The crucial step in auditing insurance programs

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To ensure an organisation’s insurance program is cost-effective, and meeting its needs, companies are encouraged to carry out comprehensive audits of their insurance programs. But there is one step in the process organisations may be missing in that audit, leaving them exposed.

James Baum, Aon managing director, broking and chief broking officer, Pacific, told Corporate Risk & Insurance when auditing, organisations should be assessing their risk register against their insurance program to ensure it is responding where it can and covering the risk it should, however “it is often the part that gets missed”.

He explained that there is often the assumption that the right insurances are in place therefore everything is covered, however the only way to truly know is by doing a gap analysis between the risk register and what is insurable.

“The important bit out of that when you find gaps, and most corporations would find gaps, it doesn’t necessarily mean they insure it. So then it comes to overlaying that with their overall appetite for risk retention,” he said.

When carrying out the gap analysis, Baum said it is essential to have the right people involved in process.

“What you might see is a circumstance where an insurance manager and insurance broker do the gap analysis together – well they’re probably not the two best people to do it. It’s got to be people deeply involved in the business who can actually the test the validity of the assumptions being made,” he explained. “They are people who understand the ramifications of the risk itself and what it might mean to retain risk.”

As well as an insurable gap analysis it’s also important to do a policy gap analysis.

“It sounds like a really basic thing to do but I think a lot of clients out there just assume, along with their advisor, that the policy will respond the way they expect it to,” Baum said. “The thing that we would also recommend is do a test against claim scenarios that the policy wording will indeed respond to what you think it’s going to respond to.”

Baum final advice to organisations conducting insurance audits is to carry out more scenario testing instead of relying on the benchmarking of limits against peers.

“You need to scenario test – so as part of those reviews you need to think about the things that go on within a business and play out some of those scenarios into a loss and actually start estimating what the cost would be. Trying to review your limits against your peers makes a basic assumption their risk is exactly like yours and even companies that look similar are invariably never the same.”

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