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Risk Management

Blended Insurance, Anyone?

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September 07, 2018

Why more corporates want to buy one big, blended insurance policy that covers a range of risks—and why they can’t 

By Antony Michels

financial system softwareA growing number of US-based multinational corporations are trying to restructure their insurance coverage so that it better reflects the risks they face—and to lower costs. One part of this push for more strategic insurance has corporates and their insurance brokers pushing insurers to offer multiyear coverage for multiple risks under one very large policy, with one deductible.

Here’s how the treasurer of a mega-cap consumer goods company that has a captive insurer explained what he’s looking for: “Rather than buy individual lines of coverage, I’m just saying give me a portfolio of coverage. Rather than feel like I need to have $500 million of excess coverage in property, give me $500 million of excess coverage, but it covers all my risks. It’s just a more efficient structure.”

It’s more efficient than paying premiums on, say, four $100 million policies for property, cyber risk, D&O and ERISA every year—when there’s very low probability a company will need to make claims on all of them in one year. What’s more, if the business has a loss of $300 million on just one of those risks, it’s on the hook for $200 million under a traditional insurance program buying structure. By contrast, if the company purchases a $400 million blended program, a loss of $300 million on any of the four insured risks is covered because the company has $400 million of blended total coverage for any of the individual risks.

Also, with a blended, integrated or multiline insurance policy, corporates would normally assume a higher deductible and therefore pay significantly lower premiums—a key driver of this concept. The treasurer of the consumer goods company said he would obviously prefer his captive insurance company keep any returns on its investments (when losses are less than expected) and dividend them to the parent company rather than using them to pay premiums to a third-party insurance company on policies where claims are rare.

Another advantage of the blended approach is that it should help corporates avoid problems that often arise when a company has separate lines of coverage through different carriers. After a claim is made, one carrier may say the loss falls under the other carrier’s policy. Legal battles may erupt, meaning the corporate may not receive compensation for years. This undesirable outcome is far less likely if one insurer writes a policy that covers a portfolio of risks.

“It’s a whole lot easier to adjudicate the claim, to avoid conflicting language around exclusions if they’re all integrated around one policy with one insurer managing the claims,” said Eric Andersen, co-president of Aon, an insurance broker that is trying to help companies, including pharmaceutical manufacturers, to structure and buy blended policies from insurers.

Large, blended programs are of particular interest to pharma and life sciences companies that are unable to buy product liability insurance from primary insurers because of the size of the risks involved. Some big pharma companies hope a blended program might offer insurers a way to accept the risks of providing product coverage. And in this case, size matters. Because while blended programs do exist, insurers so far are unwilling to structure them at the size, scale and capacity mega-cap companies are clamoring for today.

“It sounds really easy to do,” said Mr. Andersen. “It is not really easy to execute.”

One problem is convincing insurance carriers who are used to selling individual lines of coverage separately to break out of their silos. “All of a sudden if you start blending the coverages, you’re manuscripting language and you don’t have as much history and insight into what the numbers should be: how you price it, how do you adjudicate the claim? It’s just easier to do it one product at a time as opposed to multiple products in one policy,” Mr. Andersen said.

Another problem, experts say, is the experience of insurers that have underwritten blended policies in the past and suffered large losses from product liability and other catastrophic events, including the financial crisis. Part of the challenge, therefore, is to convince insurers—using better data analysis to predict losses—that they will ultimately benefit by including in one policy bigger risks, like product liability for pharmaceuticals, along with lesser risks like property.

“You’re not going to sneak it by them,” Mr. Andersen said. “The insurers will be interested in the risks that are more vanilla, but the experience of it has been that when you hide that really hard exposure inside other products, it comes back to bite you.”

Despite the impediments, NeuGroup members are not giving up on what is proving to be a bigger challenge than some might have imagined. The hope is that the insurers will see the benefit for themselves in offering products the market clearly wants.

“There’s a lot of work that’s going [on] right now to get them to come around and try it again,” Mr. Andersen says. “Right now, they’re not that interested.”

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