When reduction of risk doesn’t lead to reduction of rates

As the managing director of an independent consultancy that specialises in insurance claims, commercial-dispute resolutions and risk management, Peter Salt (pictured) has seen pretty much all there is to see in the area of industrial property and business-interruption coverage and claims.

Salt left mainstream loss adjusting in 1994 and went on to operate as a claims consultant and risk adviser to commercial insurance buyers. He established Accord Solution in Singapore in 2010. 

His career has encompassed everything from reviewing property and business-interruption (BI) losses, to providing technical advice on quantum and coverage disputes. He is now a risk consultant, advising on enterprise risk management (ERM), insurance programme placement and broker tenders.

When someone with this kind of experience raises what they believe is a major problem in the industry, it’s worth listening. StrategicRISK asked Salt to outline what he believes should act a wake-up call for the insurance industry in south-east Asia’s emerging markets.

As Salt tells it, a client of his is a multinational organisation that purchased a large national company in an emerging market. “They bought an existing going concern which the previous owners had built and established and then set up to run on a shoestring using transfer pricing to avoid taxation,” Salt says. “Because of poor management and inadequate investment in maintenance and repairs it had a relatively poor record on safety and on the frequency of claims, but surprisingly it had never been penalised by the local market in terms of adverse rating.”

Less than a year after Salt’s client took over the operation, there was a large fire and subsequent multi-million-dollar business interruption. “The fire was well contained by structural divisions and fire breaks, and the BI claim was mitigated by some clever footwork on their production and sales plans,” Salt says. “Insurers were pretty pleased with the final outcome, but at next renewal they doubled the rate and the premium increased from something like $4m to $8m.

“The cause of the fire was a pure accident as far as my clients were concerned. It was actually a hidden defect in a wall of a hot-oil pipe dating back to the construction of the factory 13 years previously, but the rationale of insurers was, quite simply, you had a big fire so we’ll penalise you.”

ERM efforts
Salt says his client took the rate increase “on the chin”, and then, acting on his advice, set about implementing a comprehensive ERM programme. “The very first thing they did was to divide the company up into base units and establish what they call risk committees in each of their units. We’re talking risk management right down to the ground floor,” Salt explains. “Safety and risk-avoidance information is channelled down from the top, and information about practical consideration of risk and avoidance of risk is channelled from the ground floor up.

“It is quite simply the most effective transfer of information relating to minimisation of risk and avoidance of accidents that I’ve ever seen.”

At the same time, they started work on a business-continuity plan (BCP). “It’s a comprehensive approach to reviewing, measuring and planning for all the kinds of risks that the company is facing,” Salt says. “It’s not just related to the kinds of physical and financial risks that impact insurance covers. It looks at things like international banking-system collapse, failure of the economy of the host country they operate in, and political risks associated with their workforce, which comes from five different countries.

“The BCP has the support of the shareholders and is fully endorsed by senior management. The action and emergency plans are thorough and extend throughout the organisation and these are live tested at regular intervals.”

No claims
Salt says that more than 35,000 individual training programmes have been carried out in the past three years for a workforce totalling almost 10,000. “My client even spent a million dollars on a shiny new fire engine which is 20 years more advanced than anything the local fire brigade possesses, and they have their on-site fire team fully trained and ready,” he says. “They have spent $30m–$35m on proper scheduled repairs, preventative maintenance, training and general risk improvement over the intervening period since the fire. The end result is quite simply this: almost four years after the fire, the frequency of industrial accidents and reported incidents has dropped by over 75%, and they have not had one single insurance claim since the big fire.

“As a risk professional with 38 years’ experience, I have never before seen any organisation so readily and wholeheartedly embrace and empower such a proactive and successful ERM policy.”

But Salt and his client have been disappointed every year when the time has come to renew the policy. “Although the insurance panel has repeatedly changed and my client no longer insures with those underwriters who met the large claim, we have not received even the slightest rate reduction despite their acknowledgement of the risk improvements,” Salt says. “The underwriters completely ignore the fact that there’s been a 75% reduction in industrial accidents, no reported claims, and that we have probably the most comprehensive ERM programme of any company operating in this industry segment in south-east Asia.

“The tangible benefits of ERM are clear to my client, but they feel they are being poorly rewarded by their insurance stakeholders who seem mesmerised by the impact of a large but purely accidental fire that occurred four years ago.”

No reward
Salt says that underwriters offer to reward clients who institute risk-management controls, but that this is often an empty promise. “The only way they can reward you is with a rating reduction, but it just doesn’t happen,” he says. “The truth is the underwriters are totally cynical; it’s a take it or leave it situation on rating as they know we have little or no alternative due to local insurance regulations.”

According to Salt, this is the case for large-scale industrial risks in all the emerging markets of South-East Asia. “You can find this situation in Indonesia, the Philippines, Thailand and Malaysia, to name just four,” he says. “The government insists that to build a viable local insurance industry, 100% of the underwriting must be done locally at direct level and there’s probably a significant amount of reinsurance that has to be placed domestically as well.

“Now, number one, there simply isn’t the capacity to fully write these domestic risks and, number two, there certainly is a shortage of skills when it comes to professional risk surveying and proper underwriting consideration. Number three, they don’t want to take on the perceived bad risks.”

Missed opportunity
Salt says he is exasperated by a situation that he believes is actually an opportunity missed by the underwriters to assist development of the insurance industry in the region. “Wouldn’t you have thought that the local market would want to be seen to embrace my clients and their adoption of a thorough and successful ERM programme, and showcase them to the rest of the industrial risks market?” he asks. “They could say: look at this company; they had a really big fire, but since then they’ve reduced the incidence of industrial accidents by 75%, they’ve had no reported property or BI claims whatsoever, and they have this wonderful, comprehensive ERM program endorsed by the president director and implemented right down to the shop floor.”

Salt says that a scaled rate reduction for this kind of effort would send a message to the underwriters’ existing clients in industrial and large risks that adoption of a meaningful programme of ERM was the way forward.

“I would see that as a very positive development in the market,” Salt says. “But I would do, wouldn’t I?”