Days of sunshine are here and many ready themselves for holiday destinations. While they might pack first-aid kit in holiday travel bags – few, I suspect, will pack rain umbrella. first-aid kit is common sense, while the rain umbrella is no doubt considered extreme or redundant by most. The lucky few, or smart few, have long-standing default cover for unexpected rain thanks to the trusty parasol, permanently resident in the car boot or back windowsill. Forgotten and unused much of the time umbrellas have defining roles when the situation turns for the worse and the going gets sticky. In storm they provide haven under which thoughts are gathered, resources regrouped and strategy formulated for pressing on out of the storm.
In the business world all four seasons can visit everyday. The most notorious meteorological forecasts are often more accurate than future business projections. Fortunately though, unlike some remote outreaches of holidayland, the business world has an insurance industry selling umbrellas everyday and always nearby. Prudent inhabitants regularly buy insurance umbrellas, at least once year and generally over the phone from the comfort of an office. Business leaders subscribe to the belief that in an unpredictable and ever-changing environment there is no excuse for not planning for an unexpected downpour.
One of the many duties of the director is to ensure adequate risk management processes and procedures are in place to protect stakeholders’ interests. The establishment and use of adequate internal controls and appropriate financial management tools and disciplines should always be prime areas for directors to focus on. External independent auditors often significantly aid this pro-cess from compliance perspective – The Audit Report – and an advisory angle – The Management Letter. Unfortunately, boards of directors often fail to give adverse event risk management the attention it deserves. In the past few months the world has seen how uncertain and unpredictable are the times in which we live and work.
I thought the claims statistics of the Insurance Council of New Zealand for year 2000 might be of interest to those who believe getting caught in sudden shower “can’t happen to us”. Claims for all forms of insurance totalled $1.01 billion. Commercial material damage and business interruption claims reached $108.1 million. And if you still believe it can’t happen to you consider that claims against professional directors, officers, product & other public liabilities policies totalled $47.9 million. The value of claims represented over 45 percent of the total premiums paid for that form of cover in 2000.
For those who believe they could get caught in surprise storm outlined below is very brief, but not exhaustive, summary of some forms of insurance available over and above the normal tangible asset insurances usually used. Directors should consider these and additional specialised policies often required for unique industry or company specific risks.
* Directors and Officers Liability Insurance
* Employers Liability Insurance
* Employment Disputes Insurance
* Statutory Liability Insurance
* Public Liability Insurance
* Warranties and Representations Liability Insurance
* Punitive & Exemplary Damages Insurance
* Liability Consequential Loss Insurance
* Escalate Cover
* Net Secure Cover
Make sure of the cover – insurers’ ratings
Insurance ratings are designed to provide an opinion as to an insurer’s financial strength and ability to meet ongoing obligations to policyholders. Ratings are primarily derived from company’s financial, operating and business profile.
The two leading ratings agencies are Standard and Poor’s and A.M. Best Co, which provide ratings opinions of the financial security characteristics of an insurance organisation with respect to its ability to pay under its insurance policies and contracts. A.M. Best has ratings scale of A++ to F with ratings above single B+ signifying very good claims capacity and classified as “Secure Ratings”. Ratings single B and below are classified as “vulnerable ratings”. For S & P AAA is the highest rating and denotes “extremely strong” financial security characteristics. Within the rating classification there are various levels of descending claims capacity. Insurers rated beyond single have weak financial security and it is arguable whether you are buying risk management or scrap paper.
The limitations of ratings
But be aware of the limitations of the ratings – they are tools not fix alls. Being cognisant of the insurer’s true ability to meet claims is key component of the risk management process, which does not end at the time of purchase. Monitor your insurer’s rating regularly. It might change, be suspended, or withdrawn due to changed financial or operating information or other circumstances – just ask the Australian-based HIH policyholders about this.
Don’t use ratings as guides to the suitability of specific policies or insurance types. Ratings are not intended to address the suitability of particular policy for specific purpose or purchaser and do not recognise policy features that differ from policy to policy such as deductibles, surrender or cancellation penalties. Importantly for organisations with cross-border or multinational operations ratings do not take into account the potential for some foreign exchange restrictions to prevent financial obligations being met.
Ignorance is no excuse
Justifiably stakeholders will be upset and angry, even litigious, if directors fail in key areas of corporate governance. Protection of stakeholders’ interests and assets through adequate risk management systems and measures such as appropriate insurance cover is an obvious area requiring thorough compliance and monitoring.
Stakeholders do not expect continuous sunshine from company. They do however expect cover to be in place for sudden unexpected rain or storms. Stakeholders look to directors to ensure umbrellas are available, of the type required and fully functioning if the need arises. In the absence of these, stakeholders may not be the only ones catching pneumonia.
