Mark Sanderson, managing director of insolvency services at Willis, discusses the purpose and pricing of open cover insurance.
How the market operates
Insolvency insurance is a niche area of the insurance market. It operates very differently to the general insurance market, and is driven purely by the unique demands of Insolvency Practitioners (IPs).
IPs are automatically exposed to various unidentified risks as soon as they’re appointed to an insolvency case, and are often unable at that stage to provide any underwriting information about those risks to insurers. This means that for a period of time there’s insufficient information available to conduct a full broking review of the risk which requires insurance.
There are only a handful of insurers and brokers who specialise in insolvency insurance, because distressed businesses are not attractive to insurers. Essentially this is because at the time insurance is being sought, many general insurers will necessarily have been provided with only minimal information, and will therefore have little idea of the extent of risk they’re being asked to cover. In those circumstances (crucially), most insurers will be unwilling to provide the flexibility which IPs require.
In order to address these issues, open cover schemes have been developed.
What is an insolvency open cover insurance scheme?
- Insurance facility offering a tailored solution
- Usually through one key insurer partner
- Reviewed regularly
- Often covers a variety of risk, ranging from good to very poor risks
Open cover – The basics
- Automatic cover on day one of an appointment
- Flexible time on risk cover
- Flexible payment terms
- Low excesses
- Few warranties
- Provided by a select few insurers
In order to broke each insolvency risk individually in the same manner as the general insurance market, an insurance broker requires full underwriting information to present the risk properly.
This includes full claims history, a detailed understanding of health and safety processes, full details of trading activities, construction, etc.
An indication of ballpark terms may be available without this; however, those terms would not usually still be available should the risk change after declaration of all material facts. In the meantime, the IPs would be uninsured, potentially exposing themselves and their creditors. Trading couldn’t continue without statutory employers’ liability and/or motor insurance in place, potentially affecting the realisation strategy for the business.
Open cover schemes were developed to deal with this issue and provide immediate cover on appointment, even with minimal underwriting information about the insured risks.
Open cover schemes offer the flexibility required, and provide automatic cover from day one.
Pricing – the broker’s role
The insolvency insurance broker’s ultimate goal is to satisfy the requirements of their client, not the insurer.
The broker should work closely with the IP to understand the risk, and offer advice to mitigate premium spend through programme structure, risk improvements and security.
Site visits and effective training from the broker help improve this process. Clarity and transparency throughout the length of an appointment is key to securing the best outcome for the IP.
A market-leading broker will have a sustainable pricing strategy based around a consistent competitive model. A strong insurer with significant history within the market is essential due to the nature of an ever-changing risk profile on any given appointment.
The act of removing lower-risk/longer-term appointments from the scheme and leaving the lower grade risks for which the general market has no appetite (‘cherry picking’) jeopardises the long-term future of open cover schemes, as the insurer requires a balance of risks in order to provide sustainability, and to ensure the availability of day one cover for all appointments – even when the risk is high.
Some, but not all, open cover schemes offer flexible pro rata premiums for the appointment period, as well as flexible payment terms, enabling the IP to delay the payment of premiums until realisation of the assets. Obtaining this in the general insurance market is just not possible.
Open cover schemes are usually provided through one insurer who writes a wide variety of risk and quality on the scheme. Producing a presentation of insurance policies from a variety of insurers on every risk is therefore not possible, as running a number of schemes side by side would reduce the overall size of the schemes, resulting in less competitive premiums for the IP.
It is therefore essential that brokers communicate how they challenge and amend insurer-offered terms on every renewal of the open cover scheme. This insurer process typically results in lower premiums, better cover and premium payment flexibility.
Occasionally IPs choose to rely on pre-appointment insurance (that is; the insurance already maintained by the distressed company) rather than using an open cover scheme. There are many factors to consider when relying on pre-appointment insurance:
- Companies in distress often cut back on their insurance.
- An IP’s requirements often change after appointment.
- General insurers often cancel cover when the insured enters insolvency.
- Claims may be repudiated citing non-compliance with warranties or a material change to the risk.
- Most significantly, the IP is relying on the company having disclosed all material facts to the insurers at the placement of the insurance programme.
If something material hasn’t been disclosed, however, any claim may be repudiated, and the entire cover potentially avoided by the insurer.
As a result of the above, reliance on pre-appointment insurances by IPs should be taken with caution.
Insurance provision in this market is delivered by professional organisations offering maximum cover for the most competitive price. Operating without open cover schemes would leave the insolvency industry without automatic cover on day one, without pro rata premiums, without flexible payment terms, and with significantly increased administration. Open cover schemes deliver the insurance solutions required by the industry.
Willis Insolvency Services is a trading name of Willis Limited, a Lloyd’s Broker, which is authorised and regulated by the Financial Conduct Authority.
Willis Insolvency Team Relocation
Earlier this year, Willis announced its intention to relocate its insurance placement office to Birmingham.
The new leadership team is delighted to announce that from 1st October all placement of insurance, bonding and claims services will be delivered through our new Birmingham office. The office, located next to our rapidly growing corporate team, will provide a geographically central operation allowing for future development, within Birmingham’s established insurance market.
For further information contact Mark Sanderson, managing director, Willis Insolvency Services
T: +44 (0)7771 678571