SPECIAL REPORT: Risk Management - Jargon Buster. A grasp of insurance small print is a must. Stuart Derrick demystifies some of the contractual legalese

The history of promotions is littered with pushes that proved just a bit too popular - McDonald's two-for-one burgers, Flora's free phone calls, and the daddy of them all, Hoover's Free Flights drive.

With all eyes on return on investment, promotional insurance and fixed fee deals are seen as an attractive way of capping risk. While promotional risk contracts may seem daunting, they are there to ensure everybody knows where they stand. "Clients are entering into a one-to-one legally binding contract with consumers to deliver the promotional proposition, notes Brian Gibb, co-founder of Promotional Risk Management. "Insurance contracts are intended to cover limiting these financial liabilities, as well as the delivery of the promotion."

To clarify the jargon, P&I teamed up with the promotional insurers to define what some of those contractual terms and conditions mean.

Universe of redemptions The number of possible opportunities for consumers to respond to the promotion Also called the "redemptions universe, this refers to the number of packs carrying details of the promotional offer.

So, if an on-pack push is featured across 30 million loaves of bread, then 30 million is the universe of redemptions.

Also relevant is the number of promotional tokens carried across different size variants of the promoted product. A collector mechanic which requires five tokens to redeem a premium, with 50 million tokens in circulation, makes a universe of 10 million. With off-the-page, it is the circulation of the publication, or the number of leaflets/vouchers distributed communicating the offer.

Promotions with an unlimited universe of redemptions carry a high risk.

Justine Holman, marketing executive at Fotorama, cites the internet as one area with a big question over the universe: "It could be totally unknown unless you have a way of limiting it."

The insurer must be informed of any change to the universe. With a fixed-fee promotion, the fee would be readjusted pro rata. "Our fee is based on a redemption rate against a set universe. If the universe changes, our fee will change proportionately, says Mando Marketing's account director Beth Johnson.

Intervention threshold The point at which the redemption coverage kicks in If a promotion is estimated to have a 4 per cent redemption rate, the intervention threshold is set at 4 per cent. The insurer will pay out on redemptions above that figure and redemptions below it are paid out by the promoter. Insurers will look at variables such as promotional history, mechanic, reward, communications and support activity to set the intervention threshold, also getting the promoter's input on probable redemption levels.

Limit of liability The amount of cover provided by the insurance contract The liability is the financial obligation of the insurer to pay for redemptions, so the limit of liability is the maximum value the promoter can claim under the contract.

It is extremely expensive and probably unnecessary to insure for 100 per cent redemption. This means promoters usually insure for a given spread of redemptions - if they expect redemption at 10 per cent of the total universe of promotional packs, they insure for anything over that amount.

The cost of the insurance rises with the amount of cover sought. The insurer will pay out on redemptions within this zone, but not under or over it.

In fixed fee there is no limit to liability and the provider will cover you to the last redemption.

Promotional period The actual period up to which claims can be made by consumers Your cover will only operate for this period. Every promotion is different, but all will have a closing date, be it next week or next year. With a long-running promotion that goes into over redemption, the promoter will not be able to make a claim until the push is over. In the meantime, the cost of funding the promotion will have to come out of the promoter's pocket.

Material facts The best possible quality of information on which the insurer can make its assessment The promoter has an obligation to supply the best possible information so the insurer can make fair assessments. This includes: the brand's promotional history; past redemption levels; market share; and support activity. Failure to disclose relevant information on which the insurer could make his estimate could negate the contract."The information supplied by the agency is what the underwriter bases his decision on. Every promotion is different and will have its own material facts, says James Howland Jackson, director of PIMS-SCA.

There is an ongoing obligation during the period of the agreement for the promoter to disclose any changes in information provided.

Burden of proof The evidence a promoter must have to prove his claim under the insurance policy It is usually down to the insured party to prove it has a claim under the insurance policy. This means there must be a scrupulous paper trail which your insurer's loss adjuster can follow.

Proof of purchases, coupons and other requirements for entering the promotion must be kept and made available for inspection in the event of a claim.

"Should a loss occur, you must be able to prove that the loss took place, says PIMS-SCA's Howland Jackson. "For example, if Dixons ran a promotion saying that everybody who bought a TV during the World Cup would get their money back if England won, and England did win, then they would have to prove the number of people who put in a claim, he explains.

Your handling house must be well briefed on how to store redemptions and which to accept and reject.

In the event of a claim, a loss adjuster will examine the proof related to the campaign. The loss adjuster represents the insurance company and will try to minimise its exposure. They take a dim view of handling houses that misredeem, for example, by honouring entries that do not have the correct number of proofs of purchase. Mando's Johnson says: "The loss adjuster might take a sample of 100, and if he finds ten misredeemed entries he could use that as the average for the promotion and knock 10 per cent off the claim. We do our own handling, so that isn't the case with fixed fee."

Support This refers to any additional activity that could have an influence on the success of a promotion Will the promotion have any additional support, either in-store such as gondola-end displays, sampling activity or couponing, or media support - TV or radio advertising, whether generic or promotion-specific? If so, it's likely to impact on the success of the promotion.

The communication on pack is also relevant and insurers will want to see all communication before final sign-off.

According to PRM's Gibb: "Artwork is important. We covered a campaign for a fruit juice that was an instant win for £50,000 but it was so anonymous you walked past it in the supermarkets.

"Another campaign, 'Try Me Free', on a pizza, took up half the box and could be seen from the other end of the store. Redemptions reflected that, he says.

Security rating The measure of stability of insurance companies There are often substantial financial liabilities involved in covering over redemption either through insurance or fixed fee, especially if the insurer is covering more than one promotion at the same time. You should be sure of the financial stability of the company you are sourcing coverage from.

Standard & Poor's offers an industry recognised security rating service for insurance companies. This ranges from AAA which is the highest possible rating, down to CC which is the least stable. You should ask about the security rating of the insurance companies your promotional insurer uses.

Warranties The terms and conditions upon which the cover is based If any of the warranties are breached this may invalidate the claim or lead to it being adjusted. They usually take the form of statements which the promoter must honour.

Insurance Premium Tax (IPT) The standard government tax of 5 per cent levied on all insurance premiums IPT is levied on all cover from home and motor to over redemption. So include this in your budget calculations.


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