UK businesses are sacrificing quality for low cost in buying insurance, according to a study of insurance-buyers, insurers and brokers.

A report by insurance risk analysis and advisory firm Mactavish with PricewaterhouseCoopers UK (PWC) found companies are vulnerable to significant and unnecessary losses due to serious flaws in the way their corporate insurance policies are arranged.

Mactavish CEO Bruce Hepburn says businesses have prioritised low transaction costs above reliable insurance policies while taking on more risk to protect returns during the recession.

“High-profile risk incidents, such as widespread volcanic ash disruption, arguably happen at all stages in the cycle, but newly constrained balance sheets, tight credit and the vastly altered risk exposures brought about by globalisation and recession represent new and poorly understood threats,” he says.

At the same time, insurers are taking a much tougher line on claims.

Commercial disputes in London courts leapt by 45% between 2008 and 2009 and professional negligence cases before the courts doubled.

Interviews at over 600 companies and 100 insurers and brokers between 2009 and this year found company executives are unaware of gaps in their coverage.

Nearly two-thirds of buyers 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 research found inadequate disclosure, widespread ignorance of a very challenging insurance law framework, failure to gather information, uncertain policies and a lack of understanding of how large claims are processed.

PWC Insurance Strategy Partner Achim Bauer says while companies are providing inadequate disclosure, many insurers are failing to systematically develop the necessary understanding of their clients’ risk profiles to enter into a truly useful relationship.

“This is leading to a no-win situation for both insurers and companies, creating a misalignment between risks and premiums, higher claims and more disputes,” he says.

The report outlines seven protocols for change:

• Making insurance buyers aware of their legal obligations and the key differences between insurance and general contract law
• Drastic improvements to the ways information is gathered, signed off and submitted in the risk assessment process
• A two-stage tender process to encourage greater dialogue between buyer and insurer
• An obligation on insurers to set out their understanding of a customer’s risks and the detailed coverage being offered
• Insistence that buyers explicitly assess the “financial materiality” of insurance to their businesses
• An onus placed on insurers to discuss major loss scenarios directly with customers to ensure they understand how policies apply to their business
• Insurers providing details of how they respond to a large loss event so clients know what happens if it occurs.