RETHINK HOW YOU PURCHASE INSURANCE

Most executives would agree that insurance is one of the cornerstones of their risk management strategy. Whether it is purchasing property insurance against the peril of fire; product liability insurance for the potential risks caused by the company’s product; or directors’ and officers’ insurance to protect and retain top flight executives, most companies purchase a host of insurance protection against the downside risk of their business.

In many ways, insurance is a form of contingent financing. That is, the policy provides funds when a specified event occurs. Many companies are starting to analyse their insurance purchase with the same benchmarks that are used in structuring their financing. Many CFOs are asking the same questions, irrespective of whether they are looking at debt or insurance. These may include: What counterparty risks are we accepting? What ‘headroom’ is required within the insurance policy? Should we ‘syndicate’ the insurance among a number of insurers or consolidate with a single provider?

The GFC has provided finance professionals with a stark reminder of the ‘simplicity of matching’ principal: failing to match long term debt to long term assets courts liquidity issues. Such liquidity issues were the downfall of far too many organisations during the GFC, when the ability to renew existing finance arrangements suddenly became difficult and expensive. Savvy insurance purchasers have been grappling with the same issue: matching the period of insurance to the period of the risk. Although this has been achieved with many project based insurance in fields such as construction, for many other insurance purchases it has historically been unattainable.

Jul-Sep 2013 Issue

AIG Australia