To claim or not to claim

Businesses have been forced to alter their opinion of insurance. The collapse of Independent Insurance, tumbling stocks and 11 September are among various well-documented events that have indirectly contributed to insurance being pushed up the business agenda.

The resulting environment means brokers are rising to the challenge of helping clients manage risk. In addition to advising clients how to avoid claims, brokers are also informing them when it is advantageous not to claim even if they have cover.

The original purpose of insurance was to protect against catastrophe but, over the years, this changed, with many policies paying attritional losses and only occasionally a major loss. However, this trend is reversing back to insurers covering only major loss. And though insurance traditionally involved the losses of the few being paid for by the contributions of the many, recent years have seen the losses of the many exceeding these contributions.

Motor fleet excesses

Take, for example, motor fleets of 250 or more that are insured with only a nominal excess of £500. As insurance costs are rising, savings can be found if clients take a higher deductible. With a fleet of 250 vehicles, a deductible of £10,000 or £15,000 would eliminate most repair bills. Over a three to five-year period this should result in an overall saving as repair costs are likely to be less than that of a premium without a high deductible. This is because insurance companies handling smaller claims will add administrative costs as well as factoring in margins for profit. Many types of companies are considering handling claims as this can be 30% - 40% more expensive through an insurer.

Continuing the example of motor fleets, brokers need to make clients aware that repairers may be reluctant to accept instructions from companies they do not know. If a client wants to manage repairs direct with a repairer, it will take a while before they can carry out work on instruction without deposit. Until the repairer has had sufficient dealings and built up a relationship based on hassle-free transactions there may be delays. This is manageable but it does take time.

Even if incidents are covered within the deductible, clients need to inform the insurer. The underwriter needs to know the measure of the potential for loss, as claims that fall within a deductible could have exceeded the deductible limit.

When policies that have had attritional losses are reviewed, insurers will reserve for those types of incidents on a worst-case scenario. At renewal they will also anticipate an increase in cost due to inflation, and an increase in severity of incidents. Consequently, the insurer may well increase the premium in case of catastrophe loss.

Clients must, therefore, consider carefully whether to claim in every instance. Higher deductibles can help, although this makes the choice in advance.

Even so, it must be emphasised that client failure to disclose a material fact at the next renewal date could lead to the insurer claiming entitlement to avoid the policy.

If the insured discloses a large number of losses, whether claimed for or not, an insurer will take this into account when setting terms for next year. Clients must disclose all relevant policy information to all insurers - this is often overlooked when clients have policies with different insurers that cover the same perils.

Not claiming for a one-off loss can sometimes be the best approach. However, when advising clients whether to claim or not, brokers cannot give any guarantee on the affect this may have at renewal, bearing in mind a disclosure has to be made at the time. Although brokers can make a recommendation based on their experience and skill, subsequent events may change this position.

Not claiming is becoming an increasingly viable option, but is usually being catered for by higher deductibles either on a voluntary or imposed basis. Brokers need to be cautious so clients do not hold them to blame if insurers subsequently decide to impose an increase at renewal despite there being no claims.