Having provided in our last INSIGHT Bulletin 10 handy tips for a successful claims negotiation we thought that we would do the same for the annual renewal process.
We have observed a number of renewals that have failed to achieve desired outcomes, leaving feelings of disappointment and a sense of failed opportunity. These renewals are unsatisfactory to both sides. It may be perceived that the insurer has benefited if the Assured is unsuccessful in their aims, but insurers will have more confidence in their relationship with the Assured if the latter feels he has had a good renewal. A successful renewal that satisfies both parties and paves the way for a constructive on-going relationship is clearly the preferred position.
Each renewal brings its own unique factors and considerations, and these must be set against generic factors that
change to varying degrees each year. Market conditions tend to fluctuate at shorter intervals than in the past,
potentially creating budgetary pressures. There is increasing importance in the insurance process as a compliance issue within Risk Management following high profile events, where for example shortcomings in the insurance programme may create financial embarrassment. From the insurance market’s viewpoint it has become a highly documented transaction as a consequence of contract certainty initiatives. All of these factors will have a bearing on the renewal negotiation. Strategies must be developed taking into account these issues in order to achieve a renewal outcome that meets or exceeds expectations. The following represents our collective thoughts as to how the prospects of achieving such an outcome can be enhanced. As with our Claims Insight Bulletin, we are proposing ten handy tips.
1. Timely Preparation
Undoubtedly this underpins every successful renewal. A hasty renewal, conceived and implemented under severe time constraints, invariably creates unnecessary pressures on all parties. The planning for renewal should ideally commence shortly after the previous renewal. A brainstorming post renewal meeting attended by the Risk Management division and the broker should be the starting point for setting objectives for the next renewal. Sometimes the attendance of a leading underwriter will be constructive in these meetings. It will identify what went right and what went wrong and assist in avoiding the mistakes, if any, made previously.
2. Set Clear and Reasonable Objectives
Before the renewal negotiation gets properly underway consult with the broker on what may be possible having regard to changing market conditions and market capacity. A broker may be unduly optimistic at this stage if he feels that a tender is in prospect. An honest dialogue needs to be encouraged so that realistic objectives can be set. Price will always be an issue but other considerations may carry more weight dependent upon the Assured’s requirements. If capacity for certain risks is in decline, or more capacity is needed for higher values and limits, the ability to generate more capacity may be equally if not more important than price. It is therefore important to determine what is really vital in support of your business plan, and then establish a set of objectives for the broker to meet that are challenging, but not unrealistic.
3.Learn from Claims Experience
Your own claims experience and that of others in the industry will have an important bearing on the outcome. If you have suffered a large claim then it is vital that full and current information is provided on likely costs and recoveries. Close liaison needs to be established with the adjuster so that accurate information is available. A presentation to the market with a frank disclosure of what went wrong and what action is being taken to avoid a re-occurrence is generally constructive. Insurers will be more appreciative of an Assured that has recognised failings in design or safety practice, because the problem has at least been identified, and can be dealt with going forwards. Similarly, if there is a very high profile incident that has caused the market a big loss, insurers will be keen to know how you are prepared if something similar were to happen to you.
4. Update Information
The legal process of disclosure is re-established at each renewal. Ensure that a full accurate presentation of your business is provided to the market through the broker. Some Assureds will seek to make a presentation to their existing and prospective insurers before each renewal. These are helpful in getting a message across, and maintaining good relationships, but are not essential. What is really important is to ensure all information on assets, likely acquisitions, plants coming on stream, drilling programmes and areas of activity, are provided to insurers. This is particularly important on liability programmes, where information on your activities, and those of your subsidiary companies, needs to be constantly updated. This process should include a reassessment of whether insured values, EML’s and limits are adequate going forwards.
5. Market Simplification and Streamlining
Overtime some insurance programmes become horribly complex, with different brokers involved and different layers
of cover on varying insurable interests. While there may be a need to establish competition between different brokers and providers, which is generally healthy, there are risks in having too complex a programme. Gaps and overlaps may appear and the logistics of co-ordinating each separate policy renewal may become hugely time consuming. A streamlined programme, reducing the need for so many individual negotiations and separate placements, will reduce these risks and create more efficiency.
6. Keep Stakeholders happy
Communicate with your stakeholders, whether they be equity partners, co-venturers, National Governments or Lenders. Co-venturers will need to know the current replacement philosophy for each asset, included updated replacement costs, and any other pertinent information such as removal of wreck costs, potential drilling dates for spudding new wells and such like. Where a national government or national oil company is a stakeholder through Production Sharing Contracts it is vitally necessary to ensure such parties are in agreement with insured valuations, deductibles and extent of cover. Lenders will need to know via your broker that the insurance has been renewed on terms in keeping with the Loan Agreements. The prudent Assured will seek to ensure all such parties are kept in the loop.
7. Manage Upwards
A poor renewal is one where the Management Board is caught by surprise, either by unbudgeted increases in premium or substantial reduction in cover, or at worst, a lack of cover due to time constraints. If there is a real possibility of unwelcome news it will need to be flagged to management as early as possible. As with claims negotiations it is sometimes better to err on the side of caution in estimating the likely outcome of the renewal. It is always then better to be able to report improvements on base case estimates.
8. Getting a Fresh Face involved
Sometimes it is important to take a whole fresh look at your insurance programme. A new pair of eyes may spot some inconsistency, or may ask challenging questions on issues that may have been taken for granted. It is not always possible to do this internally – it will depend on the size and nature of your company. But a fresh insight into the programme from an independent party, be they an alternative broker or energy insurance consultant, may bring issues to light that may either have been overlooked or taken for granted. This can be achieved constructively with your existing broker, who can become part of the exercise.
9. Setting Key Performance Indicators (KPIs)
Having established the priorities and set brokers key objectives it is advisable to consider some incentives for the broker. A challenging but not wholly unrealistic set of objectives will be demanding and may involve additional marketing or innovations in the placement process. One way to achieve this is to incorporate a Performance Bonus into the brokers terms of agreement. If this route is chosen the performance indicators must be clearly identified and the basis of compensation spelt out with equal clarity.
10. Own the Process
We have borrowed this expression from our 10 Claims Tips. It is just as true in the renewal negotiation as with the Claims process. If a timeline is developed from the outset for the whole renewal transaction, and adhered to, it will support the achievement of the desired objectives. Inevitably there will be time-lag, either because of the lack of availability of key individuals, the negotiation is more complex than expected, or simply that the market is overstretched at any one time. A good broker will keep his client informed, but this is not always the case. You need to be aware of any time slippage and keep on top of it. No news sometimes means there are unexpected problems, and you need to create an on-going dialogue with your broker so that you are kept fully up to date and can then consider contingent plans.