Terms and conditions under scrutiny

The insurance industry needs to examine the detail of contracts with much more care than usual. That is the view of Matt Fairfield, founder and chief executive officer of ANV Holdings, the Dutch head quartered specialty insurance company, who says the global economic crisis is making both buyers and reinsurers much more aware of the potential risks they are taking on and what exactly is covered in agreements.

“There is more focus on terms and service with each contract,” he says. “The persistent uncertainty in the global economy combined with a trend of looking more closely at underwriting discipline has led to risk mangers double checking their policies to be sure that are covered, and underwriters checking to be sure they are accepting only risks with which they are comfortable. Challenging environments reveal new risks and these demand new rigour to ensure that they are covered.”

He notes that some risks may simply be uninsurable and this presents both a challenge and an opportunity for the industry. “In the European market especially, the business climate remains both difficult and uncertain,” Fairfield says. “Everyone is looking to protect themselves as much as they can, but there will be limits. It is going to be the burden and the opportunity for insurers to set these limits during these continued and persistent economic challenges.”

He is also seeing a flight to quality in the market as buyers seek strong partners that have experienced people and a strong capital base. Risk managers and buyers are increasingly asking tough questions about their partners’ ability and willingness to pay claims.

“In challenging times your choice of partners is more important than ever—you can’t afford to be left without cover,” he says. “Risk managers and their brokers want not only to know that a re/insurer and its underwriting team will understand the risk and price it fairly, but also that they will be there with both the willingness and the resources required to pay claims when losses occur.”

This issue is made more complex by the continued stream of non-traditional capital entering the market. While this was a strong theme at Monte Carlo, it has been further validated by a number of strategic announcements since then. As returns elsewhere in the financial market continue to suffer, capital providers are continuing to look for new ways to move their assets into the insurance sector, Fairfield notes.

But such capital should also be aware of new risks the industry will face. While it coped well with the record losses of 2011, Fairfield believes the next big problem facing the sector will be how to deal with manmade hazards such as cyber threats, management liability and transaction risks. Some, such as contingent business interruption (CBI), came to the fore in the aftermath of natural disasters and it became apparent the industry was not prepared.

“The market took the 2011 losses in its stride with little loss in reserves, capital or across the board rate movement. But manmade risks will be the insurance industry’s next challenge. If anything stood out after the events of 2011 it was that the ‘acts of man’ components in CBI and other coverages were widely underestimated. Some of these risks are tremendous opportunities for the insurance industry to step forward and help businesses better price, manage and survive these uncertainties on a global basis.”