decided to raise some excesses such as motor claims as this was cost effective when traded off against premiums and the administrative cost of making the claims."

Having three brokers to talk to about risk, flexible construction of cover and excesses was invaluable since all had different ideas of how WWF-UK should go about things over the range of the charity's insurance, says Jones.

"We were able to pick and choose from their ideas and in the end came up with the best quality and most cost-effective combination of cover and premiums. In the end, we renewed our insurance policies with AON,

he says.

Jones attributes the successful conclusion of the project to a combination of competition, risk management and a flexible approach.

Troubles in the insurance market have caused many premiums to spiral and some companies to withdraw their cover. So how do you find the best deal? asks Liza Helps

In March this year, the British Trust for Conservation Volunteers (BTCV) was forced to suspend two-thirds of its work across 2,600 local volunteer groups after insurer, Ecclesiastical, pulled its cover (Third Sector, 12 June).

Another charity, which asked not to be named for fear of reprisals, has had to forego insurance on all of its senior citizen volunteers because its insurer refuses to cover them.

These are not isloated cases. Over the past year, many charities have seen their insurance costs double or even sometimes triple and some insurers have withdrawn their offer of cover completely. Charities, like everyone else who needs insurance, are paying the price of the industry's problems.

England's oldest children's charity, Coram Family, saw its professional indemnity cover, which offers protection in the event of a client or beneficiary suffering financial loss as a result of its advice, increase from £3,000 to £10,000 a year. What is galling is that it does not offer financial advice yet local authorities insist on such cover as a condition of funding.

Jackie Bliss, director of finance and administration, says: "The difficulty is that as a charity we cannot easily pass on premium increases in higher prices, unlike many commercial operations. Much of our income comes via contracts for which fees may be fixed for three years and some work is unfunded, so the increases in insurance premiums in general have to be funded from the charity's reserves, leaving less money available to carry out our childcare objectives."

The Industrial Therapy Organisation, a mental health charity based in Bristol, asked six insurers to quote, five refused. Chief executive Nick Murray says that as a result premiums rose by 60 per cent. "For a small charity, that is a lot,

he says.

What has been most frustrating, however, is the extremely short notice brokers and insurance companies have given as warning. Tom Flood, chief executive of BCTV, says he only received two weeks notice, not enough time to effectively look for alternatives.

Many charities feel that the reasons given for the hikes and short notice are spurious. A finance director of a leading support charity says: "What some insurance companies are doing is kicking out renewal notices with a high premium and blaming 11 September, some are putting a lot of padding in."

It is obvious that there is a high level of mistrust on both sides. Several charities requested not to be identified in this article for fear that anything they say may be held against them in future insurance negotiations.

But it is not just the charities that feel threatened. In June this year, Ecclesiastical cited the fact that it believed it had been misled by BCTV as one of the reasons for not renewing its cover.

Heather Hunter, of charity consultant Charity Business, adds a lot of insurers view charities sceptically because they think there is a lack of professional management among some organisations. However, she adds: "(Insurance companies) are lazy, they have put the onus on charities to argue the case rather than offering guidelines. If they can do it for some policies, why not standardise it so at least charities know what they need to do."

Stephen Bubb, chief executive of AECVO, believes that levels of service can vary markedly. "There are some good companies which understand the needs of the sector and others which just could not give a toss,

he says.

But there is some comfort says Richard Dyer, of broker SBJ Stephenson.

"Charities are good business and (they are) long-term customers in a very insecure world,

he says. John Parker, head of general insurance at the Association of British Insurers (ABI), agrees: "Insurance companies look more favourably on a risk they have looked after for years."

The key to softening the blow, and a charity's best tool in negotiations with insurance companies, is to have proper risk management procedures in place.

David Sinclair, of the Charity Finance Directors' Group, goes so far as to warn that organisations need to be seen to implement risk management successfully "or they won't get insurance at all". Euan Drysdale, of broker Keegan & Pennykid, agrees: "Increasingly insurers are looking at risk assessments."

Leslie Jones, deputy chief executive and director of finance at the WWF-UK, says charities "must take a proactive stance regarding risk management".

He says this should not be too onerous as the Statement of Recommended Practice (SORP) covers risk management. The big problem is that many do not realise that the same procedures can be applied to insurance.

Hunter says an "internal audit on a regular basis will pick up problems early and that's what they (the insurers) want to see, they will appreciate that there will be problems but what's important is that they are likely to be caught earlier".

"Charities,

she says, "should not go to an insurer until they have sat down and worked out exactly what they do". Instead they should break down every type of fundraising. "If you can prove that the majority of funds are donated by legacy then the risk on fundraising is less and you do not have to insure so heavily,

she says. In addition it may be useful to break down the different types of risk instead of taking block insurance.

That way the charity will be able to see clearly how much money is being paid on what insurance and amend it accordingly.

According to Parker, you can still find a good deal if you're willing to put in the groundwork. "Charities should enter into proper dialogue with insurance companies, and if the broker is not prepared to do that, get another one. What works best is if all three (broker, insurance company and charity) collaborate in an open manner about risk management,

he says.

WHY INSURANCE PREMIUMS HAVE INCREASED

The sad fact, according to John Parker, head of general insurance at the Association of British Insurers (ABI), is that the general insurance market is cyclical. What is worse this time is that the very reasons that would individually cause a hardening of the market have all aligned together making this dip in the cycle deeper than expected.

Reduced market capacity

- 11 September attack - The Insurance Information Institute in New York estimates that around $80 billion of worldwide capacity was removed as a result of the attack.

- Insolvency - "It has been said that there are currently 39 insurers in the UK in some form of insolvency,

says Richard Dyer, of insurance consultants SBJ Stephenson. One of the most spectacular has been the collapse of Independent Insurance, which removed a large amount of capacity in the UK.

- Withdrawal - Companies have been scaling down and withdrawing. According to the ABI, CGNU, AXA and Groupama have all exited or scaled back exposure to larger commercial risks in the UK. Recent weeks have seen Royal & Sun Alliance pulling back as well.

Increased claims cost

- As well as the World Trade Center there have been a number of high-cost incidents. SBJ Stephenson cites the Port Talbot steel works fire last November, a chemical plant explosion in Toulouse, two plane crashes in Milan, the Hatfield and Potters Bar train crashes, as well as a fire at Centre Parcs in April.

- There was also a 50 per cent increase in the insured cost of natural catastrophes (mostly weather related) in 2001 and does not include recent events in Germany and eastern Europe.

- The introduction of "no win, no fee

is increasing the numbers of clients willing to claim as well as the cost to the insurer when the claim is successful.

- Changes in the law, which have increased the extent and level of damages for personal injury claims. These have been rising at around 10-12 per cent a year for several years.

Increased reinsurance costs

- Parker says the reinsurance industry had already suffered a decade of poor profit and prices charged for reinsurance will increase markedly.

The stock market

- Most insurance companies cover the cost of claims through the reserves they make through investing money in areas such as the stock market, however, says Euan Drysdale, of insurance broker Keegan & Pennykid: "The stock market has been falling so insurance companies are not making the same income on reserves as they once did."

CASE STUDY - WWF-UK FINDS FLEXIBILITY CAN HELP REDUCE PREMIUMS

WWF-UK was already aware that the insurance market was under pressure before the attacks on the World Trade Center on 11 September last year. But, says Leslie Jones, deputy chief executive and director of finance, the general mood in the insurance world following 11 September was one where it was envisaged that "premiums would hit the roof".

Under those circumstances, Jones felt it necessary that WWF-UK should put its insurance out to tender to ensure that at this critical time the charity maximised competition to ensure it negotiated the lowest possible premiums available and the lowest broking fee.

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