Insurance and the CEO

Happy New Year and I hope you all have a wonderful 2024 ahead. As we start a new year I wanted to revisit an old subject - and one that is much maligned in many board rooms in Asia. Why is insurance important to the CEO? Surely, it's just a transactional, hygiene factor that can be safely delegated to some junior person in the CFOs office?

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Well, today this could not be further from the truth. From every direction liability exposures faced by top management are multiplying. At the same time, many corporates in Asia are facing increased costs and reducing capacity (read protection) from traditional insurance solutions. Only by addressing the relationship with the insurance sector can the C-suite really secure value and long-term protection. Later in this series, we will consider more creative approaches using captives, parametric, and other so-called alternative risk transfer solutions. But first, we should address the basics.?

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The wise CEO looks at the insurance sector as a series of corporate partnerships, and not a commodity buy. It’s sometimes just a change of perspective that’s required to get the best out of insurance. Not necessarily an increased spend.

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For example, many successful CEOs consider the relationship with investment and other bankers as a partnership of near equals. The parties have huge value to add to each other when properly engaged. A shrewd corporation will treat the relationship with the insurance markets in the same way. Insurance is usually, but not always, a tripartite affair in Asia. That doesn’t mean the care and attention required to properly manage the insurance program with the broker and the markets is any less valuable than the relationship with the banks. When times get really tough the insurance relationship can save the business. The solutions provided by bankers in contrast are more likely to kill it.

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To properly understand how the insurance relationship should be managed it’s important to step back and consider from basics, the fundamental reasons a company buys insurance. It’s not because the government says it should. It’s because when really bad things happen, someone will give the CEO a large chunk of cash to protect the balance sheet, and perhaps save the company.

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Good risk management will perhaps limit the likelihood of this happening for some events. But for others, for example, natural catastrophe risk, it is impossible to prevent all aspects of the event from impacting the organization. In those cases, the backstop is the insurance partnership.

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Insurance is invisible. There is no hard product. Everything is based on trust. The CEO trusts the insurer to step in when needed. But many CEOs and their corporate teams do little or nothing to reciprocate in that relationship, and build trust in the company being insured. Asian corporations are particularly guilty of this.

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For an average company, spending a little time to demonstrate to an insurer the quality of the risk management activities being carried out will essentially cost nothing. An underwriting team that has some knowledge of an organization is likely to be a little more trusting themselves. In return, this can almost be guaranteed to generate a saving in premium, or an increase in available capacity, perhaps a significant one. Out of a faceless selection of competitors from a particular sector, it’s the company that presents its risk well that is remembered, and will be positioned towards the front of the pricing envelope. If there are extra elements of coverage required or the scope changes over time, more opportunities are available for the Asian CEO who has already built a relationship. Perhaps most significantly, a strong relationship can be leveraged when needed.

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In the next newsletter, we start to consider who is best placed to help the CEO with this process.

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