The report, produced in association with PwC, paints an alarming picture of inadequate disclosure, widespread ignorance of a very challenging insurance law framework, managerial failure to gather relevant information, deeply uncertain policies and a lack of understanding of how large claims are processed.

“The deficiencies the report reveals in how insurance is arranged are disturbing. What we see today is a system that has prioritised low transaction costs above reliable insurance policies. This approach is not fit for purpose for the environment we are now moving into,” said Bruce Hepburn, chief executive officer of Mactavish.

UK businesses, especially medium-sized companies, are putting themselves unnecessarily at risk and in today’s economy are far more exposed if a major insurance policy fails to pay out, he continued. “Customers, brokers and insurers must all start to invest adequate time into securing appropriate insurance,” he urged.

The report is critical of insurance buyers and finds that 65% at large companies do not review the materials used to arrange their insurance, and almost all have inadequate discussions with insurers and brokers regarding coverage.

The quality of disclosure underpinning insurance is at best poor and sometimes ‘shocking’, the report warns. Almost every document used to explain companies’ risks to insurers, out of the hundreds reviewed in the study, contained errors or omissions that could directly lead to a large claim being questioned.

“But while the quality of risk disclosure provided by the corporate sector is inadequate, insurers are also playing a material role in an ineffective risk transfer process,” said Achim Bauer, insurance strategy partner at PwC. They are failing to systematically develop the necessary understanding of their clients’ risk profile to enter into a truly useful relationship, he added.

The report also finds that 87% of insurance buyers do not understand the extent to which the duty of insurance disclosure is their responsibility or the consequences of failing to meet this duty.

John Hurrell, chief executive at AIRMIC, agreed that amongst buyers there is a lack of understanding about duty of disclosure. Although, as the report makes clear, this is more of a problem for the mid-market that do not employ full-time insurance professionals and lack the financial resources of the larger players, he pointed out.

This finding backs up Airmic's concerns over the past year regarding disclosure rules. Many feel that the law favours insurers over buyers.

Under UK insurance law the responsibility for making a fair presentation of the risk falls squarely on the insurance buyer. A failure to do so can put the entire insurance protection at risk.

The country is widely regarded as having the most customer-hostile legislation of any large economy, Airmic said. “As the report demonstrates, it increases the risk of a large claim being refused even when made in good faith.”

Airmic would like to see a change in the law but has conceded that this is likely to take four to five years.

As such it is producing a best practice guide to help companies deal with disclosure. It is also in the final stages of drafting a remedial clause for commercial insurance contracts with law firm Herbert Smith, Mr Hurrell told Commercial Risk Europe. It will provide clarity for both insurers and buyers. The next step will be discussions with the market.

Airmic also welcomes the report’s focus on the need for boards to take a fresh look at the role of insurance in their financial structures.

“Banks are not rushing to lend to companies in distress. Unless a company has sufficient cash flow or financial reserves to withstand an uninsured loss then adequate fit for purpose insurance is a critical board issue and potentially a question for survival,” said Mr Hurrell.

The association is keen to stress the importance of a risk-based approach to the purchase of insurance cover in favour of the cheapest policy on offer.

In the event of a catastrophic loss, an effective insurance policy could make all the difference between company survival and failure; the cheapest policy is of no value unless it pays out, Airmic said.

The report also shows that insurers are taking a much tougher line on claims.

Mr Hurrell agreed with this conclusion and pointed to the fact that nearly one third of Airmic members have had a claim challenged in the past five years on the grounds of non-disclosure.

The report suggests that reform is urgent and highly achievable if insurance buyers, brokers and insurers work together to improve disclosure and the practices used to arrange insurance.

It sets out seven protocols intended as a blueprint for change that have now been formally endorsed by a range of leading industry players.

The 2011 study is the latest installment from Mactavish on insurance placement and trends, following its 2010 report. It concluded that neither companies nor insurers were sufficiently on top of the significant changes to corporate risk caused by the recent economic upheaval. The latest offering was based on consultations with over 600 UK companies and more than 100 insurers and brokers.

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