Introduction
This document outlines a trend in the world of (non-life) insurance for companies. It puts the spotlight on a development that is becoming increasingly evident and one that, in Riskonet’s opinion, could in the long term negatively impact support for risk prevention.
The development we are referring to is the role that sprinkler systems play in the various requirements stipulated by insurers in 2020/2021. Investment in a sprinkler system is increasingly being made a precondition for acceptance by an insurer. The bottom line here is insurability.
This is a trend that is putting pressure on the relationships between insurers and their customers, as well as diverting attention from the complete offering of available risk-management and risk-finance-management measures. Moreover, it also often negatively affects the way companies can do business.
The objective?
The developments outlined in this Discussion Paper are important enough to be properly considered. They provide food for thought that will, hopefully, lead to a lively discussion. In this way, Riskonet wants to make insurers and entrepreneurs think collectively about how to reduce risks and potential damage in an open and transparent manner.
The dialogue about the use of sprinklers – which is, after all, what this paper is all about – should provide clarity about the role, application and advantages of sprinkler systems, as well as throw light on their limitations. An honest discussion can once again put sprinkler systems back into the right perspective.
A discussion with whom, and for whom?
- Insurers
- Entrepreneurs
What’s the problem?
At the moment, insurers are increasingly mandating the installation of sprinkler systems as a precondition for offering (damage) insurance. And this is even being made applicable for companies whose risk profile has remained the same for the past few years! On the one hand, this is driving an overestimation of the importance of sprinkler systems, while on the other hand an underestimation of the type of measures that can have a major, positive impact on the risk profile of an insured object. While a sprinkler system can certainly limit the damage caused by a calamity, it does nothing to reduce the likelihood of it happening in the first place.
This observation has come to light during a year in which the insurance market has hardened significantly. Insurers are seeing their earnings come under pressure, due to claims emanating from an increasing number of acts of nature, as well as other causes. It’s, of course, perfectly reasonable for insurers to look for ways to limit the risks and level of claims that they are exposed to – and thereby underpin their profitability. And they are doing this by applying limitations to the cover they offer, increasing their premiums and stipulating ways with which companies/insured parties are expected to handle and limit risks and damage. In addition to looking at the maximum-damage scenario, to an increasingly extent normal-damage scenarios are now also being brought into the equation.
A noteworthy development has emerged here. In more and more discussions and negotiations about non-life insurance policies, a desire – or even a requirement – that a company installs a sprinkler system is being stipulated. The reason is understandable. By installing a sprinkler system, a company can significantly reduce the normal damage scenario. Ostensibly, this makes it an effective measure. But only if you look no further than the damage scenario.
In the real world, unfortunately, companies and insurers often pay only limited attention to reducing the likelihood of exposure to damage/calamity. And that is a real shame. Additional focus on the reduction of risk (proper analysis, organisational measures, investments in maintenance and structural attention to safe working practises) can have a major positive effects on the overall risk situation. And it’s for this reason that Riskonet is urging insurers to step up their efforts to analyse damage statistics. Sharing information about the frequent causes of damage can reduce the likelihood of companies being exposed to it!
Impact of installation work
It is important to note at this point that installing sprinklers in existing buildings is simply not an option for some companies. For one company, for example, the installation might be physically impossible, due to the layout of a production or logistics area. Another company’s storage location might be relatively low and installing sprinklers would thus limit its vertical storage options. A Riskonet client once forfeited a third of a building’s effective storage space, making it necessary to invest in additional storage capacity.
For another client, the impact of installation work would have been so significant – resulting in temporary shutdowns and the relocation of production – that it would have been hugely costly. Furthermore, for companies operating in complex environments, labour costs for installation can be prohibitive. Finally, many companies simply cannot afford the investment, sometimes for the installation of a sprinkler system that cannot demonstrably add any value.
In Riskonet’s experience, a situation has arisen several times in which a company that really needs insurance can no longer obtain it. Being uninsurable can sometimes be a real and present danger to a company’s continuity.
Getting back to the issue at hand, in some industries the discussion about sprinklers becomes an automatic part of the equation when it’s time to renew insurance policies. Installing a sprinkler system is increasingly being seen as a sort of one-size-fits-all panacea. Without pulling any punches, this is tantamount to one-sided, one-dimensional thinking.
Potential consequences of focusing on sprinklers
They can be dramatic. Companies seem to acquiescing – technically, organisationally or financially – to insurers’ demands in the area of sprinkler systems. In some cases, the path they have to follow culminates in a dead-end: they either have to take out insurance at a very high premium, or be (partly) uninsured.
The bottom line here is that companies are being obliged to discontinue parts of their business operations. And given that the market is not exactly saturated with business-insurance providers (a rationalisation has taken place), alternatives are not readily at hand. The chances of getting a better deal amount to virtually zero. Moreover, the insurance of larger objects automatically calls for the participation of multiple insurers, and they must all be reading from the same page.
So what are we missing here?
A sprinkler system is an inhibitive tool, intended only to limit the extent of any damage. But there are also ways of reducing the risk of calamity and damage in the first place. A sprinkler system will not prevent anything and it has no effect on a worst-case scenario. To put it bluntly, demanding a sprinkler system means you are only adjusting the dial of one of the available options.
What other dials are there?
In Riskonet’s opinion, several options are undervalued as alternatives to the current focus on sprinklers and other inhibitive measures. In a nutshell, these can be categorised as “BIO” + other conditions/higher premiums:
- Building-related measures, such as the installation or optimisation of fire walls, partition walls (as they are better than is stipulated by the Building Decree), as well as the use of safe insulation materials. Furthermore, you have to ensure that existing measures are not devalued over time: if an installer drills a hole in a fire screen, for example, it will make that screen less effective.
- Installation measures, such as detection. A good fire-alarm system can prevent a fire in its early stages from going unnoticed and thus developing into a real calamity.
- Organisational measures, such as promoting safety awareness and implementing protocols, like turning off printers and checking that other sources of heat are switched off at the end of the working day. Verifying permits for hot work, such as welding and grinding, can also reduce the likelihood of a calamity. You must ensure that welding is not done in close proximity to combustible materials. And check that building work is carried out safely. In other words, it’s all about order and tidiness, organising risk reduction and promoting a good safety culture.
- For many companies being uninsured is simply not an option. If a company runs out of realistic improvement possibilities why can’t it be offered an alternative, such as a higher premium in combination with increased excess, for example?
Appeal for dialogue
Which groups is Riskonet targeting by appealing for this dialogue about sprinklers? Insurers certainly, but not exclusively. The business community should also be stimulated to manage the likelihood and risks of damage, in smarter and more sensible ways. Some companies don’t pay enough attention to damage expectation under normal circumstances. Others focus too strongly on complying with insurers’ requirements and not enough on alternatives that could substantially reduce risks.
Another good piece of advice is that entrepreneurs should pay more attention to risks when defining company policy and making investment decisions. It will do more for a company’s continuity than “buying off” risks with an insurance policy. This was well illustrated by consultancy advice provided by Riskonet recently. A company saw gains in terms of efficiency and construction costs by bringing together different production facilities under one roof in one location. By doing
so, however, that company was putting all its eggs in one basket, exposing itself to additional risks and potentially greater damage in the event of an incident or calamity. The choice for separate buildings at one location constituted a much better risk profile.
Our appeal, to both parties, is to enter into dialogue on substantive grounds and, above all, assess the situation multi-dimensionally. Have an open discussion and be receptive to alternatives that can contribute to the bigger picture. This applies to insurers and to companies – they need to realise that there are risks they should not want to be exposed to. There are plenty of ways to substantially reduce the risk of a disaster.
The vision of insurers
In assessing this dilemma it might be a good idea to momentarily put yourself in insurers’ shoes. How do they view this seemingly one-sided focus on including sprinkler systems in the package of requirements?
Riskonet has conducted probing, in-depth discussions about this with several insurers’ representatives. Aside from the fact that it was clear that insurers acknowledge the existence of the dilemma, the discussions threw up some interesting insights. Arguments we discovered in the common thread are listed below.
- In the context of their acceptance process, insurers have to make some difficult decisions, particularly when it comes to risks and the likelihood of calamities. Moreover, they have an – understandable – predilection for aspects that can be substantiated. Things that are tangible, measurable and, after years of practical experience, can be demonstrated to really work. They are looking for some form of security, which is not difficult to appreciate, given the possible financial repercussions of an acceptance. A sprinkler system certainly offers a degree of security, because its effect when it is brought into play is clear. In the event of an incident, a sprinkler system plays a positive and easily identifiable role in averting extensive damage. A sprinkler system that has been certified and checked makes a measurable contribution. Unfortunately, it does nothing in the way of prevention.
- It goes without saying, of course, that insurers also acknowledge the value of other aspects. However, these are, by definition, less tangible in terms of numbers and hard data. They are seen by insurers as softer aspects and they include, for example:
- A good safety policy
- A well-organised safety plan
- Well-trained safety personnel
- Excellent maintenance of safety installations
- These softer aspects are open to interpretation and evaluation. While it cannot be denied that they are important and carry value, they seem to weigh less heavily in an acceptance process that places more importance on harder aspects that tick boxes.
- In the insurer’s underwriting process, the “likelihood” aspect plays a subordinate role. It is also an aspect that is difficult to express in figures. After all, how big or small is the likelihood that there will be a calamity? Irrespective of how big or small that likelihood is, the sprinkler system is there to limit the consequences, which makes it a “hard” factor. In the hardened world of insurance, the fact that only limited attention is being paid to the “likelihood” is one that will not be changing any time soon.
Possible solution!
Insurers’ need for security is certainly understandable. That said, the current tendency to mandate sprinklers detracts from the serious efforts that companies are making in the area of prevention. But since there is no doubt that these efforts reduce the likelihood of a calamity and limit the possible consequences, it cannot be denied that they are difficult to quantify. How then can we make these efforts weigh more heavily?
A possible solution that Riskonet wants to offer insurers and companies alike is a Prevention Certificate. Can an organisation, for example, demonstrate that it is taking prevention seriously? Does it have effective safety plans? Is it investing the necessary time and money in training employees and maintaining its installations? Are permit systems being properly implemented? And has all this been checked, approved and certified? If so, the organisation will have earned itself a Prevention Certificate, something that will probably go down very well with insurers and can lead to acceptance for the necessary insurance.
Insurers have been optimistic about the role that such a certificate could play in the acceptance process. And companies, for their part, seem more than willing to formalise their efforts in the area of prevention.
Riskonet meanwhile, from its position as a professional advisor to these parties, intends to further explore the practicality of such a Prevention Certificate and, in collaboration with all stakeholders, accelerate its introduction.
Have Your Say, or Contribute in Another Way?
If you’d like to participate in the discussion, share your vision or contribute in another way, contact Ron de Bruijn, managing partner van Riskonet.
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