Today’s commercial broker must understand risk management principles

By: Andrew Lilley, Joint Group CEO, Econorisk

What would you do if your entire factory burnt down? Or if cybercriminals corrupted your IT systems beyond repair? And what if your company got sued for three times its annual turnover? These are the sorts of questions brokers should be asking their clients when setting the levels of cover required in commercial policies.

Far too often we see companies taking out levels of cover that are woefully inadequate and ending up having to close their doors – or worse! – after a serious event occurs.

We recently heard of a case where a business insured itself with a liability limit of only R5m and a potential exposure of R75m – an alarming gap and a serious shortcoming on the part of the business. The business in question did not make use of a broker when taking out its policies. Unfortunately, a major incident occurred and the inevitable outcome was that there wasn’t enough insurance cover.

What tends to happen in cases like this is that the focus then transfers to the next-best insured. In this case, the next-best insured was one of our clients, who was summoned as a second defendant.

Fortunately, our client has a liability limit of R100m. And so, while the law takes its course, our client is secure in the knowledge that it won’t suffer a crippling knock to its business.

The more complex an insurance transaction, the more important the role of the broker becomes. Intermediary services have moved way beyond transactional broking. Quality brokers are risk advisors. When the stakes are high, businesses need the benefit of experienced insight. And at the moment, the stakes are very high indeed!

The South African short-term insurance industry entered a hard market cycle in about mid-2017, triggered by devastating storms and fires in the Cape, floods in Durban, a R1bn warehouse fire and a catastrophic bulk carrier crash in Durban harbour, where damage to the 600t loader alone is costed at around R265m. Add to this the 2018 listeria outbreak – with its product recalls and inherent loss of reputation – and the estimated R300 million’s worth of losses suffered by the trucking industry in just one month during the N3 Toll Plaza protests near Mooi River, and the picture starts getting clearer. There is no doubt that liability is far reaching, often unforeseen and can have potentially devastating consequences to any business, large or small.

A MAZE OF COMPLEXITY

Businesses need expert skills to help identify the maze of variables that SMEs and indeed, large corporates are exposed to not only in hard market cycles but also in tough economic times. It becomes increasingly important for insured companies to choose their service providers with eyes wide open and to establish a partnership approach between themselves, their insurer and their risk advisor – strengthened by an action plan around risk identification as well as risk improvement. A brokerage that knows what it is doing has the inherent skills to provide the right cover, and the expertise to negotiate the complexities.

In the 2017 bulk carrier crash, Financial Mail reported the series of complex cases regarding liability and jurisdiction that are still unfolding to this day. These include a claim for close to USD 330 million lodged by a US-owned charter company for damage to its 40 160t ship. The ship entered the harbour with a pilot and two tugs crewed by the Transnet National Ports Authority. And although the vessel had its own captain, it is compulsory by law that an official harbour pilot should navigate the arrival and departure of every vessel at any SA port. FM reporter, Carmel Rickard, outlined that under the law, the South African pilot, though provided by the harbour authorities, is deemed to be an employee of the ship.

“Some outsiders might regard this as a legal fiction, but it is real enough when it comes to litigation, and will play a significant role in upcoming claims for damages,” reported Rickard.

Within this labyrinth of complexity, there are obvious benefits to implementing sound risk management built on the solid foundation of a tailored insurance programme. One size cannot possibly fit all.

A good intermediary who fully understands risk management principles should be part of any business, regardless of industry or size. Millions of livelihoods are at stake – literally.