Risk management: Brief insurance guide for Romanian managers – general precautions
Guest writer Gabriel Popescu covers risk management for Romanian managers, with a first piece on corporate insurance, highlighting pitfalls and how to avoid them.
This is the first of a series of views on risk management for the use of the managers willing to employ this sophisticated business management discipline for increasing the economic performance and operational resilience of their operations on the Romanian market. The term “insurance” is used with the meaning of corporate insurance (property, liability, and others) and not personal insurance.
It is not uncommon to see local managers disregarding risk management, expressing doubts or lack of interest about its usefulness. This is quite unfortunate as almost any significant decision, in business and life as well, is the result of a balancing act between expected benefits and risks taken, regardless of if the decision maker is conscious about it or not.
It is often said that risk management is nothing more than good management. Let’s not question this statement now and just take it for granted. The beauty of risk management is that it can add value in almost every corner of a business, if done right. While risk management is a highly strategic tool, it has also the capability to produce quick wins, including important savings of costs, which are among the favorite decision triggers of the financial managers.
One of the easiest ways to highlight the benefits of risk management is to wisely question your corporate insurance program, if you have one. And if you do not have yet, get one quickly, as it is always better to be safe than sorry.
In my opinion, based on my experience as a risk management consultant and ex-insurance broker, many organizations are well positioned, sometimes much better than they think, to upgrade their insurance management practices, which would further secure their activities and safely reduce costs, regardless of whether they use an insurance broker or not.
A specificity of the Romanian insurance market is that the coverage quality of many insurance policies for corporate use has dropped in the last few years as a consequence of a fierce and degenerative competition on price. This unfortunate change is partially fueled by the relentless search of many buyers for the “cheapest and best” insurance, a “Fata Morgana” that very often turns out to be the cheapest and nothing more. However, the local insurance market has not become a humdrum place yet. You can still find advanced corporate insurance covers if you know how and where to search for them.
Here are some ideas you can work on, irrespective of the way your organization acquired insurance: as an obligation imposed by a leasing company, an authority or a client, as part of an international insurance program of your group or, preferably, following a conscious decision to treat some risks identified, analyzed and evaluated within a corporate risk management process.
Have always in mind the limited nature of the insurance.
First of all, bear in mind that insurance is just one of the many possibilities to manage your organization’s risks and that it often needs a minimum risk management framework for maintaining its full functionality and validity. You may see the insurance like a promise that you will receive a sum of money if the risk will occur as strictly specified in the insurance contract. And, as you probably do with any other kind of promise, you should be very careful from whom you take it and in what conditions you get it.
Be careful with the insurance terms and conditions.
As you may already have noticed, the insurance contracts are loaded with various restrictions and limitations, some visible and others hidden in the insurance wording. Insist on clarifying everything that is implicit and make it super explicit, i.e. fully and clearly formulated. Get rid of the insurance contracts containing messy insurance conditions or a twisted wording, which might facilitate the denial of the payment of a significant loss or its indefinite delay.
Take care of biased judgement about insurance quality.
Insurance buyers are subtly exposed to hidden traps that often undermine their ability to buy sound insurance. Some think that insurance policies with the same name coming from different insurers are the same product differentiated only by price, and they are not. Others associate an increase in the quality with an inherent higher cost, a common sense rule that is not always true in the insurance world. Here is a small example: several years ago, when I was working for an insurance broker, I replaced the insurance policy made for a local mobile phone operator by one of the largest brokers world-wide with another policy provided by the same insurer group, but with much better terms and conditions, and with a saving of about USD 400,000.
Resist the temptation to carelessly buy cheap insurance.
Remember at all times that “there is no such thing as a free lunch” when you are lured by a low price for excellent insurance. A cheap price often hides severe limitations in the insurance conditions, poor or lack of re-insurance, unreliable loss payment behavior, a trap to make you change your current insurance provider or a catchy combination of these. It may sound strange but, sometimes, a difference of 10 percent in the insurance cost can represent the difference between good and poor insurance.
Pay attention to the asymmetric nature of the insurance contract.
You pay the price of the contract now and the insurer will pay the loss in the future and only if the loss occurs as specified in the contract. The broker is not part of the insurance contract and gets paid by the insurer soon after you pay your insurance premium. So, you, as the insured party, are the most interested to carefully verify that the insurance contract can deliver its promises. You may take an unnecessary risk if you assume that others will always do it for you.
Always look for a customized policy.
Insurance customization is highly important because the standard insurance conditions offered on the insurance market are usually shaped to fit the average needs of a large panel of companies of many sizes and industries. Various insurance clauses can be added or existing restrictions deleted in order to obtain an insurance policy wording that adequately matches your risk profile against a reasonable cost. The insurance required by a bank as collateral for a loan should also be improved as far as reasonably practicable because your company remains liable to the bank in case the insurance fails to adequately indemnify a loss.
Look for supportive evidence of insurance customization.
Insurance customization is one of the most often mentioned insurance improvements and also one of the rarest seen in practice. You can hardly find an insurance broker not claiming that their insurance is fully customized to meet your company’s risk profile. Many managers do not overly question such claims. It is wise to do it. You should have already received analyses of vulnerabilities, exposures, risks and impacts for your review and approval well before the insurance offers, right? Otherwise, how could you know what insurance adaptations are really necessary? If you have not seen such analyses, you may be pretty sure that you do not have a customized insurance yet, no matter what you are told.
There is no local regulation to manage the conflict of interest specific to the insurance brokers, which are all paid by the insurance companies on contractual bases and provide services for both parties of the insurance contract, acting as distribution channels for the insurance companies and advisers for the insured organizations. Some northern EU countries (e.g. Finland, Denmark) have already solved this conflict of interests by legally banning the use of brokerage commission and all associated payments from insurers to brokers.
If you are not among those that think they will have the best of winning trial if their lawyer is paid by the other party, you are in the perfect stance to negotiate a transparent and fair remuneration with your insurance broker and save a lot of money. We will see how in the next article of this series.
By Gabriel Popescu, Guest Writer
Gabriel Popescu is an Associate Member of the Business Continuity Institute, management consultant and founder of Esentum Business Managemen, a consulting firm dedicated to promoting the art and science of Risk Management and Business Continuity Management, based in Bucharest. Before starting his own consulting business, Gabriel worked for more than 20 years in industry (technological equipment and aircraft) and financial services (banking and insurance brokerage).