The Policy That Insured the Wrong Thing
A logistics company operates 40 heavy goods vehicles and a central warehouse. Its insurance programme consists of a motor fleet policy, a property policy covering the warehouse building and contents, and public liability cover. The risk manager is preparing the annual renewal. Three facts emerge. First, the company has begun storing customers' goods under a bailee arrangement, and the property policy excludes goods held in trust. Second, the warehouse is in a flood zone; the property policy covers flood but with a GBP 250,000 deductible, and the company's own estimate of a 1-in-100-year flood loss is GBP 1.8m. Third, a new contract with a major customer requires the company to accept unlimited liability for consequential loss, which the public liability policy will not cover. The finance director wants to reduce premium by raising deductibles across the board. The company has GBP 3m in cash reserves and a GBP 2m revolving credit facility.
1. Identify the gaps and mismatches in the current insurance programme and assess their materiality.
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Three distinct gaps, of different kinds and materiality.
1. Bailee goods - uninsured exposure. The property policy excludes goods held in trust, but the company is now storing customers' goods. If those goods are damaged or stolen, the company is liable and uninsured. Materiality depends on the value of goods stored, which is not stated but is likely significant for a logistics operation. This is a coverage gap that can be closed by a bailee extension or a separate policy. It should be closed before renewal, not after.
2. Flood deductible vs. loss estimate - a retained-loss decision, not a gap. Flood is covered, but the GBP 250,000 deductible means the company retains the first GBP 250,000 of a flood loss. Against a 1-in-100-year loss of GBP 1.8m, the retained amount is about 14% of the modelled loss. With GBP 3m cash and a GBP 2m facility, the company can absorb it. The question is whether the deductible is priced correctly and whether a 1-in-100-year event is the right planning horizon. The exposure is real but funded; it is a retention decision, not an uninsured hole.
3. Unlimited consequential-loss liability - uninsurable under current cover. The new contract transfers unlimited consequential loss to the company. Public liability will not respond. This is potentially the largest exposure: consequential losses can dwarf physical damage. It is not a gap that insurance can simply close - unlimited liability is generally uninsurable, and the company would need either a contractual cap or a bespoke policy with a limit. Accepting unlimited liability against GBP 3m of reserves is a balance-sheet risk, not an insurance-purchasing one.
Materiality ranking: the unlimited liability is the most serious because it is unbounded; the bailee gap is the most easily fixed; the flood deductible is the most manageable.
2. The finance director proposes raising deductibles across the board to cut premium. Evaluate this proposal against the company's risk financing capacity, and recommend a position.
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The proposal is directionally reasonable but cannot be applied 'across the board' - it must be matched to the nature of each exposure and the company's capacity to retain loss.
Capacity assessment. The company has GBP 3m cash and a GBP 2m facility. Cash is not all available for risk retention; some is working capital. A prudent approach is to treat a defined portion - say GBP 1m - as the maximum aggregate retention in any one year, and to ensure that a single large loss does not breach covenants or exhaust liquidity. On that basis:
- Motor fleet: high-frequency, low-severity. Raising the deductible here is usually sensible: the company can fund small claims from cash flow, and the premium saving is often good value. Support.
- Property (including flood): low-frequency, high-severity. Raising the deductible increases retention exactly where a single event could be large. The existing GBP 250,000 flood deductible already retains 14% of a 1-in-100-year loss. Raising it further moves the company toward a retention it may not be able to fund alongside other losses in the same year. Oppose further increases without modelling.
- Public liability: raising the deductible does nothing for the unlimited consequential-loss exposure, which is the real problem. Irrelevant to the main risk.
Recommendation:
- Do not apply a blanket increase. Segment by frequency and severity.
- Accept deductible increases on motor fleet and other high-frequency lines.
- Model the aggregate retention under a plausible bad year (e.g., a flood plus two large motor claims) before changing property deductibles; keep the flood deductible where it is unless the model shows headroom.
- Close the bailee gap and address the unlimited liability by negotiating a contractual cap or buying a bespoke limit - these are higher priorities than premium reduction.
- Present the finance director with the aggregate retention figure, not just the premium saving. Premium reduction that increases unfunded retained loss is not a saving.