THE EXECUTIVES GUIDE TO

INSURANCE AND RISK MANAGEMENT

 

 

Taking Control of Your Insurance Programme

 

 

 

Graeme Berwick, MBA

QR Consulting

 

 

Sydney 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Executives Guide to Insurance and Risk Management

 

First published in Australia in 2001 by QR Consulting

P.O. Box 456 Haberfield NSW 2045

www.qrconsulting.com.au

 

Copyright  © 2001 by Quality Results Pty Ltd

 

Cover photograph supplied by Getty Images Australia Licence no 2119631

 

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher.

 

Printed in Australia by Fastbooks, Glebe, NSW  

 

ISBN 0 9578866 0 8

1.            Insurance         2.            Risk management

 

TABLE OF CONTENTS

 

 

 

INTRODUCTION                            1

 

 

CHAPTER ONE - RISK MANAGEMENT

 

1.1       Risk Management Defined           4

 

1.2       The Risk Management Process           4

 

1.3       Risk Identification and Evaluation      5

 

            1.3.1            Commercial and Legal Relationships 8

            1.3.2            Economic Circumstances  8

            1.3.3            Human Behaviour       8

            1.3.4            Natural Events             9

            1.3.5            Political Circumstances  9

            1.3.6            Technology and Technical issues 9

            1.3.7            Management Activities and Controls          10

            1.3.8            Individual Activities        10

 

1.4       The True Cost of Risk Exposures       10

 

1.5       Evaluation and Quantification  11           

1.6       Avoiding, Reducing and Controlling Risk Exposures       13

 

            1.6.1            Management Procedures 14

            1.6.2            Human Resource Policies / Strategies     18

            1.6.3            Operational Procedures / Controls          19

 

1.7       Risk Financing       22

 

            1.7.1     Self retention of risk / Self Insurance 23

            1.7.2            Captive Insurance Companies     26

            1.7.3            Alternate Risk Transfer / Finite Risk Insurance       29

            1.7.4            Government Relief          30

 

 

CHAPTER TWO - THE INSURANCE MARKET

 

2.1       Market Participants    32

 

            2.1.1            Insurers 33

            2.1.2            Underwriting Agents      34

            2.1.3            Insurance Agents            36

            2.1.4            Insurance Brokers           36

            2.1.5            Risk Management Consultants   39

            2.1.6            Reinsurers            39

                        2.1.6.1            Treaty Reinsurance Programmes   40

                        2.1.6.2            Facultative Reinsurance   41

            2.1.7            Reinsurance Brokers      43

            2.1.8            Retrocessionaires            43

 

2.2       Lloyd’s - A Unique Market            44

 

2.3       Insurance Market Cycles            46

 

            2.3.1            International Market Cycles            46

            2.3.2     The Australian Market Cycle 47

 

2.4       Insurer Solvency         52

 

2.5       Insurance Broker / Insurer Selection         54

 

            2.5.1            Timing 54

            2.5.2            How Often            55

            2.5.3            Conceptual Reports versus Premium Quotations     55

         2.5.4            Contents of A Tender Document       56

 

 

CHAPTER      3 - INSURANCE OF ASSETS AND CONSEQUENTIAL LOSSES

 

3.1       Industrial Special Risks  66

 

            3.1.1            Basis Of Cover  66

            3.1.2            Wording Pitfalls / Additional Covers            68

            3.1.3            Business Interruption / Consequential Loss Issues    73

            3.1.4            Calculating An Adequate Sum Insured   75

                         3.1.5       Strategies To Improve The Results of The Insurance Placement       77

            3.1.6            Claims Management Strategies       79

 

3.2            Engineering          82

 

            3.2.1            Basis Of Cover  82

            3.2.2            Wording Pitfalls / Additional Covers            83

            3.2.3            Calculating An Adequate Sum Insured   84

                         3.2.4       Strategies To Improve The Results of The Insurance Placement              85

 

3.3       Computer and Electronic Equipment      86

 

            3.3.1            Basis Of Cover  86

            3.3.2            Wording Pitfalls / Additional Covers            87

            3.3.3            Calculating An Adequate Sum Insured   88

                         3.3.4       Strategies To Improve The Results of The Insurance Placement              88

 

3.4       Motor Vehicle            89

 

            3.4.1            Basis Of Cover  89

            3.4.2            Wording Pitfalls / Additional Covers            89

            3.4.3            Premium / Cover Alternatives   91

                3.4.4                Strategies To Improve The Results of The

                                Insurance Placement                94

            3.4.5            Claims Management Strategies       94

 

 

3.5       Fidelity Guarantee / Crime            95

 

            3.5.1            Basis Of Cover  96

            3.5.2            Wording Pitfalls / Additional Covers            96

 

3.6       Marine Cargo  97

 

            3.6.1            Basis Of Cover  98

            3.6.2            Institute Clauses For Insuring Risks            98

            3.6.3            Additional Covers            99

                         3.6.4       Strategies To Improve The Results of The Insurance Placement              100

            3.6.5            Claims Management Strategies       101

            3.6.6            Marine General Average - A Simple Explanation    101

 

 

CHAPTER 4 - LIABILITY INSURANCE PLACEMENTS

 

4.1       Public and Products Liability (General Liability)            104

 

            4.1.1            Basis Of Cover  105

            4.1.2            Wording Pitfalls / Additional Covers            105

            4.1.3            Calculating An Adequate Sum Insured   110

            4.1.4            Umbrella Liability           112

                         4.1.5       Strategies To Improve The Results of The Insurance Placement       113      

         

4.2            Professional Liability       114

 

            4.2.1            Basis Of Cover  115

            4.2.2            Wording Pitfalls / Additional Covers            115

            4.2.3            Calculating An Adequate Sum Insured   119

4.1.4       Strategies To Improve The Results of The Insurance Placement       119

4.1.5       Claims Management Strategies       120

 

4.3            Information Technology Liability / eCommerce Risks            121

 

            4.3.1       Some Reasons Why Traditional Insurance Policies Will Not Respond To Emerging Risk Exposures       123

            4.3.2            Wording Pitfalls / Additional Covers            124

            4.3.4            Information Used By Insurers To Assess Your Risks   126

 

4.4       Directors and Officers Liability (D & O)            127

 

            4.4.1            Basis Of Cover  130

            4.4.2            Wording Pitfalls / Additional Covers            131

            4.4.3            Calculating An Adequate Sum Insured   137

                         4.4.4       Strategies to Improve the Results of the Insurance Placement              138

            4.4.5            Claims Management Strategies       138

            4.4.6            Risk Management For Directors & Officers           139

 

4.5            Employment Practices Liability           140

 

            4.5.1            Basis Of Cover  141

            4.5.2            Wording Pitfalls / Additional Covers            141

 

4.6            Superannuation Fund Trustees Liability            142

 

            4.6.1            Basis Of Cover  143

            4.6.2            Wording Pitfalls / Additional Covers            144

 

4.7            Compulsory Third Party Motor Vehicle Liability (CTP)            145

 

            4.7.1            Various State Arrangements            145

            4.7.2            CTP Gap Exposures       145

 

CHAPTER FIVE - INSURANCE OF HUMAN RESOURCES

 

5.1       Workers Compensation            151

 

            5.1.1            Differences Between Various States and Territories            151

            5.1.2            Coverage Issues 151

 

5.2       Corporate Travel / Personal Accident         156

 

            5.2.1            Basis Of Cover  156

            5.2.2            Wording Pitfalls / Additional Covers            157

            5.2.3            Calculating An Adequate Sum Insured   158

 

5.3       Keyman Insurance       159

 

            5.3.1            Basis of Cover  160            5.3.2            Taxation Issues 161

           

 

CHAPTER 6 - OTHER CLASSES OF INSURANCE

 

6.1       Products Recall / Product Guarantee       164

            6.1.1            Basis Of Cover  164

           

6.2       Malicious Product Tamper            165

            6.2.1            Basis Of Cover  165

 

6.3       Kidnap Ransom and Extortion         166

            6.3.1            Basis Of Cover  167

 

6.4            Environmental Impairment Liability           169

 

            6.4.1            Basis Of Cover  169

            6.4.2            Environmental “Cost Cap”            170

            6.4.3     Site Specific Environmental Coverage        170

 

6.5            Construction        171

 

            6.5.1            Construction All Risks   174

                        6.5.1.1            Wording Pitfalls / Additional Covers            174

            6.5.2            Construction Advanced Loss Of Profits            177

                        6.5.2.1            Wording Pitfalls / Additional Covers            180

            6.5.3            Force Majeure / Liquidated Damages         182

 

 

6.6            Defamation          183

 

6.7       Trade Credit  185      

6.8       Political Risks / Expropriation 186

 

6.9       Insurance Bonds 188      

 

CHAPTER 7 - INDUSTRY REGULATION

 

7.1       Insurance Act      190

 

7.2       Insurance Agents and Brokers Act   191

 

            7.2.1            Duties of Insurance Brokers           193

 

7.3       Insurance Contracts Act            194

 

7.4       Financial Services Reform Bill       196

 

7.5       Trade Practices Act 196

 

 

GLOSSARY OF INSURANCE TERMS           199

 

 

BIBLIOGRAPHY            207

 

 

INDEX           211