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How Private Equity Firms Can Drive Value Through Portfolio Insurance Purchasing

02/16/2021 · 4 minute read

The pandemic continues to eat into the profits of many businesses, creating greater challenges for private equity firms as they work with portfolio companies to improve operational efficiency. At the same time, cost increases and capacity restrictions in the commercial insurance market are making insurance purchasing decisions even more complex.

Private equity firms, however, can benefit from a strategic approach to buying insurance, which can mitigate negative market effects and drive efficiency in their portfolios. This approach involves purchasing insurance in a coordinated manner for the entire portfolio, which can often yield better results across key performance indicators.

A Fragmented Approach Leaves Much To Be Desired

Private equity portfolios often include a number of acquired companies across multiple sectors, each of which could purchase insurance coverage individually. But such an approach often leads to less than optimal results.

By approaching insurance in a fragmented fashion, private equity firms cannot leverage their full purchasing power on behalf of their portfolio companies, which often results in higher pricing and higher claims costs in the event of losses. Moreover, companies that take this approach could be left with inconsistent policy terms and conditions. And they could be missing out on opportunities to share best practices and track and measure performance across their portfolios.

A Smarter, More Coordinated Method

The alternative to this lack of coordination is a portfolio approach. Working with the right insurance advisor, you can manage all insurance purchases — including property, casualty, and financial and professional coverages — holistically. That generally means lower cost, less complexity, and greater efficiency across the deal lifecycle, from raising capital to executing exit strategies.

Through a portfolio program, private equity companies can generally benefit from:

  • Lower premiums and less volatility. Negotiating your entire portfolio with an insurer can lead to more competitive pricing. It can also better insulate you from the effects of a market in which prices are increasing.
  • Superior coverage and best practices. Subject matter and industry expertise can be shared across your portfolio, which can often enable companies to obtain more consistent and enhanced terms and conditions.
  • Better claims recovery. Leveraging your entire portfolio can often lead to better claims outcomes, including accelerated resolutions.
  • Central oversight and accountability. A dedicated team managing your full portfolio can drive more favorable results and allows for regular, more streamlined reporting to track and measure performance.

Beyond these specific benefits, a portfolio approach can help reduce your total cost of risk, help you improve your risk profile and ultimately increase your valuation at exit.

Getting Started

Developing a robust portfolio program strategy isn’t particularly difficult. But it does require strategic oversight, careful coordination, and detailed planning. And it requires a broker with deep resources, a track record of portfolio program execution, and the ability to support your program now and in the future.

Among other steps, you’ll need to work with an experienced broker to:

  • Analyze existing coverage across your portfolio, choose a new strategy, and set clear objectives for your portfolio program.
  • Select the right structure for your new program and make other important choices, such as reporting cadence and whether to align all policies around a common effective date.
  • Communicate your strategy and approach to your portfolio companies, and engage them in the solution and outcome.

As you execute these steps, it’s vital that you work with an advisor that has the experience needed to build an effective portfolio insurance program. Specifically, you should look for a broker that can offer dedicated placement hubs and strong relationships with insurers, a deep understanding of private equity risks throughout the investment lifecycle, and a service model that enables the delivery of global, local, and industry-specific expertise.

Working with the right advisor, a portfolio insurance program approach may be the right strategy for your organization.

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