Watch your insurance renewal 

You may end up with no insurance if you do not act now. This could mean, under the compulsory insurance requirement, that you have to suspend your operation simply because you cannot afford the impact of an accident.

Most business operators, for effective booking of accounts, schedule their insurance renewal to match their financial year. A large number of them fall on December 31^st. It is the time now when your Accountant, or HR Manager, or Admin. Manager starts preparing for renewal negotiations with the respective Insurers.

The practice is that insurers are obligated to dispatch renewal invitations to their clients in mid-November for the January 1^st renewals. I am not surprised that you have yet to receive them this time round. Probably when they reach you, it is likely close to the end of December. It won’t bother you if the renewals are invited at terms as expiry. The chances are however; you may be notified either that your insurer is unable to provide continuous cover or that an inflated premium is required for renewal. You simply do not have the time to make alternative arrangements.

This is not a threatening remark. The impact is not much so for property insurance, health insurance and cargo insurance. Nevertheless employees’ compensation insurance, public/product liability insurance and motor insurance will be the victimized areas. The insurers and reinsurers are now strangling with each other behind the scene. Your fate is yet to unveil. So wake up to do something in advance.

Is the position so scary? 

In order to maintain a healthy operation, an insurer has to, among other requirements, diversify the risks written, protect a safety level of capital and keep the liquidity to meet claims. One major and effective tool is by way of reinsurance. For every dollar you pay to the insurance company, a portion of it is pay to the reinsurer as premium for protection of large losses. A portion of it is set aside as reserve for claims of smaller scale. When the reserve is not adequate, it will hit the capital. This would prompt the Government Authority to intervene when it sees the capital to fall either by limiting the insurer to accept additional business or by increasing the capital requirement. The worse case is to compel them in suspension of operation.

An insurer operates locally or regionally, whilst a reinsurer operates globally. An impact on reinsurers in other area of the world would also hit the insurers in terms of sharing the reinsurer’s result. Since the September 11 incident two years ago, the reinsurers staying in the market have substantially recovered by increasing the premium due from insurers which in turn passed onto your insurance costs. You may not forget this painful experience when you wrote your premium cheque. 

Is it now the end of premium increase? Regrettably, the answer is ‘NO’. The reinsurers experienced these unprecedented huge losses arising from terrorism, natural disasters, SARS etc. and anticipate that these are recurring. They have to do something about it. This year, they are not increasing the premium to build up their reserves; instead they are imposing higher excesses borne by the insurer to reduce their size of reserve. What happen is that the insurers at the front line have to pay more on each claim. The answer to the change is either to increase premium to policyholders or to raise shareholders’ capital to a level to meet the solvency margin (a yardstick to measure insurer’s financial capability to meet claims) laid down in the Ordinance. 

The battle is now going on between insurers and reinsurers. The insurers are being accused of not charging adequate premium and the reinsurers are being accused of being too greedy. The winner is yet to know. At certain point, the Insurance Authority has to step in to resolve position.  

The consequence of increasing premium is that the insurers can afford to write less business to maintain premium growth. The capacity of insurance providers will suddenly shrink. Insurers are positioned to take the preferred business leaving the sub-standard ones to pay rocket high premium. Any increase of less than 15% is your luck. 

In the current climate of low interest rate, insurance is no longer a profitable business to attract investors. It just does not support the return on investment. What if the shareholders decide not to increase the capital? The consequence is that the insurers will stop writing certain class of business or simply drive themselves out of the market. This is particularly material for the small to medium size insurance companies. The market capacity is further suppressed. It becomes a sellers market. As an insurance buyer, you can hardly make any complain in this laissez-faire market.

What can you do? 

You may now be discouraged to learn all these unfavorable signals. But are you doing nothing and wait for your insurer to manoeuvre? If not, what can you do? Here are some suggestions: 

1.          Find yourself a GOOD broker. They work on a fee of 15 to 20%. It is good value for money if they are really GOOD.

2.          Reassess your level of insurance protection. Do not over insuring.

3.          Get quotations from at least three insurers.

4.          Consolidate your insurance program to discard those classes of insurance, which you find yourself financially capable to self-insuring. Spend the saving on risks management.

5.          Precisely work out your sum insured. Depreciation must be deducted.

6.          Consider taking a higher deductible in return of a premium discount.

7.          Exercise your right under the Stock Declaration Clause and the Wages Adjustment Clause.

What your association AHKEA can do for you? 

One way of containing costs is by means of collective bargaining. Your association is in a position to take up such role. It is aimed to achieve: 

1.          Secure the support of several large insurers that are less vulnerable to the impact of reinsurer dominance.

2.          Develop special schemes for the members. Particularly in areas of cargo insurance and product liability insurance.

3.          Get added values for members through advisory service and free review conducted by a good broker.

4.          Identify the right insurer to cover your risks in Mainland China.

5.          Strengthen the bargaining power by pooling the premium of members.

So start to look into your insurance program before it is too late!!

Click this to see details of the One-Stop Insurance Scheme for AHKEA members.

Hilson Ng

Senior Insurance Advisor

Nov 17, 2003 

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