Procurement Intelligence Unit

"I don't want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too." 

The legendary US entertainer Jack Benny may have made that comment in jest, but the events of the past two years and the near bankruptcy of a number of the world's leading insurers means that his words will resonate.

Risk has been a watchword over the past two years as firms have grappled with the some of the most turbulent economic conditions in a generation. This focus has led to an increased focus on insurance – but are companies armed with the information they need to secure the right deal at the right price?

No-one needs reminding of the shockwaves that the collapse of Lehman Brothers sent around the world, but it was the Federal Reserve's bail-out of AIG that really drew attention to the almost unprecedented global crisis facing firms that had previously viewed the insurance industry as one of the most robust in the financial sector.

An upcoming PIU operational research study into business insurance paints a mixed picture of a market that is beginning to take its first tentative steps to recovery. And it also outlines the major issues facing those charged with ensuring that their insurance covers meets the company's risk management needs.

Procurement's role in this process is obviously crucial, and the sourcing strategies that organisations employ in this area can have a huge impact, not only on the effectiveness of the cover, but also its cost implications.

As the fall-out from AIG's near-collapse continues, it's little surprise that the financial stability of insurance providers is now viewed as the number one priority. According to Aon's Global Risk Management Survey 2009, financial stability ranks higher than the ability to deliver a global programme, capacity, value for money, industry experience, prompt settlement of large claims, long-term relationship, flexibility/innovation/creativity, claims service, and speed and quality of documentation.

Although the financial stability of the provider is seen as being crucial, so is the need for a company's buying cover to reduce insurance costs across the board. Our report found that those firms implementing a global programme can reduce premium spend by nearly 20% for any given product line that has previously been purchased on a decentralised basis, i.e. an insurance package purchased by an individual person as opposed to one bought by a central risk management team.

The benefits of this go beyond cost, however, with our study also finding that this centrally negotiated programme also helps in addressing compliance issues, and consequently delivers greater consistency of coverage as well as forming an enterprise-wide global risk finance strategy by coordinating key insurance purchases.

To date, the European insurance industry has shown a greater resilience to the economic crisis than those firms across the Atlantic, although the fall-out has inevitably had an impact, with rising claims costs, increasing competition and a general decline in demand for insurance products. This has been most keenly felt in Central and Eastern Europe, and these struggles are likely to continue for the short-to-medium term.

So what is the future of insurance procurement, and what information and trends do buying organisations need to be aware of?

Firstly, there's a real danger that costs could be about to rise considerably, as supplier consolidation gathers pace over the next 12-18 months. And with this in mind, sourcing strategies must take into account the variables that can directly affect the sums that companies are paying for insurance services.

As our study states: "Businesses must calculate the risks carefully and understand the impact of any exposures with clear mitigation plans in place. Savings made in reduced premiums could result in cost increases in other areas of the business – for example, a higher excess on accident damage for vehicles and an associated lower premium may lead to increased costs on higher accident repairs that continue to adversely affect the profit and loss."

Key price indicators, such as the cost of capital must also be fully understood, as must a firm's previous claims history. And it's this area that could pose procurement with one of its major challenges because if claim rates are high, then there could be a number of internal issues that need to be addressed – namely corporate behavioural changes to reduce these numbers.

The length of contracts entered into by organisations should also be a primary consideration, with the benefits, or otherwise, of longer-term contracts fully investigated and understood.

The opportunities to cut costs are there for procurement. Whether procurement is armed with the knowledge and understanding to be able to take advantage, however, remains to be seen.