Outlining the importance of insurance to the Board, this guide can support Airmic members in raising the role of insurance, and demonstrating their value as an insurance professional. Published for the Institute of Directors, Airmic, ACE, PwC and Willis

1. CRITICAL
BUSINESS
INSURANCE
GUIDEDirectorInspiring business·
DirectorInspiring business·
A practical guide for board members

2. CRITICAL BUSINESS INSURANCE
2015
Group Editor, Director Publications Ltd: Lysanne Currie
Consultant Editor: Tom Nash
Creative Director: Chris Rowe
Production Manager: Lisa Robertson
Publishing Director: Vivien Cotterill-Lee
Commercial Sales Director: Jo McGraw
Director General: Simon Walker
Cover: Getty Images
Published for the Institute of Directors, Airmic, ACE, PwC and Willis
by Director Publications Ltd, 116 Pall Mall, London SW1Y 5ED
020 7766 8910
www.iod.com
©Copyright Director Publications Ltd, November 2015
A CIP record for this book is available from the British Library
ISBN 978-1904520-87-0
Printed and bound in Great Britain
The Institute of Directors, Airmic, ACE, PwC, Willis and Director
Publications Ltd accept no responsibility for the views expressed by
contributors to this publication. Readers should consult their
advisers before acting on any issue raised.
A practical guide for business leaders
Critical Business Insurance 2015
AIRMIC
ACE
PwC
WILLIS
INSTITUTE OF DIRECTORS
Airmicrepresentscorporateriskmanagersandinsurancebuyers.Itsmembershipincludestwo-thirdsofthe
FTSE100,aswellasmanysmallercompanies.Theassociationorganisestrainingforitsmembers,seminars,
breakfastmeetingsandsocialoccasions.Itregularlycommissionsgroundbreakingresearchanditsannual
conferenceistheleadingriskmanagementeventintheUK.Ithaspreviouslypublishedthewidelyacclaimed
riskmanagementreportsRoadstoRuinandRoadstoResilience.
Visitwww.airmic.co.uk
ACEGroupisoneoftheworld’slargestmultilinepropertyandcasualtyinsurers,withoperationsinover50
countriesandaglobalnetworkspanningaround200countriesintotal.IntheUKandIreland,itservesclients
andtheirbrokersthrough12officesacrossfiveregions.ACEprovidescommercialandpersonalpropertyand
casualtyinsurance,personalaccidentinsurance,supplementalhealthinsurance,reinsuranceandlifeinsurance
toadiversegroupofclients.Itoffersparticularexperienceinmultinationalprogrammesfororganisationsof
everysize.ACEisdistinguishedbyitsbroadproductandservicecapabilities,exceptionalfinancialstrength,
underwritingandclaimshandlingexpertise,andlocaloperationsglobally.
Visitwww.acegroup.com
AstheUK’sleadingproviderofintegratedgovernance,riskandregulatorycomplianceservices,PwCspecialises
inhelpingbusinessesandtheirboardscreatevalueinaturbulentworld.Drawingfromaglobalnetwork
ofspecialistsinrisk,regulation,people,operationsandtechnology,PwChelpsitsclientstocapitaliseon
opportunities,navigaterisksanddeliverlastingchangethroughthecreationofarisk-resilientbusinessculture.
Visitwww.pwc.co.uk
WillisGroupHoldingsplcisaglobalriskadvisory,re/insurancebroking,andhumancapitalandbenefitsfirm.
Withrootsdatingbackto1828,itnowoperatesoneverycontinent,withmorethan18,000employeesinover
400offices.Willisoffersitsclientssuperiorexpertise,teamwork,innovationandmarket-leadingproductsand
professionalservicesinriskmanagementandtransfer.Itsexpertsrankamongtheworld’sleadingauthorities
onanalytics,modellingandmitigationstrategiesattheintersectionofglobalcommerceandextremeevents.
Acrossgeographies,industriesandspecialisms,Willisprovidesitslocalandmultinationalclientswithresilience
forariskyworld.
Visitwww.willis.com
TheIoDistheleadingorganisationsupportingandrepresentingbusinessleadersintheUKandinternationally.
Oneofitskeyobjectivesistoraisetheprofessionalstandardsofdirectorsandboards,helpingthemattain
highlevelsofexpertiseandeffectivenessbyimprovingtheirknowledgeandskills.Ithaspreviouslypublished
BusinessRisk:Apracticalguideforboardmembers,producedincollaborationwithAirmic,PwCandWillis.
Visitwww.iod.com

3. 2015 Critical Business Insurance
TAKE INSURANCE
ON BOARD
FOREWORD
3
Simon Walker
Director General,
Institute of Directors
I
nsurance matters to businesses and to the directors who run
them. If there is one overriding message in this Director Guide,
it is that if you fail to understand the importance of business
insurance as a key part of your risk management oversight, then you
are failing in one of your key roles as a board member.
There are at least four powerful reasons why insurance should
be a recurring item on the board agenda of every company, large or
small. First, today’s risk environment is continually evolving – and
the challenges facing businesses are larger and more diverse than
ever before. While traditional risks such as fire and flood have not
gone away, they have been joined by new, emerging and growing
risks such as cyber crime, terrorism and political violence, along
with the risks born of doing business internationally, such as supply
chain interruptions and legal and regulatory setbacks.
Second, insurance policies are among the largest commercial
contracts many companies enter into. Their size and complexity
alone means that they demand board-level scrutiny to ensure that
cover is ‘fit for purpose’ and that it also represents good value.
Third, the recently passed Insurance Act 2015, which has
significant implications for business, will kick in from August 2016.
In essence, the new law aims to provide greater safeguards for
policyholders, but it will also place them under new obligations and
all boards will need to be aware of these changes.
Fourth, insurance goes far beyond protecting and supporting a
business in a crisis – vital though this function is. The right business
insurance acts as a strategic enabler, underpinning companies’
ambitions and allowing them to seize new opportunities.
Learn, question and challenge
For some directors, insurance may traditionally have been a ‘grudge
purchase’ – something they felt obliged to spend money on, but
did so reluctantly, at the lowest possible price and with little
understanding of the cover acquired. If so, the dynamic nature of
today’s business environment demands a new approach.
Clearly, it is not feasible or desirable for directors to know every
detail of the insurance buying process. But the onus is on them
to know enough to be able to ask pertinent questions around the
boardroom table, and to challenge other executives and insurance
professionals. This guide provides them with many of the necessary
insights to do so, as well as checklists of relevant questions to raise.
How many have you asked?
Critical Business Insurance 2015
CONTENTS CONTRIBUTORS2
Chapter 1
4 When risks become real
John Hurrell, Chief Executive, Airmic, highlights why companies must not
overlook critical business insurance
Chapter 2
7 Wake-up call for the board
Alpesh Shah, Partner in the Actuarial Risk Practice, PwC, explains why critical
business insurance demands board-level attention
Chapter 3
10 Insurance as a strategic enabler
Ailsa King, Head of Sales, Willis GB, describes how the right insurance not only
offers businesses protection, but also helps them to fulfil their ambitions
Chapter 4
13 Counting costs
PwC’s Alpesh Shah discusses the potential financial impact on your business of a
flawed insurance strategy – and the value of scenario planning
Chapter 5
16 A buyer’s guide
Phil Sharpe, Chief Operating Officer, UK and Ireland, ACE Group, presents a
rigorous approach to acquiring the right insurance cover at the right price
Chapter 6
19 Going global
Karen Gorman, Head of International Programme Management, Willis GB,
outlines key considerations when coordinating insurance programmes globally
Chapter 7
22 Fast forward
Andy Macfarlane, Regional Manager for Scotland, ACE Group, considers emerging
risks and explains the part that insurance can play in mitigating them
Questions for your board
JohnHurrellhasbeenChiefExecutiveof
Airmicsince2008,followingacareerof
almost30yearsintheMarshandMcLennan
Groupofcompanies,wherehewas
ChiefExecutiveofMarsh’sriskconsulting
businessthroughoutEuropeandthe
MiddleEast
AlpeshShahisaPartneratPwC,where
heleadsthecorporateriskanalytics
practice,developinginnovativeriskanalysis
solutionstoprovideboardswiththetools
tomanageriskbetter
AilsaKinghasover23years’experienceat
Willis.PriortohercurrentroleasHeadof
SalesforWillisGB,sheledthebusiness’s
risksolutionsclientsegmentintheUK,
deliveringbrokerservicestomajorclients
withcomplexriskexposures
PhilSharpehasworkedintheLondon
insurancemarketforover30yearsand,
since2012,hehasbeenChiefOperating
OfficerofACEGroup’sretailpropertyand
casualtybusinessintheUKandIreland.
Priortohiscurrentrole,hewasDirectorof
CasualtyandMajorRisksfortheUKand
Irelandregion
KarenGormanhas25years’experiencein
theinsuranceindustry.Priortohercurrent
roleasHeadofInternationalProgramme
ManagementforWillisGB,shewasa
Partnerwithintheglobalservicerisk
practiceatJLT
AndyMacfarlanehas25years’experience
inthecommercialinsurancemarketin
ScotlandandinBermuda.HejoinedACE
Groupin2010andwasappointedRegional
ManagerforScotlandin2012.Hecurrently
servesasPresidentoftheInsuranceand
ActuarialSocietyofGlasgow

4. 2015 Critical Business Insurance
CHAPTER ONE WHEN RISKS BECOME REAL
and how it relates to the risk exposures
identified in their risk register, before a crisis
occurs. It is particularly vital for directors to
appreciate the true financial implications of
business-critical insurance – or the lack of it – by
understanding key metrics and crisis scenarios.
Think value, not cost
One of the recurring themes of this guide
is that, when purchasing business-critical
insurance, companies should negotiate their
policy based on its efficacy – its ‘fitness for
purpose’ – and not on price alone.
In a recent review of claims handling for
small and medium-sized enterprises (SMEs),
the Financial Conduct Authority noted “a gap
between the claims service received and the
SMEs’ expectations”. It went on to highlight “a
number of instances where the sum insured was
inadequate to cover the loss”.
This problem is entirely avoidable, but will
require companies to understand that not all
insurance is the same. As with most buying
decisions, you get what you pay for. Indeed, if
a contract is designed to provide cover against
events that could lead to serious balance
sheet damage, or even threaten the survival
of a business, boards should be wary of false
economies. Remember, having an insurance
policy that will pay out as and when you expect
it to is the most important criterion. This may,
in some instances, result in paying more for the
insurance policy, but ultimately paying the right
premium for the right cover will benefit the
business financially in the long term.
Few companies have an in-house insurance
expert, so it is also essential that senior
decision-makers have access to professional
advice before authorising the purchase of
insurance cover. For example, where insurances
relate to critical assets and facilities, getting
independent legal advice on the coverage of the
policy is best practice. Insurers are increasingly
using lawyers in the event of a claim, so it is
prudent to acquire your own legal advice at the
outset: once the loss has occurred, it is too late.
5
Critical Business Insurance 2015
Insurance is business critical
Insurance policies are often the largest and most
complex commercial contracts that a company
enters into. The successful payment of a claim
may well underpin the continuing financial
success of the company – or even its survival.
And, as the following chapters make clear, when
approached in the right way, insurance is also
a key strategic enabler and potentially a means
of taking carefully calculated risks to achieve
competitive advantage.
But how often is insurance on the board
agenda? In no other area of business would
a contract worth potentially hundreds of
millions of pounds fail to receive board-level
scrutiny. Despite its importance, many company
directors have little understanding of their
company’s insurance requirements. All too
often, insurance is viewed simply as a necessary
cost overhead without much consideration of
its scope or effectiveness – they assume that
policies will pay out when needed. While most
policies do indeed pay out, such complacency
can be costly, especially regarding larger and
more complex claims.
When a large risk materialises that is
uninsured, or where a claim against it is delayed,
unpaid or only partially paid, it can seriously
threaten the financial viability of the business.
The consequences can be disastrous. Many
companies would face a huge challenge to
finance an uninsured loss or payment delay
involving, say, their largest physical asset or
a liability claim that might equate to pre-tax
earnings.
Boards, therefore, must be asking important
questions about their insurance programme
4
WHEN RISKS
BECOME REAL
JohnHurrell,ChiefExecutive,Airmic,highlightswhytoday’sdirectorsmust
notoverlookbusinessinsurance
•Theriskenvironment
iscontinually
evolving–andthe
challengesfacing
businessesaremore
diversethanever
•Insurancepoliciesare
amongthelargest
andmostcomplex
commercialcontracts
•Anewlegal
frameworkwill
governcommercial
insurancefrom
August2016
•Businessinsurance
covermustbe‘fitfor
purpose’,aswellas
goodvalue
•Insurancealonewill
neverbeenoughto
protectabusiness
fromallrisks
Summary

5. 2015 Critical Business Insurance
WAKE-UP CALL FOR THE BOARD
AlpeshShah,PartnerintheActuarialRiskPractice,PwC,explainswhyinsurancedemandsboard-levelattention
CHAPTER TWO WAKE-UP CALL
A vital tool
Insurance is critical to protect and grow a
business. It is often also one of the most
complex and financially significant contracts
organisations enter into. Yet insurance is
seldom discussed seriously at board level.
Insurance is a vital tool to help almost
all companies manage key aspects of risk
they face. There will be implicit reliance on
insurance to mitigate the impact of some of
the most material risks that businesses face,
providing quiet confidence that, should the
worst happen, the financial costs will be
covered by a third party. In short, insurance
is a strategic enabler, allowing risks to be
actively taken in the pursuit of a strategy that
would otherwise not be palatable.
On a more practical, operational level,
insurance may be critical to a business’s
licence to operate. There are many situations
that require insurance to be in place in order
to allow business to continue operations,
ranging from regulatory or legal obligations
and debt covenants through to market
requirements due to competitive pressures
and industry norms. In these situations,
the existence of appropriate insurance is
often taken as given around the boardroom
table, and assumed to have been put in
place by those tasked with procuring it. But
such complacency in these business critical
situations is a potentially serious mistake.
The failure or non-performance of insurance
could have a catastrophic effect on the
business’s ongoing ability to operate.
Insurance governance
Revisions to the Corporate Governance
Code in the UK place increased emphasis
on the board’s duty to ensure the effective
management of risk. Given the importance
7
•Insuranceiscritical
toprotectandgrow
abusiness,butitis
oftenabsentfrom
theboard’sagenda
•Boardshaveadutyto
ensurethatinsurance
coverisappropriate
andeffective,but
manyarefailinginit
•Itisnotacceptable
forboardssimply
toabrogate
responsibility
by‘outsourcing’
insurancepurchase
•Insuranceshould
playamajorrole
insupportinga
businessinacrisis
•Businessesface
anincreasedlegal
obligationtoprovide
insurerswithrobust
information
Summary
WHEN RISKS BECOME REAL CHAPTER ONE
those that ‘keep directors awake at night’ but,
despite this, research suggests that boards often
incorrectly assume they have cover for them.
Insurance solutions are developing for these
emerging risks. But no matter how thorough
and well designed your insurance programme
is, in today’s dynamic business environment
insurance alone will never be enough to protect
a business from all the risks it faces.
So, while boards must ensure they are
asking the right questions about insurance, the
conversation must not stop there. Businesses
must still establish crisis management and
business continuity plans to respond to adverse
events and potentially uninsured losses.
Insurance should never replace the need to
look at today’s top business risks and consider
how these can best be managed holistically.
If the first step is to use the corporate risk
map to undertake due diligence into business-
critical insurance, the second must be to ask
how the risk map can inform a company’s
wider risk management strategy and processes,
with a view to making the business truly
resilient to the challenges of the 21st Century.
6
Critical Business Insurance 2015
It is also best practice for senior management
to test the insurance programme against
specific scenarios, such as those at the top of
the corporate risk map, with their insurance
advisers. This will demonstrate how the
policies would respond in the event of a claim,
and flush out any gaps in cover.
Changing risk environment
The risk environment is continually evolving –
and the challenges facing businesses today are
more diverse and complex than ever before.
Many risks are non-physical and harder
to define than in previous business eras –
covering areas such as cyber, reputation and
intellectual property. This is particularly true
of emerging risks. Strategically, these can be the
most important risks for businesses because
they are often by-products of new business
opportunities. Emerging risks tend also to be
Insurance Act 2015
Anewlegalframeworkwillsoongoverncommercialinsurance
contracts.TheInsuranceAct2015isoneofthemostsignificant
legalreformsfordecadesandaffectsallbusinesses.Boardsneed
enoughunderstandingtoquestionrelevantexecutives.
• TheactwillapplytotheplacementofallUKcommercial
insurancepoliciesfrom12August,2016
• Thereformislargelyforthebenefitoftheinsuredparty,
puttinginplacegreatersafeguardsforpolicyholders
• However,insuredbusinesseswillalsobesubjecttonew,
morespecificrulesabouttheinformationtheydiscloseto
insurers,includinginformationknownbyseniormanagement.
Companiesshouldthereforebepreparedforgreaterdue
diligenceandamorelegalisticapproachfrominsurers
• Businessesmustnotbecomplacent:evenwiththenew
safeguardsinplace,insurancecanstillfailtoperformas
expectedintheeventofaclaim.
Many company directors have little
understanding of their company’s
insurance requirements”

6. circumstances, disputes regarding liability and
simply delays in understanding the extent of
the loss, often lead to delays in claim payment
or disputed compromise settlements.
The failure of insurance to respond fully as
expected when risks materialise is a business
risk in itself. Does your corporate risk register
recognise this?
Cover in a crisis
Insurance should play a major role in financially
supporting businesses at times of crisis.
When the worst happens, the first port of
call for the board will typically be to address
any immediate threats to people or assets,
understand the emerging risk scenario, and
manage communications with stakeholders.
Business recovery plans will come into play
in an attempt to ‘steady the ship’ and ensure
that the business disruption from insured
events is contained and immediate adverse
consequences are managed.
Soon after, however, attention will turn
to insurance as a means to start rebuilding
and remediating. At this point, the strength
of the relationship between the insured
and the insurer can be tested. The mark of a
strong, symbiotic relationship with insurers
and brokers is the immediate support of the
business, often around the implementation of
short-term, practical actions to contain damage
and rapidly establish the parameters of any
potential claim. If there has been clarity around
the nature of the insured risk at the time the
cover was purchased, there will be less scope
for challenge from, and dispute with, insurers
when it comes to making claims.
Too often, however, it is at the point of claim
that the nature of the risk is really investigated
to find out if such clarity exists. Before a crisis
or a setback occurs, boards should ask how well
their company’s risks have been articulated to,
and understood by, their insurers. By acting
with foresight and rigour in this way, support
from insurers is much more likely to be
forthcoming when it is really needed.
New obligations
From August 2016, the Insurance Act 2015 will
place an increased requirement on insured
businesses to ensure that the information
they provide to insurers at the time cover is
purchased is suitably robust and controlled.
Boards should ask how well controlled
insurance risk information flows are within
their organisation, as it is often separate from
financial information and, as such, may not be
as accessible or well maintained.
2015 Critical Business Insurance
CHAPTER TWO WAKE-UP CALL
9
Aswellasmanagingbusinessrisksand
insurance,boardmembersshouldalso
considerriskstheyfaceinapersonal
capacity.Often,thetwoarelinked.
Theexposureofdirectorsandofficers
(D&Os)tolawsuitsisontheincrease,as
regulatorsandshareholdersfocuson
highstandardsofcorporategovernance
andlegalandregulatorycompliance,
andlooktoholdindividualexecutives
personallyliableforfailures.Pitfalls
comeinavarietyofformsandthecost
ofdefendingclaimsisrisingrapidly.
D&Oinsuranceisakeysafeguard.
Insurersofferspecificcovertoaddress
theneedsofindividualboardmembers,
mostimportantlyprotectingtheir
personalassets.Keyareasofcover
availabletoindividualsinclude:
• Specialexcessprotectionfornon-
executivedirectors
• Lifetimerun-offforretiredinsured
persons
• Investigationcover
• Extraditioncover
• Environmentalcover
• Publicrelationscovertomitigate
theadverseeffectonanindividual’s
reputation.
This is personal
Key questions for the board
• Howoftendoesinsurancefeatureontheboardagenda?
Whenwasthelasttimetheboardapprovedthecorporate
insurancestrategyorrenewal?
• Doesthenon-performanceofinsurancefeatureonyour
corporateriskregister?Whatplansdoyouhaveinplaceif
claimsarechallengedandsettlementsaredelayedorpartial?
• Howwellcontrolledaretheprocessesusedtoprovide
corporateriskinformationtotheinsurancemarket?When
weretheselasttested?
8
that insurance plays in the ability of a business
to operate, and the financial significance of
insurance contracts, this should include the
mitigation of risk through insurance. The board
has a duty to ensure that coverage is appropriate
and effective.
In reality, when it comes to insurance,
many boards are falling short of the required
standard. Consider, for example, the amount
of board scrutiny likely in raising £100m of
debt or equity or transacting a £100m merger,
compared with placing £100m-worth of
insurance coverage. As the illustrative chart
above shows, in most cases there will be a
significant disparity in the level of board focus.
It is often argued that insurance contracts
are complex, and therefore difficult for
directors who are focused on running their
business to understand and challenge. But it is
not acceptable for boards simply to abrogate
responsibility by ‘outsourcing’ insurance
purchasing to the company’s specialist
insurance buyer or external broker. Whilst the
skills of a dedicated insurance buyer, coupled
with the advice received from brokers and
other risk consultants, form a valuable basis
for the placement of insurance, it remains the
board’s duty to ensure the coverage entered
into is appropriate and effective. Given its
business-critical nature, insurance and its
purchase require a level of challenge around the
boardroom table.
Simply having an insurance programme
in place should not imply that the financial
costs of risks the business thinks are covered
will always be so. There are many reasons why
insurance may not provide the cover expected
at times of crisis. Legal challenges to claim
Before a crisis occurs, boards should ask how
well their company’s risks have been articulated
to, and understood by, their insurers”
Critical Business Insurance 2015
Illustration of board priorities
Investment of time and money on arranging £100m equivalent
Diligence on company Raising equity Loan Insurance
Source:PwCclientexperiences

7. 2015 Critical Business Insurance
CHAPTER THREE A STRATEGIC ENABLER
rises to 90% for small businesses that suffer a
data loss incident.
This highlights the importance of a business
having the right incident management plans
and insurance in place to get back on its feet.
Appropriate insurance cover can help with
everything, from rebuilding destroyed physical
assets to providing compensation for business
interruption; ensuring companies survive and
thrive after what can be a catastrophic event.
The risks faced by companies, both large and
small, are constantly changing and increasing
in number, diversity and complexity. This
trend is demonstrated by the growth in the
digital economy and increasing reliance on
sophisticated data, exposing businesses to
potential cyber attack and loss of customer data.
In several high profile cases this has led to
significant reputational damage accompanied
by severe financial loss, much of which could
have been avoided by businesses understanding
the risks they face, how they might change in
the future and implementing the correct risk
mitigation strategies.
The importance of the right insurance and
risk advice is clear.
Enabling tomorrow
If the purchase of insurance and risk
management advice is not a key strategic
decision, a business cannot make fully
informed choices about its future.
Forward-looking businesses understand
that having the correct insurance and risk
management strategies in place has a positive
11
Research finds 90% of
small businesses that
suffer a data loss incident
fail within two years”
Critical Business Insurance 2015
INSURANCE AS A
STRATEGIC ENABLER
AilsaKing,HeadofSales,WillisGB,describeshowinsurancenotonlyoffers
businessesprotection,butalsohelpsthemtofulfiltheirambitions
Thinking strategically
Understanding where a company wants to be
in the future, identifying risks that might stop
it getting there, and working with risk advisers
and insurers to get the right risk management,
transfer and mitigation strategies in place, all
help build a resilient and sustainable business.
To realise this ambition, businesses should
be asking their risk advisers and insurers
to look beyond the existing insurance
programme and examine the company’s short
and long-term objectives, together with its risk
register, to fully understand the wider range of
risks it faces.
Protecting today
Insurance can be seen as a tactical purchase,
with the decision on what insurance to buy
(and from whom) sometimes coming down
to cost and minimum compliance with legal
requirements, as opposed to the quality of the
cover. This is particularly true in the current
competitive economic environment, where
companies are squeezed and cost savings need
to be made.
This approach, while appearing expedient
in the short term, ignores the fundamental
value of good quality insurance and its
strategic importance in building resilience for
the future.
Research around the world (including
recent studies by the UK government and US
audit and accountancy practice McGladrey)
shows that 70-80% of businesses that suffer a
major loss, and which do not have an effective
business continuity plan (and adequate
insurance), are no longer trading two years
after the incident took place. This number
10
•Insuranceis
sometimesseenas
atacticalpurchase,
withthedecision
basedoncostrather
thanqualityofcover
•Therightinsurance
canhelpovercomea
crisis–butthisisonly
partofthestory
•Insuranceand
proactiverisk
managementisa
‘strategicenabler’,
providingcertainty
andultimately
helpingcompaniesto
achievetheirgoals
•Strategicambition
willbringincreased
risks.Boardsshould
strivetoidentify
whereriskswillarise
andensuretheright
protectionisinplace
Summary

8. 2015 Critical Business Insurance
COUNTING COSTS
PwC’sAlpeshShahconsidersthepotentialfinancialimpactonyourbusinessofaflawedinsurancestrategy
CHAPTER FOUR COUNTING COSTS
No ordinary overhead
It is often at times of crisis, when
insurance losses are triggered, that
board and senior management
attention really focus on the value
and performance of the corporate
insurance programme. But the true
value of business-critical insurance
to the organisation should be
considered when insurance strategy is
set and cover purchased. Comparing
the amount of cover required, the
size of potential losses and the
financial consequences of not having
cover, or insurance not responding
as expected, against other key
financial metrics is a way of creating
appropriate focus on insurance.
Metrics matter
Around the board table, most
significant business decisions will
be based on an analysis of relevant
financial metrics. These might
include, for instance, the potential
impact of a new product on gross
revenue or operating profit, the
consequences of rationalising
back-office functions on business
expenses or the impact of a proposed
merger on shareholders’ equity. The
reason for this is simply that metrics
provide a common language in
which to measure business success,
both internally and with external
stakeholders, such as financial
analysts and lenders. Strategic
outcomes, whether positive or
negative, are often expressed in terms
of these metrics. Similarly, the impact
of risk, whether insured or not, can
13
•Thetruevalueof
business-critical
insuranceshouldbe
consideredwhen
insurancestrategy
issetandcover
purchased
•Theimpactofrisk
canbemeasured
throughestablished
financialmetrics,
providingaconsistent
strategicviewofrisk
andrewardaround
thebusiness
•Ifthebusiness
suffersasignificant
loss,theboardmust
consideritsshortand
longer-termfinancial
implications
•Theremaybean
expectationthat
insurancewill
respond,butclaim
circumstancescan
affectpayouts
•Boardsshould
considerpossibleloss
scenarios,enhancing
thecorporaterisk
register,recovery
plansandinsurance
coverinlightofthem
Summary
A STRATEGIC ENABLER CHAPTER THREE
12
Critical Business Insurance 2015
Key questions for the board
Insurance as a strategic enabler
Understanding your risk exposures
Protectingtoday
• Doyouunderstandthefullrangeofrisksyoucurrentlyfaceandthedifferent
strategiesavailable(includinginsurance)tohelpmitigatethem?
• Hasyourcurrentinsurancerespondedtopreviousclaimsasyouexpected?
• Areyoubuyingenoughcoverandretainingtherightamountofrisk,or
woulditbebettertotransfermoreofyourexposuresusinginsurance?
• Haveyouconsideredthechangingclaimsenvironmentandhowthis
impactsyourlosshistory?
• Haveyouconsideredalternativeriskmitigationandtransfersolutionsto
insurance?
Enablingtomorrow(strategicplanning)
• Areyouconsideringhowinsurancemayhelpstrategicdecision-making?
• Doyouunderstandwhatrisksyourcompany’smediumtolong-term
strategiesmaycreate?
• Doyouunderstandhowtheabilitytoinsurecertainriskscanpositively
influencestrategicdecision-making?
• Howcaninsurancehelpmitigatenewareasofrisk,suchasinternational
expansion,newmarketsandnewproductsandservices?
• Howmightinsuranceformpartofyourvaluepropositiontocustomers?(For
example,haveyouconsideredaffinity/reinsuranceoptions?)
• Doesyourriskadviserlookbeyondtodaytounderstandwhatrisksyoumay
facetomorrow?
• Isyourriskadviserkeepingyouuptospeedwithbenchmarkingandhow
yourcompetitorsaremitigatingrisk?
• Isyourriskadvisermakingrecommendationsonriskmanagementand
insurancethatclearlyaredirectlyrelevanttoYOURbusinessstrategy?
• Isyourriskadviserkeepingyouinformedontrendsinthelegaland
regulatoryenvironmentasitrelatestoriskinyourbusiness?
impact on the delivery of a company’s short, medium and
long-term ambitions. Most businesses have a clear vision
about where they would like to be in one, three or five
years’ time, and will have strategic plans in place to help
them achieve their aims.
These objectives can be diverse, ranging from new
product launches, international expansion, moving into
fresh distribution channels, or growth through merger
or acquisition.
Achieving any of these goals will involve some element
of increased business risk, for example, greater exposure
to cyber crime, or risks associated with the ownership of
overseas assets, the management of international supply
chains, or the need to comply with unfamiliar legislation.
The importance of understanding these risks and
how they might affect a business cannot be overstated
and successful companies are those that place risk
identification and mitigation, now and into the future, at
the heart of their business’s strategic planning process.
Researchconfirmsthatwhilethecircumstancesandmacrodynamicsofbusinesses
arequitedifferent,thechallengesandriskstheyfacecanbesurprisinglycommon.
Thisinsighthasledtothedevelopmentofananalyticalframeworkthat
businessesandtheiradviserscanusetobuildadeeperunderstandingofkey
performanceareasandtherisksrelatingtoeach.
Thisinsightlooksbeyondtraditionalrisks,highlightingareasthatwouldnotbe
apparentintraditionalstrategyandriskplanningprocesses.
Themainelementsofthisframeworkare:
Helpingtoattracttalent
Ifabusinessisexpanding,perhapsintoanewterritoryoranareaofpotential
politicalinstability,itmayfaceachallengeinattractingandretainingthebestpeople.
Insurerscanofferarangeofproductstohelpcompaniesattractthenecessary
talent,includingemployeebenefitssuchaspensions,healthcareand,inthecaseof
overseasworkers,repatriationinsuranceintheeventofacrisis.
Marketdevelopment
Offerdevelopment
Margindevelopment
Acquisition
Humancapital
Relationshipcapital
Brandcapital
Physicalcapital/IP
Impactonsociety
Corporateidentity
GROWTH VALUE
CITIZENSHIP

9. board considers what the short, medium and
long-term financial implications of dealing with
it may be. Whilst the risk resulting in the loss
may have been on the corporate risk register,
and the stated mitigation may have relied on
insurance cover, the live business impact of such
losses is often more financially complex.
Short-term costs relating to immediate
business recovery costs, dealing with
stakeholder communications and eliminating
any immediate threats to people or assets will
have to be met out of the business’s free cash
resources or agreed short-term credit facilities.
Beyond that, any immediate impact on business
operations may result in additional business
continuity costs, either as revenue shortfall
due to failure to supply customers or remain
open for business, or as additional expense, for
example from keeping staff employed when
production has ceased. In the case of liability
claims, legal costs will also start to mount up.
Longer term, there may be an expectation
that insurance cover will respond to
these costs. But insurers will still need to
complete appropriate diligence on the claim
circumstances before approving payments and,
where disputes arise around the admissibility of
the claim, the financial recovery from insurers
may be delayed or diminished by compromise
settlements. Sources of finance to bridge the gap
between loss expense and insurance payout,
such as bridging loans, are increasingly rare, and
access to additional credit financing at times of
business distress can be difficult to secure.
It is within the context of these financial
challenges that boards should consider how
well prepared the company is to cope with
potential losses. Running through possible
loss scenarios, enhancing the corporate risk
register, business recovery plans and insurance
provision in light of them, will help to get the
business on the front foot.
2015 Critical Business Insurance
CHAPTER FOUR COUNTING COSTS
15Running through possible loss scenarios,
enhancing insurance provision in light of them,
will help get the business on the front foot”
Key questions for the board
• Whatarethefinancialimplicationsofnotinsuringorinsurance
notrespondingasexpected?Howdothesecomparewiththe
financialmetricsthebusinessisassessedagainst?
• Whichfinancialmetricsandtargetsaremostcriticaltoyour
businessanditssuccess?Whatrisksdoesthebusinessface
thatthreatentheirachievement?Doesinsurancefeatureasa
responsetothesethreats?
• Doyouunderstandtheshortandlong-termfinancial
consequencesofvariouslossscenariostothebusiness?
Howeffectivelydoinsurance,businessrecoveryplansand
otheremergencyfinancingarrangementsinterfaceinlightof
thesescenarios?
14
also be measured in terms of these metrics to
provide a consistent strategic view of risk and
reward around the business.
Considering insurance limits and potential
losses in the context of these key financial
business metrics will help raise the discussion
of insurance up the board agenda, enabling
appropriate attention to be given to insurance
decisions that may be just as important, in
terms of their financial implications, as other
board-level business issues.
The chart above provides an illustrative
example of a range of financial business metrics
against which proposed insurance limits or
potential loss sizes can be plotted.
The chart can be used to plot individual
insurances versus financial consequences in
the event of the insurer failing to meet the
customer’s expectations of a claim. Clearly,
while this particular chart relates to a ‘generic’
organisation, companies can easily prepare
their own version using readily available data.
When preparing their own chart, insurance
managers should consider:
• The financial metrics listed on the ‘y’ axis
will not be relevant to all organisations, or
a variation may be more appropriate. For
example, ‘business-critical expenditure’ may
refer to R&D, marketing or other costs
• The values for each financial metric listed on
the ‘y’ axis should be readily available from
the annual report and accounts, or from the
company’s finance department
• Thorough, robust loss-forecasting data
is required when plotting the ‘x’ axis.
Companies should consider the types of loss
likely to affect the business, the expected
value of each type, and whether the loss
would need to be financed within one
financial period or could be spread
• The financial and corporate structure of the
organisation will affect the consequences
of financing an uninsured loss. Specific
considerations could include the company’s
liquidity, leverage and borrowing facilities.
The chart can form a practical basis for
describing the financial and accounting strain
that would be placed on the company in the
event of a significant loss where insurance does
not respond as needed. Drawing comparisons
helps to provide clarity. For example, the chart
shows that losses incurred from a potential
product recall would be larger than annual
dividend payments, putting those payments at
risk. Similarly, a third-party liability exposure, if
unmitigated, could wipe out shareholder equity.
Financing losses in a crisis
When the worst happens and the business
suffers a significant loss, it is essential that the
Critical Business Insurance 2015
Relationship between financial losses
and key financial business metrics
Size of insurable loss (£)
Grossrevenue
Shareholders’equity
Long-termdebt
Business-critical
expenditure
Operatingcashflow
Undrawnoverdraft&
short-termloans
Operatingprofit
Interestpayments
Totalannualpayroll
Profitaftertax
Dividendpayments
Short-termdebt
Cash&cashequivalents
Productrecall
significantloss
Finance business
metrics (£)
PDBI
significantloss
Thirdparty
liability
Source:BusinessCriticalInsurance,reportbyAirmicandPwC,June2015

10. 2015 Critical Business Insurance
CHAPTER FIVE A BUYER’S GUIDE
17
Whatcouldimpactyourbusinessand
preventyoufromdeliveringyourgoodsor
servicestoyourcustomers?
2 Evaluation
Whatmeasuresandpreventioncan
youputinplacetoprotectyourbalance
sheetandensureyousurviveiftheworst
happens?
Howwillyouensurethatthesemeasures
arerobustandprovidevalue?
3 Control
What do you need to protect?
Some risks will threaten the survival of your business whilst
others, although undesirable, will have less impact. During
this stage, you should establish what assets – both tangible and
intangible – you must ensure are protected.
It is important to:
• Understand the business’s requirements – now and in the
future
• Consider assets beyond buildings and stock, such as key
personnel, reputation and brand. Think through: the potential
impact of a loss of data; your ability to relocate or replace
plant and machinery; how robust your suppliers are; and the
strength of your relationship with key customers
• Review or create a risk register, which will inform your
decision-making and provide a checklist for your final
programme.
Stage 1: Identification phase
What are the threats to your business?
Once you have established what you need to protect, you can
begin to consider what threatens those assets.
It is important to:
• Evaluate the risks. Identify the real risks and threats, which
will go beyond traditional fire, flood and theft
• Evaluate risk appetite. What risks can your business
potentially manage and how would an impact here affect your
strategy?
• Consider risk mitigation. What are the available options?
Stage 2: Evaluation phase
What are the potential solutions to the threats your business faces?
This phase is about ensuring that you have coverage and
mitigation for risks, without gaps or overlaps.
It is important to:
• Consider both insurance and non-insurance solutions
• Assess the credentials of professional partners
• Demand more from insurers
• Know your risk mitigation programme
• Own relationships with insurers and other partners
• Take a proactive approach to claims.
Stage 3: Control phase
Critical Business Insurance 2015
A BUYER’S GUIDE
PhilSharpe,ChiefOperatingOfficer,ACEUK&Ireland,presentsarigorousapproachto
ensuringinsuranceprogrammeefficacy
Price versus value
As previous chapters have noted, insurance is one
of the most significant purchases a company can
make. Insurance is about protecting a company’s
balance sheet by transferring risk to a secure
partner. In addition, insurance may be required
by law, or by other parties, in order for a business
to trade. Ensuring that the correct provision is in
place could ultimately determine a company’s
very survival, as well as opening up new
strategic opportunities, underpinning growth by
mitigating known business risks and allowing
investment risk elsewhere.
But for all this to hold true, an insurance
programme must be robust, fit for purpose and
meet the real-world needs of the organisation –
which is why programme efficacy is ultimately a
board-level responsibility. Yet, in many instances,
there is insufficient engagement at board level
into the design of insurance programmes, as
well as a poor perception of their worth. For
board members, a good approach to ensuring
programme efficacy is to consider the policy,
not merely in terms of its chargeable cost, but as
having a value equal to the limit of the indemnity
being purchased. This approach should help
the board to recognise insurance cover as the
valuable asset that it is.
As investment guru Warren Buffet has
famously observed, “Price is what you pay; value
is what you get.”
Programme efficacy
In order to ensure that your insurance
programme is fit for purpose and offers your
business value and protection, insurance
purchase decisions must be part of a broader risk
management review, as the accompanying model
and its adjacent commentary illustrate.
16
•Theprocessfor
ensuringthat
aninsurance
programmeisfitfor
purposecanbesplit
intothreekeystages:
Stage1:
Identificationphase
Whatareyoutrying
toprotect?
Stage2:
Evaluationphase
Whatarethethreats
toyourbusiness?
Stage3:
Controlphase
Whatarethe
solutionstothese
threats?
•Thereisno‘onesize
fitsall’template
forensuring
aninsurance
programmemeets
everyrequirement
•Boardengagement
andintervention
atkeystageswill
ensurethatthe
ultimatesolutions
aremoreresilient
andunderpinan
organisation’s
survivalandgrowth
Summary
Whatdoyouneedtoprotecttoensure
yourbusinesssurvivesintheeventofa
disaster?
1 Identification
The three phases of
ensuring programme
efficacy

11. 2015 Critical Business Insurance
GOING GLOBAL
KarenGorman,HeadofInternationalProgrammeManagement,WillisGB,highlightskeyissuesinglobalinsurance
CHAPTER SIX GOING GLOBAL
A complex world
The connected digital economy
enables companies of all sizes
to trade globally, offering them
significant new opportunities. Yet
this new paradigm also creates
a far more complex operating
environment.
Success in the global economy
is about understanding and
managing that complexity, whether
it is unfamiliar local laws and
regulations, cultural differences or
complicated global supply chains.
And that requires excellent local
and international knowledge,
communication and organisation.
Companies should be fully aware
of the impact international exposures
may have on their business, and
ensure they have intelligent
and comprehensive insurance
programmes that meet international
requirements and provide them with
the right level of protection.
Local variations
Businesses should be aware of,
and adjust to, local practices and
insurance requirements as these
can vary dramatically between the
different countries in which they
operate.
Examples include:
• Local tariff premiums or
minimum filed rates
• Mandatory local insurance
retentions where there is a
requirement to retain risk in the
local insurance market
19
•Globalisation
createsafarmore
complexoperating
environmentfroman
economic,political,
technologicaland
culturalperspective
•Companiesshould
beawareoftheir
international
exposures,and
ensuretheyhave
comprehensive
insurance
programmesinplace
asprotection,either
globallyorlocally
•Localpracticesand
regulationscanvary
dramaticallybetween
thedifferent
countriesinwhich
businessesoperate
•Awell-managed,
centralised
programme
streamlinesthe
managementof
diversestakeholders,
ensuringtheirefforts
arealigned
•Businessesshould
regularlyreview
theirinternational
insurancestoensure
theymeettheir
ongoingneeds
Summary
A BUYER’S GUIDE CHAPTER FIVE
18
Key questions for the board
Theboardshouldembracethefollowingactionsandchallengesto
ensurethecompanyiscorrectlycoveredand,therefore,thatany
claimwillbepaid:
• Areyouengagingwithyourinsurerinpre-lossplanning?
• Isalltheinformationyouprovidedyourbroker/insurer
accurate?
• Doyouhaveamechanismforupdatingchangesaboutyour
businesstoyourbrokeroutsideofrenewaltime?
• Doyouhaveclarityonwhichcoversarecritical?
• Haveyoubeenrealisticaboutthecoveryoucanachievewith
yourbudget?
• Haveyouthoroughlyreviewedalldocumentationand
challengedwhereappropriate?
• Haveyouandyourcolleaguesmetyourinsurer’sclaimsteam
(pre-loss)?
• Doyouknowwhattheclaimscultureofyourinsureris?
• Areyoufamiliarwithyourinsurer’sclaimsprocesses?
• Ifyouarepartneringwithmorethanoneinsurer,haveyou
undertakenagapanalysisbetweencovers?
• Haveyoudocumentedwherenecessary?
• Haveyou,asamanagementteam,consideredallreasonable
threatstoyourbusiness–particularlyemergingrisks?
Critical Business Insurance 2015
A three-stage process
As a minimum, boards should be discussing the three key
stages in the model, as such debate can often anticipate risks
and help avoid damage to the business. Preventing losses in
the first place is ultimately far preferable to compensation
after an adverse event.
Although there are three clear stages involved in
achieving programme efficacy, ensuring your organisation
is adequately protected from risk is a continuous cycle, and
board members should be aware that different elements
of a programme can co-exist in different stages at the
same time. External factors can also shift components to a
different place in the cycle without warning, so you must be
prepared to revisit any area at any time.
Key interventions for the board
There is no ‘one size fits all’ template for ensuring an
insurance programme meets every requirement for every
business. Experience tells us, however, that the board’s full
engagement and decisive intervention at key stages of the
process will ensure that the ultimate solutions are more
resilient, helping to underpin an organisation’s ongoing
survival and future growth.
The board should be actively involved in:
• Shaping risk strategy. What are the key drivers, risk
appetite and strategy?
• Appointing someone internally to be responsible for
insurance procurement
• Reviewing the big picture of what assets to protect and
how
• Broker selection
• Risk transfer strategy. The board should have regular,
thorough insight into the process
• Meeting proposed and incumbent insurers and
challenging their capabilities. Good insurers will rise to
the challenge
• Monitoring the programme – receiving regular updates
and reviews
• Responding to change. Today’s dynamic, interconnected
world requires the board to be proactive in adapting its
risk management and insurance strategy.
The board’s full engagement and
decisive intervention will ensure
that solutions are more resilient”

12. Enhancing effectiveness
Businesses can make managing their insurance
programme easier by being aware of the types
of information insurers, brokers and regulators
may require.
More may be needed than just underwriting
information in order for insurers to calculate
premiums and taxes in different countries,
and this may vary depending on the class of
insurance. To issue or price a local policy, any
relevant legislation – for example anti-money-
laundering rules and sanctions – must be
adhered to. Information such as the following
will also be required:
• Local legal entity names and addresses, and
fiscal codes
2015 Critical Business Insurance
CHAPTER SIX GOING GLOBAL
21• Proposal forms or financial statements for
financial lines
• Any additional insured under local policies
• Business descriptions.
Getting it right first time
This maximises global transparency and
efficiency, and can be facilitated by:
• Treating problem countries as a priority
• Documenting commonly raised problems
• Working with the broker or risk adviser on
how to mitigate them
• Clearly formulating communication
channels and eliminating duplication
• Establishing information requirements early
in the renewal process
• Incorporating action points relating to global
programme administration into the renewal
timetable
• Planning ahead.
Go global, be flexible
Businesses should regularly review their
international insurances to ensure they meet
their needs as they grow, particularly into
specific markets or new, untested territories.
An international programme should also be
flexible enough to adapt to changes in the wider
business environment, such as new legislation
or amendments to local regulations.
Key questions for the board
• Doyouhavecleardocumentationthatsetsoutreporting
guidelines,communicationandescalationchannels,and
theinsuranceframework(aconsistentserviceplatformand
tangibleobjectives)?
• Doyouhavearobustrenewalprocesswithaquality
managementsysteminplaceandconsistentprocessesacross
allnetworkoffices,coveringareassuchascompliance?
• Doyouhaveacommunicationschedulethatensuresregular
communicationwithallofyourterritoriestoensureclarity,
withnoduplicationofeffort?Isinformationescalatedtothe
relevantstakeholdersordisseminatedquicklyandeffectively?
Where required, a company’s risk adviser
should align its network to the local offices
of its client’s business.
• Cost-effectiveness
Buying an insurance programme centrally
– as opposed to buying cover locally – helps
to control cost through the economies
of scale and purchasing power of the
business.
• Broader coverage
Purchasing insurance centrally often
means a company can leverage more
comprehensive cover. This may also
include non-standard covers that it may not
be possible to purchase in some countries.
20 • Cash before cover/other premium
payment rules
• Compulsory covers or those aligned with
local market practice
• Local capacity (including sharing of limits,
aggregation)
• Scope of cover locally (including awareness
of tariff wordings)
• Exchange controls.
Managing risk and connecting stakeholders
Even for relatively small companies, purchasing
international insurance cover involves many
diverse stakeholders, including insurers and
other local service providers.
A well-managed insurance programme
streamlines the management of all of these
stakeholders, ensuring their efforts are aligned
and focused on delivering the right solutions.
Businesses can manage their risks efficiently
by having a centralised approach, rather than
allowing local offices to make standalone
insurance purchasing decisions. However, an
effective programme should be benchmarked
against the cost of insurance bought locally,
to confirm that the benefits of a centralised
programme prevail.
Realising the benefits
• Consistency
Best practice is more easily shared through
centralised programme management across
all the territories a business operates in,
allowing for greater control and enabling
standardisation of insurance and risk
management processes.
• Compliance
A centralised programme assists with
corporate governance and helps ensure
compliance with local laws and regulations.
Businesses can manage their risks
efficiently by having a centralised
insurance programme”
Critical Business Insurance 2015

13. 2015 Critical Business Insurance
CHAPTER SEVEN FAST FORWARD
management attention as the chief obstacle
to effective emerging risk management.
Specifically, managers may wish to maintain
a ‘risk radar’ database of emerging risks, and
each time they look at the company’s risk
register, review it to consider whether any
are worthy of elevation.
• Collaborate
Managing emerging risks requires a
multidisciplinary effort, with different
functions working together. A piecemeal
approach is unlikely to work well and, by
making it everyone’s responsibility, boards
can help ensure that it does not become
a siloed activity. By setting the right tone
and expectation from the top, business
leaders will help to build the right culture
of emerging risk awareness throughout the
company. Cyber risks, for example, cannot
be the responsibility of the IT function
alone, just as supply chain risks should not
solely be the concern of the operations team.
• Take skilled advice
ACE’s research identifies a lack of human
resources and skills as a major obstacle
to good emerging risk management,
particularly within smaller companies. This
does not mean companies have to provide
all of the solutions in-house, but it does
mean careful attention should be given to
the choice of external partners – including
insurance partners. The board must be
confident it can call upon specialist emerging
risk skills and experience when needed.
• Access additional services
Many SMEs are increasingly taking
advantage of insurance market solutions
that go beyond the traditional insurance
policy. This may include practical benefits
such as automatic access to specialist legal
advice in the area of employer’s liability or
D&O claims, information security audits, or
incident management or crisis PR support
for environmental, cyber or export liability
incidents, for example.
• Provide full information
Comprehensive insurance solutions are
still a work in progress in some areas of
emerging risk. Especially where there is
limited historical information on which
to base pricing decisions, underwriters
may also require more information than
usual in order to calculate exposures. This
typically includes areas such as supply
chain and cyber risk where, the better
the risk management processes in place
and the information available, the more
productive any insurance discussion is
likely to be. Reputational risk is recognised
as being particularly difficult to insure.
Indeed, in ACE research, two-thirds of
companies said that they feel inadequately
covered for reputational risk. Nevertheless,
the increasing number of practical crisis
management and incident response
23
By setting the right tone from the top, business
leaders will help to build the right culture of
emerging risk awareness”
Critical Business Insurance 2015
FAST FORWARD
AndyMacfarlane,RegionalManagerforScotland,ACEGroup,considers
emergingrisksandexplainshowinsurancecanhelpmitigatethem
Emerging risk and insurance
The risk environment for businesses continues
to evolve. Some risks, such as cyber, are
relatively new. Others, such as D&O liability
and environmental and reputational risk, have
been around for a long time, but have taken
on a new dimension due to social, economic
and regulatory change. Compounding this
increasing complexity, risks today are often
interconnected, with loss events no longer
respecting the neat categories they may have
fitted in the past.
Specific insurance products are evolving as
risks become more complex. However, choosing
the right solution has to be about more than
simply transferring risks at the best price.
Companies need to ensure they have clarity
about the boundaries of insurance contracts,
what can and what cannot be covered, and
what information and risk behaviours insurers
expect of them when discussing coverage.
Identifying and managing emerging risks
The identification and monitoring of emerging
risks is far from straightforward. However, the
dynamic nature of today’s risk environment
means that it should be a growing priority
for all companies to ensure they have the
frameworks, capabilities (both internal or
external) and processes to monitor their
emerging risks, as part of a broader enterprise-
wide approach to risk management:
• Pay attention
Companies should ensure they give adequate
airtime to emerging risk at board and
management level. In recent research by
ACE with European companies from a range
of industries, many small and medium-
sized enterprises (SMEs) pointed to lack of
22
•Businessesfacea
constantlychanging
riskenvironment,
withnewthreats,
suchascyberrisks,
emerging
•Asrisksevolve,so
toodotheinsurance
productsthatcover
them.Butchoosing
therightsolution
hastobeabout
morethansimply
transferringrisksat
thebestprice
•Companiesmust
knowwhat
informationandrisk
behavioursinsurers
expectfromthem
•Boardsshouldtake
caretoaddress
knowngapsintheir
knowledgewhenit
comestoinsuring
emergingrisks
Summary

14. 2015 Critical Business Insurance
Board attention to risk and insurance
• Howoftendoesinsurancefeatureontheboardagenda?
• Howoftendoestheboardapproveourcorporateinsuranceprogrammeorpolicy
renewal?
• Doestheboardfullyunderstandtheriskswefaceandthedifferentstrategies
available,includinginsurance,tohelpusmitigatethem?
• Istheboardawareoftheadvicereceivedfromourriskadvisersonrelevantlegal
andregulatoryissues,insurancetrendsandindustrybestpractice?
Board understanding of loss scenarios
• Doesourboardunderstandtheshortandlong-termfinancialconsequencestothe
businessofvariouslossscenarios?
• Doesourboardunderstandhowinsuranceandotherfinancingarrangements
wouldrespondtolossscenarios,andfacilitatecrisismanagementandongoing
businessrecovery?
• Hasourcurrentinsurancerespondedtopreviouslossesasexpected,andwhat
werethefinancialimplications?
• Whatplansdowehaveifclaimsarechallenged,orsettlementsaredelayed?
Board understanding of future developments
• Doestheboardunderstandwhatrisksourmediumandlong-termstrategiesmay
create?
• Haveweconsideredhowinsuringcertainriskscouldinfluenceourstrategic
decisionsonbusinessexpansionandnewproductdevelopment?
• Couldinsuranceformpartofourvaluepropositiontocustomers?
• Dowelookbeyondourownstrategicplanstounderstandtheemergingand
growingrisksandthreatsthatweface?
QUESTIONS FOR YOUR BOARD
FAST FORWARD CHAPTER SEVEN
solutions being made available by insurers is
helpful in this area. More broadly, companies
can use the expertise of insurers and brokers
to help them manage more ‘traditional’ risks
effectively in the first place, so the risk of
reputational damage is reduced.
Mind the gap
Research suggests there are three particular
areas of emerging risk where companies face
confusion over the definitions, solutions,
exclusions and language of their current
policies, namely environmental liability,
terrorism and political violence risk, and cyber
risk. For example, in a study by ACE in 2013,
around half of UK middle-market businesses
stated they were insured for environmental
liability, but the real proportion is likely to be
much lower because of confusion over what is
covered by different policies.
The tables set out some typical covers, and
gaps in cover that companies should look out
for when considering insurance for these risks
in the UK market. This is a high-level summary
and different policies vary, so businesses should
always check with their insurance partners.
24
Critical Business Insurance 2015
Environmental liability
Terrorism and political violence
Cyber risk
Risk/ policy General liability Property Environmental liability
Sudden and accidental pollution ✔ LIMITED ✔
Gradual pollution ✗ ✗ ✔
Historical pollution ✗ ✗ ✔
Statutory clean-up ✗ ✗ ✔
On-site first-party clean-up ✗ ✗ ✔
Environmental Liability Directive ✗ ✗ ✔
Environmental damage ✗ ✗ ✔
Loss mitigation ✗ ✗ ✔
Incident response ✗ ✗ OPTIONS AVAILABLE
Crisis management and PR costs ✗ ✗ OPTIONS AVAILABLE
Risk/ policy Property Terrorism Integrated PDBI terrorism
and political violence
Property damage and business interruption ✔ ✗ ✔
Terrorism (including sabotage) ✗ ✔ ✔
Social unrest (riots, strikes, malicious damage and civil commotion) ✔ ✗ ✔
Uprising (civil commotion, insurrection, rebellion, revolution) LIMITED ✗ ✔
War (including civil war) ✗ ✗ ✔
Risk/policy General liability Property Cyber
Loss of income for non-physical damage ✗ ✗ ✔
Incident response ✗ ✗ OPTIONS AVAILABLE
Extortion ✗ ✗ ✔
Data breach liability ✗ ✗ ✔
Unauthorised system use liability ✗ ✗ ✔
Digital media/social media liability ✗ ✗ ✔
Crisis management and PR costs ✗ ✗ OPTIONS AVAILABLE
Key questions for the board
• Doweknowthekeyemergingriskstoourbusiness?Do
weadequatelybuildemergingriskintoourboardand
management-leveldiscussions?Dowehaveariskregisterand
emergingriskradarthatwereviewregularlyandintandem?
• Dowetakeasiloedapproachtoemergingriskmanagement?
Howcanwebestdelegateresponsibilitiesandembedthe
rightcultureofemergingriskawareness?Whatprocesses
shouldweputinplaceforourkeyemergingrisks?
• Whatspecialistexternalemergingriskskillsandexpertise
doweneed,andhowcanweaccessthem?Dowemake
emergingriskcapabilityacriterionwhenwechooseour
insurancepartners?
• Doweunderstandthewayourdifferentinsurancepolicies
willperformforourkeyemergingrisks?Whatgapsmightwe
haveinourcoverageandcouldspecialistpolicieshelp?

15. Institute of Directors
116 Pall Mall, London SW1Y 5ED
www.iod.com
Critical Business
Insurance
In today’s dynamic business
environment, insurance matters
to companies and to the directors
who run them. One of the key roles
of board members is to understand
the vital importance of business
insurance as part of their overall
responsibility for, and oversight of,
their company’s management of risk.
Clearly, it is not possible for directors
to know every detail of the insurance
buying process. But the onus is on
them to know enough to be able to
ask pertinent questions around the
boardroom table, and to challenge
other executives and insurance
professionals when necessary. This
guide provides them with many of the
insights they need to do so.