Bill Midgley column

Apr 1 2003 By Bill Midgley, The Journal

I read reports to the effect that the insurance industry is booming. I presume these are references to that part of the industry that does not include pensions or endowment business, given the well reported difficulties of those particular products.

The area most likely to be booming is that which is often referred to as general business, that is non-life business, and particularly reflects the rapidly-increasing premiums that are facing the business community.

There are justifiable concerns about claims under public liability cover, the increasing responsibility of directors and senior officers which needs further protection, and also the complexity of Employment Law which is likely to bring even further claims against businesses.

All this has to be paid for, although whether level of premiums (or to be more accurate, increase in level of premiums) justifies the extent of such claims that are made has yet to be demonstrated. So it is to be hoped that if insurance companies are merely seen to be opportunist, increasing premiums on the back of unfounded fears, then there will be an adjustment in the favour of business in future.

Insurance premiums can have a devastating effect on the ability of small businesses, in particular, to survive. There are examples of small businesses refusing to pay premiums and ceasing to continue trading.

One area to which business may wish to turn its mind is that of "captive" insurance companies. This is an insurance company owned by those businesses to whom it supplies cover. Generally it would be in partnership with an insurance company, or with a Lloyds broker which has much experience in the area.

Many large companies already operate their own "captives" and have the capital basis so to do. But that is not necessarily an option open to smaller business. So trade organisations have an opportunity to set up insurance companies offering protection to members, certainly at lower premiums, and with profits going back to members should claims not eat all income. Clusters of businesses may be able to do the same. The North-East has been successful in setting up clusters to cover specific businesses particularly those in new technology, and their need can be provided for.

We do not hear a great deal about "captive" insurance companies, but nevertheless it is a growing market. There is also a challenge for regional development agency (One NorthEast) to look at ways it might encourage such organisations to be established.

While it may not be possible for One NorthEast itself to set up such a captive, there is no reason why it should not be able to provide expertise to bring together areas of business that find the extra cost prohibitive.

Any company which decides to ignore its insurance liabilities or thinks it can carry its own risk is dicing with its own future. And that is a risk in itself which is far too high to take.

Insurance companies may well be doing well at the expense of business. But there is an alternative, and if premiums are to go on increasing at the current rate then it would benefit many of our businesses in the region if they were to explore the captive route.