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British businesses exposed to costly failings in insurance protection

British businesses exposed to costly failings in insurance protection due to governance gaps, Mactavish/PwC report warns.

  • Commercial insurance ‘not fit for purpose’ for post-crisis era, with claims disputes set to rise
  • Serious flaws in the way corporate insurance policies are arranged are leaving businesses exposed
  • Insurance needs to become a more prominent feature of companies’ risk and capital-management process

UK companies are exposing themselves to significant and unnecessary losses due to serious flaws in the way their corporate insurance policies are arranged. This is according to a new study of commercial risk carried out by the specialist research firm Mactavish, in association with PwC, which reveals serious deficiencies in how corporate insurance is arranged and the role of boards in governing those arrangements. This is leaving companies vulnerable in the event of a large loss and subsequent dispute with their insurer.

The report, based on consultations with over 600 UK companies, more than 100 insurers and brokers and detailed case analysis, paints an alarming picture of inadequate disclosure, widespread ignorance of a very challenging insurance law framework, managerial failure to gather relevant information, deeply uncertain policies and a lack of understanding of how large claims are processed.

Bruce Hepburn, chief executive officer of Mactavish, said:
“The deficiencies the report reveals in how insurance is arranged are disturbing. What we see today is a system that has prioritised low transaction costs above reliable insurance policies. This approach is not fit for purpose for the environment we are now moving into. UK businesses, especially medium-sized companies, are putting themselves unnecessarily at risk and in today’s economy are far more exposed if a major insurance policy fails to pay out. Customers, brokers and insurers must all start to invest adequate time into securing appropriate insurance.”

The Mactavish findings come at a time when the role of insurance as a financial backstop is especially vital. The recession has left many companies taking on more risk to protect returns and boards are under increasing pressure to demonstrate effective corporate governance. High-profile risk incidents, such as the widespread volcanic ash disruption, arguably happen at all stages in the cycle, but newly constrained balance sheets, tight credit and the vastly altered risk exposures brought about by globalisation and recession represent new and poorly understood threats.

At the same time, the report shows that insurers are taking a much tougher line on claims. It suggests that reform is not only urgent but highly achievable, if insurance buyers, brokers and insurers work together to improve disclosure and the practices used to arrange insurance.

PwC is co-publishing the research, which it views as a vital component of the wider debate on corporate governance and compliance - where insurance is too often ignored.

Richard Sykes, governance, risk & compliance lead at PwC, said:
“Many UK companies are unaware they are facing costly and damaging gaps in their insurance coverage. The risk that an insurance policy won’t pay out is not being recognised by boards. The lack of quality and in-depth information around risk exposure provided by companies to their insurers is currently inadequate and has left many businesses with unreliable and inappropriate cover. Companies need to make more informed decisions about how much risk they should retain or transfer, rather than simply seeking to minimise insurance expenditure. Insurance needs to move up UK companies’ agendas and become a more important part of their wider risk and capital-management plans.”

Achim Bauer, insurance strategy partner at PwC, said:
“While the quality of risk disclosure provided by the corporate sector is inadequate, the insurers are also playing a material role in an ineffective risk transfer process. Many insurers are failing to systematically develop the necessary understanding of their clients’ risk profile to enter into a truly useful relationship, which is based on more tailored and effective risk management. This is leading to a no-win situation for both insurers and companies, creating a misalignment between risks and premiums, higher claims and more disputes. This report represents both a significant challenge and positive for insurers and brokers. At a time of low growth, many insurers are unable to grasp the opportunities that could come from a closer relationship with their customers and deeper understanding of their risks.”

The report sets out seven protocols (see appendix I) intended as a blueprint for change that have now been formally endorsed by a range of leading industry players (see appendix II).

Key highlights of the research show that:

  • 87% of insurance buyers do not understand the extent to which the duty of insurance disclosure is their responsibility or the consequences of failing to meet this duty

  • Two thirds of buyers (65%) at large companies do not review the materials used to arrange their insurance, and almost all have inadequate discussions with insurers and brokers regarding coverage

  • Claims professionals across all parts of the commercial insurance market are starting to report an increase in questioning of claims by insurers, on top of an expected surge in losses from operational changes made by firms during the recession. The total number of Royal Courts of Justice commercial disputes (excluding bankruptcy proceedings less likely to relate to insurance) jumped by 45% between 2008 and 2009, with some related categories such as professional negligence disputes up over 100%

  • The quality of disclosure underpinning insurance is at best poor, sometimes shocking (see case studies on p. 25 -26 of full report). Almost every document used to explain companies’ risks to insurers, out of the hundreds reviewed in the study, contained errors or omissions that could directly lead to a large claim being questioned. For example, one high-tech manufacturer failed to provide its insurer with details about high-risk product end-uses, delicate testing work undertaken for third parties or the use of highly sensitive manufacturing techniques

  • Widespread evidence of poor communication between the commercial insurance function and operational managers, reliance on undocumented risk information and insufficient contact between buyers and insurers.

Notes to editor:

* The report is based on over 600 in-depth consultations with customers conducted throughout 2009, 2010 and 2011. Over 100 consultations with insurance brokers, policy makers and underwriters were undertaken. For a full copy of the report, please contact Amy Tiernan (PwC) or Stuart Bailey (Mactavish) on the details below.

* Mactavish is a specialist research and advisory business focused on the risk and commercial insurance segments.

* PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See for more information

Media contacts:

Amy Tiernan, PwC, on: 0207 804 0556, mobile: 07852 941236 or email:
Stuart Bailey, Mactavish, on: 0207 463 0638, mobile 07706 144530 or


The seven Mactavish Protocols call for the following reforms:

1. Steps to make insurance buyers aware of their legal obligations and the key differences between insurance and general contractual law

2. A shake up in the risk-assessment process and drastic improvements in the way information is currently gathered, signed off and submitted

3. A two-stage tender process to maintain transaction efficiency and encourage far greater dialogue between buyer and insurer

4. An obligation on insurers to set out their understanding of a customer’s risks and the detailed coverage being offered directly to the customer

5. Insistence that buyers explicitly assess the financial materiality of insurance to their business

6. An onus on insurers to discuss major loss scenarios directly with customers at the outset of the policy period to ensure customers understand how policies apply to their business in practice

7. The up-front specification by insurers of detailed loss response service elements to avoid uncertainty as to what happens procedurally when a large loss event occurs.


Insurance industry support for the Mactavish Protocols is already widespread:

James Nicholson, managing director, Willis Risk Solutions, said:

"Willis applauds Mactavish's continued tenacity in challenging the status quo and shining a torch on the fact that we as an industry must be better at demonstrating the immense value insurance provides in supporting businesses. As a change leader, Willis endorses the study's findings which are in line with our drive to challenge inefficient insurance practices and lead reform through innovation such as our unique carrier benchmarking tool, the Willis Quality Index."

Alexander Oddy, partner, Herbert Smith, commented:

“The Mactavish report identifies a series of issues around the insurance placing process. What stands out is that these issues appear now to be taking place against a background of dynamically changing risk exposures within insurance buyers' organisations. Under English insurance law the responsibility for making a fair presentation of the risk falls squarely on the insurance buyer. A failure to do so can put the entire insurance protection at risk. The ultimate objective for all parties in the insurance transaction – buyers, brokers and insurers – should be certainty as to the agreed risk transfer. That is the best way to avoid disputes which are costly, time consuming and serve none of their interests. If the Mactavish Protocols are adopted even in part then insurance buyers are likely to stand a better prospect of getting claims paid when they need it most – at the critical time of a major loss.”

John Hurrell, CEO, AIRMIC, commented:

“Mactavish’s research is thorough and convincing, and it lifts the lid on a potential crisis looming in the UK commercial insurance market. Airmic has long argued that the current legal framework for commercial insurance contracts is unsustainable. This research illustrates just how dangerous the situation can be.”

For more information contact:
Amy Tiernan
Financial Services PR Executive, PwC
Tel:020 7804 0556
Mobile:07852 941 236 

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