Our definition of insurance risk is the risk that the insurance does not perform as expected or as promised. Another technical word for it is insurance basis risk, which 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 risk is serious because Management buys commercial insurance to protect their operations and sleep well at night, 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 operational experts who are independent of brokers and insurers as it is to structure coverage. So 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 of the insured and how resourceful they are.
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 risk and many of them were taken by surprise when the insurance that they had been paying for did not come to their rescue. Unlike SMEs, multinationals had learned their lessons over the years and across different geographies and that is why they employ in-house insurance risk managers whose job is to ensure that proper insurance coverage is sought making sense to the business and not to the insurance companies. The insurance risk managers negotiate directly with insurance brokers and can be either part of the in-house risk team or the finance team.
Thousands of individuals representing themselves or businesses google 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
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- When insurance doesn't pay
- Insurance won't pay claim