Recession leaves UK firms underinsured

A widening gap between the commercial risks that companies are currently facing and the exposures that they present to their insurers is leaving some UK firms underinsured and could also pose problems for the insurance market, revealed new research.

In a highly dynamic and recessionary risk environment companies are not doing enough to accurately disclose how their risk profile has changed, according to a detailed survey of senior risk and insurance professionals.

The effect of the economic downturn has been to drastically increase the pace of change in the business world. Such a severe recession has also altered the existing risks that companies face and added new ones. And yet, according to the study, those responsible for transferring corporate risks have failed to communicate how their exposures have changed.

The problems are poorly understood even amongst some of the largest and most sophisticated firms, claimed the report, which is backed by PricewaterhouseCoopers (PwC) and analysts at the investment bank, Citi.

This is putting insurance cover at risk and may leave shareholders bearing unexpected losses when insurers refute claims on the basis that the contract does not reflect the true nature of the risks.

Underwriters queried by the research also claimed they are not being briefed on the changing nature of corporate risk, suggesting that companies are failing in their duty of disclosure.

While this poses problems for corporates it also represents a significant challenge for the insurance industry. As a result of these disclosure problems the insurance industry is systemically under pricing risk and this could lead to a brutal hardening of the market when the correction comes, warned the report.

Bruce Hepburn, chief executive of the research firm Mactavish, which carried out the survey, put it succinctly: “Major business changes and great uncertainty around commercial risks have been caused by the recession…This means that some companies are not properly insured, and insurers are carrying greater risks than they realise.”

Achim Bauer, a partner with PwC, added: “Many commercial insurers have failed to keep pace with the unprecedented changes in commercial risk and the findings have revealed significant flaws in the way commercial risk is assessed.” He went on to say that a failure to adjust underwriting processes and reserving would exacerbate losses and undermine confidence in the market.

Given the dramatic changes in the business climate, widespread under-pricing of corporate risk is inevitable throughout 2010, said the report. Citi analysts confirmed that these trends could have a material impact on insurer stock prices over the next 18 months.

These factors will contribute to a brutal hardening of the insurance market in the future, warned Hepburn, but he would not be drawn into predicting when this is likely to occur.

In a related finding the research also revealed those companies which are worst at reviewing how their operational risk exposures have changed are mainly from the financial services sector. Given the banking crisis and the failure of operational risk management, most people would expect financial services firms, in particular, to give this area more attention.