Defining Insurance Basis Risk
Insurance basis risk is the risk that the insurance does not perform as expected or as promised.
Moreover, it is the risk that the insurance will not meet the insured's expectations either in terms of the timeliness or amount of the insurance payout in the event of a claim.
Insurance basis risk is serious because Management buys commercial insurance to protect their operations and meet compliance requirements, and not producing such an outcome all while paying annual premiums is simply destructive in terms of economic value.
Insurance Companies can deny payment even if coverage exists (Strategic Default).
It's as important to clinically trigger commercial insurance for payout by an insurance claims consultant who is independent of brokers and insurers as it is to structure coverage by an independent risk management consultant.
Even though the insurance company is able to pay and the insurance contract itself provides for coverage, the insurance company can still deny payment simply because it can do so in light of most businesses not having the resources to fight them in court.
Insurers can even choose to go to court and settle, or drag the case in different courts for years, over paying the full amount of the claim that is due right away simply because it may be more profitable for the insurers to do so. This all depends on the size and complexity of the claim as well as the size and sophistication of the insured.
What happened during the Covid19 pandemic is a classic example of the insurance companies being able yet not willing to pay.
A large number of businesses closed down and many people were laid off as a result. The majority of businesses especially SMEs were not aware of insurance basis risk and many of them were taken by surprise when their insurance did not pay out.
Unlike SMEs, multinationals had learned their lessons over the years and across different geographies. That is why they hire an in-house insurance manager or outsource the function to an insurance risk management consultant, or both.
Searches Online About Insurance Not Paying
Many individuals representing themselves or businesses search daily about insurance companies not paying claims. Some of their queries include the following:
- Insurance did not pay
- Insurance company is not paying a claim
- What if insurance doesn't pay enough
- Insurance doesn't want to pay
- Insurance won't pay
- When insurance doesn't pay
- Insurance won't pay claim