Identifying Insurance Risks For Commercial Insurance Brokers Risk Management

Risk management is the Commercial Insurance Broker’s role in assisting his client company to identify and manage the risks that threaten it.

This help may include the identification and evaluation of those risks, so that correct action can be taken to limit their effects or to provide for the cost of loss.

Many risks can only be eliminated completely by incurring unacceptable costs or inconvenience, but it may be possible to reduce them to an acceptable scale.

Loss control measures may operate to reduce the probability of loss – fire-resistant partitions – or to reduce the severity of loss once it occurs – for example by the installation of sprinklers.

Although a risk has been controlled in this way, there may still be a residual risk which would be too great to be borne comfortably by the company.

In such cases, the risk may be transferred by insurance or financed when it occurs, either by raising loans or by meeting it from the company’s own resources. This may be done by establishing a self-insurance fund from which losses can be paid as necessary.

The modern Commercial Insurance Broker must be prepared to advise his client not only on insurance matters but also on loss prevention and on these alternatives to insurance.

Larger companies will almost certainly employ a risk manager or insurance manager, and his knowledge of the company’s operations may relieve the broker of much of the basic investigation of the client company’s insurance needs.

The risk manager is himself an insurance specialist, and can be expected to take over much of the broker’s task to act as an interpreter between the worlds of industry and insurance. The commercial insurance broker is not, however, relieved of his responsibility to suggest new covers, or new forms of old ones, and to point out needs which appear not to have been met.

The Business Insurance Broker, looking at the company from the outside, may see things that the risk manager has missed, and the broker’s connections with the insurance market, which are likely to be more extensive and more frequent than those of the risk manager, may suggest innovations or lines of enquiry which may result in a better insurance programme for the client.

A large company will probably have overseas operations, and will wish to co-ordinate the insurance arrangements of all its branches and subsidiaries as far as possible.

This means that the broker must be able to provide service, either through his own insurance brokerage or through a network of correspondent brokers, wherever his client may be operating.

The emphasis with larger clients is likely to be on catastrophe risks – perhaps the threat of fire or explosion to a vast industrial complex, the risks of a major construction contract, or the possibility of a huge award being made in a products liability case. In cases such as this, the broker may have to go to markets beyond the British one in order to find sufficient capacity.

The Commercial Insurance Broker who has large companies and multinationals as his business clients cannot therefore think in purely national terms.

Many large clients these days are interested in forming an insurance subsidiary – a so-called ‘captive’ insurance company – usually in an offshore tax haven. The broker’s role thus becomes extended to carrying out a feasibility study on such a proposal, advising on suitable locations, and setting up, managing and arranging reinsurance programmes for the captive.