The commercial world is constantly evolving. Recent trends include globalization, streamlining of processes and outsourcing. These changes impact every part of a business from physical operations to the legal environment. In this environment, businesses need to examine whether partners can truly meet their needs. Will Morris of AGCS in london reviews the latest developments.
Will Morris, AGCS UK Head of Liability, discusses changes in the liability market and what needs to be considered when selecting an insurance partner.
Reproduced with kind permission of CIR Magazine, June 2010
This challenge can be put into context by considering the way in which the UK economy has evolved in recent decades from a manufacturing bias to one based on service. Companies still engaged in manufacturing often have operations that are outsourced, offshored or run by joint ventures. The impact of these changes upon risk management and insurance needs is twofold.
Firstly, the change from manufacturing to services raises different types of exposure for companies. The long-term risks in traditional industries are fairly well-known. In the new service economy there may well be risks that will take some years to be fully recognised.
In addition, where production is outsourced or operations are changed, the nature of liability exposure may change with it. For example, the passing of risk down the contractual chain, differing health and safety procedures, the interaction of public and professional liability will all require attention.
Companies will also be operating under different legal regimes in different territories. The liabilities to which they are exposed may also change, so an understanding of practice and procedure in new territories is vital. Once this risk assessment is completed, it is also important to insure risks under the appropriate coverage form for that territory. As the chain of production lengthens, there are also risks in quality control and knowing exactly who is doing what and when.
A recent case which highlights some of these issues concerns is drywall building products imported from China between 2004 and 2007. Problems then occurred due to the drywall degrading in the presence of heat and moisture. These emissions have caused homeowners to report respiratory tract infections, sinus problems and nosebleeds. Since late 2008 the US Consumer Product Safety Commission has received about 3,000 reports from homeowners in 37 states.
Cases like this highlight that new business methods can bring new exposures years after the original business deal. Liabilities can be a long tail exposure which can see claims being made some 15 years or more down the line. It is vital to the company's balance sheet they are correctly analysed and protected.
The need to create the right client and insurer partnership is essential. The key areas for consideration can be summarised thus: security – are you confident that the insurer has the stability and rating to be there in 10 / 15 years when a claim could arise?; expertise; coverage – can they offer fully compliant cover where you have operations around the globe?; global servicing; and product range.
Understanding the importance of liability insurance needs to be emphasised throughout the business, but particularly at board level. The board needs to comprehend the scale of a damage that can be done both financially and to the reputation of business should there be a major incident. Many businesses struggle to recover fully from a major incident having underestimated their exposures.