Risk Management and Identifying Business-critical Insurances

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ISN 2 2016 AU BlogRisk Management and Identifying Business-critical Insurances

This article reprinted by permission of The Insurance Research Letter. To subscribe to The Letter, please visit https://irletter.com/the-letter/

The true value of insurance is often only recognized as a consequence of a major loss. At other times, insurance can be viewed by boards and  business units as just another cost overhead, where value is judged by securing the lowest premium. Businesses may fail to appreciate the value  of insurance in supporting the overall strategy of the organization and the achievement of its objectives. As a result, insurance can be unfit for purpose and when losses occur, may fail to meet the expectations of the organization.

The challenge for insurance buyers is raising the awareness of the value of insurance beyond that of a commodity, and articulating how individual insurance covers can contribute to the financial strategy and financial modelling of the organization. The result would be a more carefully targeted and strategically aligned approach to insurance design and buying, that supports the risk appetite of the business and maximizes the value of  insurance cover, rather than simply minimizing the cost. This paper proposes that individual insurance covers can be classified as follows:

  • Optional
  • Mandatory
  • Business Critical

business critical insurance PWCThis paper will describe the three types of cover, set out a framework for categorizing individual insurance covers and demonstrate the importance  of mapping business critical insurances against the context of key corporate finance thresholds.

In ‘Efficacy of Business Insurance’ (Airmic, 2014), Airmic detailed the importance of business insurance, and the steps organizations can take to ensure insurance acts an effective risk financing mechanism. The framework detailed in this paper develops this guidance, placing certain business critical insurances as key contingent assets where the risk evaluation would center on what level of loss, reputational damage or business interruption could lead to financial jeopardy or even collapse. This in turn emphasizes the need for a greater level of due diligence during procurement.

Read the full paper at http://www.airmic.com/tech-doc/business-critical-insurance

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