Risks rise, but liability insurance fails to keep pace

According to a new report by Marsh, since 2004, UK firms have not increased their levels of insurance protection limits purchased, despite increased litigation action, product recalls and supply chain risks.

In its annual global study, Limits of Liability 2006, Marsh found that when comparing companies year-over-year for three years, the average limits purchased increased by only 1.8 percent in 2006 to euro 67 million, the same figure as 2004, after decreasing to euro 66 million in 2005.

Andrew Keefe, a senior vice president in Marsh’s European Casualty practice said: “New legislation, such as the General Product Safety Directive for product recall and the Sarbanes-Oxley Act, means companies are under increasing scrutiny and pressure in their day-to-day business. Even though firms continue to maintain their levels of insurance protection this year, they need to recognize that they are buying insurance today to cover losses they might have to pay five years from now or more.

“It can take a lawsuit five years or longer to work its way through the court system, so a large claim brought today may not be settled until 2011 or later. In light of litigation costs, the resolution of a company’s claim five years into the future might be far more costly than what a business might anticipate now. Over two-thirds of UK business faced court actions in 2005, and half expect to see more litigation during 2006.

“Companies need to ascertain if they are prepared for future liabilities. While the large firms traditionally buy large amounts of limits, the smaller firms are becoming risk aware and starting to increase their amount of cover,” Mr Keefe said.

The smallest UK firms in the study – those with annual revenues of euro 200 million or less – increased their average limits to euro 30 million in 2006, from euro 29 million in 2005, which was in line with the European increase.

Mr Keefe said: “The UK and Europe are following a global trend of a declining cost and flattening liability limits. The average price for euro 1 million of coverage purchased among UK firms declined, falling to euro 9,427 in 2004 to euro 6,533 in 2006.”

The study found that firms which experienced losses of $5 million or more in the past five years are far more likely to purchase significantly higher limits of coverage. European firms that have sustained large losses in the past five years purchased seven times the level of protection that was bought by those without such losses, compared to four times more in the US.

Mr Keefe said: “Experience is a great teacher. Firms that have sustained large liability losses may recognize they’re vulnerable to a significant claim and make sure they have purchased the additional premium now required to maintain their level of protection. Firms that haven’t sustained large losses may feel they are relatively insulated but they should recognize that many of the biggest damages are paid by businesses involved in relatively common place incidents, such as accidents involving cars or trucks, or allegedly defective products.”

The study also charted the potential impact of large uninsured losses on businesses and found that large losses can have a dramatic effect on a firm’s bottom line. For example, a company with a 5 percent operating margin would have to generate more than euro 100 million in revenues to compensate for an uninsured euro 5 million loss.

Firms based in the UK purchased an average limit of euro 60 million. The average limit for European firms was euro 30 million, US firms euro 56 million, while Canadian firms purchased average limits of euro 30 million and Latin American firms with euro 14 million. Limits purchased by Asia firms were euro 23 million on average.

Among UK and Irish firms, the transportation industry purchased the highest limits with an average of euro 95 million. Next was the chemical and pharmaceuticals sector (euro 84 million), followed by mining and energy (euro 81 million), and finance (euro 69 million). Government entities purchased limits of euro 51 million, while rubber and plastics was the lowest (euro 18 million).

Marsh’s study examined trends based on insurance purchases of businesses in several parts of the world. Included in the survey were 2,897 firms in the United States, 2,729 in Europe, 522 in Latin America, 562 in Canada, as well as companies in Puerto Rico, Australia, New Zealand, South Africa, Japan, Korea, Taiwan and other countries in the Asia Pacific. The 2006 survey was more comprehensive than previous years, with the addition of 11 new countries and over 1,100 companies.

Read the report.

www.marsh.com

•Date: 6th Dec 2006• Region: UK/World •Type: Article •Topic: Operational risk
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