The business of managing risk
When it comes to protecting your business from the negative impact of future events, it can be hard to separate the emotion from the commercial reality. Marine Business spoke with Lyndon Turner of Nautilus Marine Insurance about the business of managing risk.
Insurance is an emotional business. How do you put a realistic value on a business in which you’ve invested so much blood, sweat and tears? How much are you prepared to pay to protect that business? And in the unfortunate event that you need to call upon your insurance policy, how well does it live up to your expectations at what can be an extremely stressful time?
Not surprisingly then there can be a lot of feeling tied up with the ins and outs of insurance coverage, as can be seen by the many heart-felt stories from customers, both positive and negative, about their experiences with insurance companies.
For business owners though, insurance is also just another business decision which needs to be assessed on its merits in terms of what it provides for that particular business.
Lyndon Turner, CEO of Nautilus Marine Insurance, puts it succinctly when he comments that, at its simplest, insurance is about “risk transfer”. Clients who take out insurance are “removing the risk away from the business to a capital provider”.
Of course every business venture is risky to some degree – hence the rewards – but there are still many risks that can be ‘transferred’ so the business doesn’t have to carry them alone. How much is that worth to your business? What sort of value do you put on that? That’s where the brokers and insurance companies come in with their years of experience in assessing and valuing different types of risk.
Tell it like it is
This leads to the first and most important piece of advice that Lyndon Turner gives potential clients: the necessity for full disclosure.
“The best advice that we can give a business owner is to make sure that they are very open with their insurance broker about what they can do.”
Sometimes business owners may be reluctant to reveal everything about what they are doing for fear that it will force premiums up or be seen as too great a risk. Such concerns though are unwarranted, says Turner.
“An insurer hates it when a client holds back information about what they do. And generally it’s something the insurer may be comfortable with anyway. The more information we have about a business, the better we can correctly analyse that risk.”
From a business perspective then, it pays to be upfront with your insurance broker or advisor about what you are doing: the types of boats being sold or serviced, the types of boats in the marina, how much is being imported compared to locally manufactured, and so on.
“These are the things we look at as an insurer to get the premium right but also get the coverage right,” says Turner.
Paying for value
Allied to the need for the right type of coverage is the role of specialised insurance providers. Nautilus provides cover for its business clients via around 400 independent brokers operating in Australia. In turn, Nautilus is just one of hundreds of suppliers that these brokers can access. It is also one of a small number of specialist marine insurers.
While a general insurance company can provide cover for a company in the boating industry, it is unlikely to offer the same breadth of cover that Nautilus provides. Nautilus can do this because it has a deeper understanding of how the industry works, the types of activities it undertakes and the associated risks. Turner says this is something that has evolved over time as specialised insurers have come to the forefront.
“It’s something I’ve been very close to over a number of years and we’ve been able to adapt that over time.”
What would you pay for such a service? Lyndon Turner quotes the Warren Buffet saying “Price is what you pay. Value is what you get.” Prices go up and down but the level of service that is delivered should remain at a consistently high level and that is what determines the value of the contract.
The acid test in terms of insurance contracts is typically when a claim is made and how the insurer responds. Turner says Nautilus works hard to have appropriate systems in place to ensure that when customers contact them there is somebody qualified and trained to respond at all times, even if it is in relation to something that may not be covered by a policy.
“It may be as simple as giving someone guidance as to what to do. Often they just need someone to hold their hands.
“The reality is that we’re selling a promise. If we don’t deliver at the claims time we can unwind the message pretty quickly.”
Keeping the momentum going
In terms of pricing, Turner says businesses have benefited over the past five or six years from soft market conditions. The likelihood is that premiums will firm up in the next couple of years as a result of weaker returns by major insurers.
The latest KPMG annual review of the general insurance sector recorded that, in the year ending June 2015, profit among Australian insurers fell by 23.6% to $3.7 billion, partly as a result of five natural disasters in the 12 months to June 2015 which cost the industry about $3.6 billion.
Price is obviously a key factor in determining how much and what sort of cover business owners select. Turner says that while the number of businesses in the marine industry operating without any form of cover is in a minority, the wider question is whether companies have adequate cover for their needs.
One area which is often over-looked is business interruption cover, despite the fact it is one of the most keenly-priced options available today and can be critical to the survival of a business when disaster strikes. In these circumstances, business interruption insurance can provide for a percentage of a company’s revenue to be paid for a period of time to cover on-going fixed costs while it is out of action.
Periodic payments can kick in as a result of physical damage caused by fire or storms but it can equally apply to events such as being unable to access premises due to off-site disruption such as gas leaks, or even interruption caused by overseas disasters disrupting supply chains. In the marine sector, Nautilus offers cover for on-water assets as well as land-based ones, so for instance if a fuel dock is out of action, adversely affecting a marina’s revenue stream.
“Business interruption is critically important because it keeps momentum going in the business,” says Turner. “If trading revenue is being covered it takes some of the pressure off what can be an exhausting and emotional process.”
Despite this, Turner estimates that up to 50% of businesses in the Australian market are currently not using business interruption cover.
“We see a lot of under-insurance when it comes to business interruption,” he adds.
The irony is that a business which may be covered for physical loss could still end up going out of business because it lacked the means to continue trading in the interim. So how would that make you feel?
This article first appeared in the April-May 2016 issue of Marine Business magazine.