Many companies are experiencing material disruptions to their operations and cash flows as the impact of COVID-19 on the global economy continues to unfold. Macquarie Insurance Facility (MIF) has prepared this article to convey general guidance received from the insurance market on how businesses can manage their insurance costs during these challenging times.
MIF is a global aggregated insurance buying programme that delivers portfolio benefits to private equity and infrastructure portfolio companies. Through its scale and buying power, MIF has delivered premium savings in excess of US$245 million. MIF is accessed by over 45 financial sponsors and, together, the Macquarie assets and third party businesses represent 850+ companies and over $1.1 billion of premium, making MIF one of the largest buyers of insurance in the world. (For more information, please click here.)
The options outlined below could be explored ahead of a renewal or, if necessary, mid-term, through negotiations with insurers or via a cancel-rewrite. It should be noted that some of these options may not be applicable to certain policies and that the willingness of insurers to offer them may vary. Please consult with your broker in the first instance should the need arise to consider these options.
- Renegotiation: In the property market, brokers are finding that some of the major insurers may be willing to consider a return premium due to a significant and verifiable reduction in exposure. This is likely to be a rare occurrence and ultimately at the discretion of the insurer.
Employers’ Liability and other Liability/Casualty policy premiums are often adjusted following an audit, based on factors such as revenue and payroll. A reduction in risk exposure should therefore result in an automatic premium adjustment for those policies once an audit has been completed. Otherwise, non-auditable and standard rated policies could be adjusted at renewal to reflect reduced operations.
- Cancel-rewrite: A mid-term cancel-rewrite would usually only be considered by a company if significant risk characteristics or programme features (e.g. limits, retentions etc.) have changed dramatically. In the current environment, this could potentially apply to businesses operating in retail, transport and hospitality/entertainment sectors. It should be noted that a cancel-rewrite may result in reduced cover and, as the insurance market continues to harden, any premium reductions may be offset by rate increases.
Options to explore at renewal or when considering a cancel-rewrite:
- Reducing limits: To drive premium savings, limits can be reduced within current programmes, or excess layers can be cancelled or not renewed. In many cases, brokers are revisiting CAT modelling, loss forecasting and benchmarking to support a reduction in limits. Debt covenants and lease agreements should be reviewed in advance of reducing limits to ensure that contractual obligations are met.
- Sharing of aggregate limits: Sharing a single combined sum insured for two or more insurance policies, as opposed to a separate sum insured for each, could result in a modest premium saving.
- Limit reinstatement: Concerns over reducing limits may be mitigated by including a pre-negotiated limit reinstatement. A reinstatement occurs when claims have eroded a policy limit and insurers agree that they will replenish the limit to cover additional claims that may occur during the policy period. There may be a premium surcharge to have a reinstatement option included in a policy, however, the premium for reinstatement itself is generally not paid unless the limit needs to be reinstated.
Conversely, deleting an existing reinstatement option in a policy may result in a premium saving.
- Increasing retention levels: Increasing retention levels (or deductibles) might be considered if there is appetite to retain additional risk. Retention decisions are best supported by modelling of expected losses.
- Reducing cover: In the softer market prior to 2019, many insurers offered to expand cover rather than reduce premiums. These add-on coverages are now attracting premium charges as the market turns and are often hard to spot. A careful review of these add-on coverages with your broker may reveal opportunities to carve out these premium charges without significantly reducing important coverage features.
- Changing the rating base: In the current environment, brokers are looking at options to change the rating base used by insurers so that they are more reflective of actual operational exposures. For example, rating workers’ compensation on payroll may not give credit to the reduced risk of employees working from home.
- Premium financing: This provides an opportunity to convert an up-front premium payment required by insurers to an instalment basis, resulting in improved cash flow. Financing can also include broker fees. The broker who is placing your lines of cover will have internal resources to facilitate this option. Usually, premium financing companies would require a 10% deposit, however, in the current environment they may require larger deposits. In any event, interest rates on financing may be a good trade-off to support liquidity and cash flow.
- Reducing broker remuneration: Brokers may be willing to discuss fee/commission reductions. It should be noted, however, that in the current environment brokers are having to allocate more resources to servicing clients, so discussions regarding a reduction in their remuneration should be considered in this context. Offering a multi-year contract in exchange for a fee reduction could be an acceptable compromise.
Please contact us if you have any questions about MIF or would like to discuss managing insurance costs through the COVID-19 crisis:
Note: This article does not contain all the information necessary to fully evaluate options available in relation to new policies or policies currently in force and no representation is made in connection with the matters contained in this article.