In part one of this blog, we focused on market reflection — discussing trends and lessons learned. Next, we’ll explore six ways to ensure success of our risk management programs moving forward.
Make purposeful insurance buying decisions
Many risk managers — including myself — likely took advantage of insurance being an efficient spend these last 15 years, and insured well beyond our company’s ability to absorb risk. To the same token, however the deterioration in claims across multiple lines was not out of sight, out of mind; nor was it sustainable. The soft insurance market certainly shifted the mindset around the willingness of companies to bear risk, but did not impact their ability to bear risk. While no company welcomes volatility and loss, the most successful ones were built by taking calculated and known risks — approaching them with eyes wide open.
Step one toward making purposeful and effective insurance buying decisions is to understand all the risks inherent to the company, specifically those that are — or historically are — uninsurable. Next, ensure that your perspective and knowledge around insurable risks — including the efficiency or inefficiency of insurance as a hedge — is communicated to your finance and enterprise risk leaders. If your company chooses to make an inefficient insurance spend, it should be a deliberate decision made with full knowledge of all the risk on the table, the availability of other risk hedges and the strength of your company’s balance sheet. For example, paying an inefficient rate for insurance may be a wise decision when faced with other risks that cannot be effectively insured or otherwise hedged. In addition, you should understand your company’s risk bearing capacity, also known as the point where the weight of loss will have a significant, adverse impact on market capitalization. Once you completely understand the holistic risk environment, including your company’s ability to bear risk and the limitations of risk tolerance analysis, you are well situated to make purposeful insurance buying decisions.
Understand the efficiency or inefficiency of insurance
With the impressive advancements in analytics, data and loss modeling, we have better visibility into the efficiency of insurance as a risk hedge. The insight you gain from the analysis is useful in negotiating with underwriters, but even more so, it’s invaluable in buy/no-buy decision making. Your brokers will be helpful in this exercise, which should be done annually for all lines. You will gain a better understanding of your average annual losses, the standard deviation and coefficient of variation, maximum foreseeable loss, and distribution of loss based on varying levels of confidence. Some lines of coverage are better suited to this analysis, such as casualty and property. But doing so will arm you with a better understanding of 1.) your program efficiency; 2.) the efficiency of layers of coverage within each line; and 3.) breakeven premium. . While this forward-looking analysis has great value, do not forget to also examine your company’s own historical losses and develop assumptions around them — as well as emerging risks — to gain additional insights for the future.
Tell your story
On the front end of a market cycle upswing or following a particularly devastating event, underwriters may lump many insureds into one group without differentiating between the different exposures and risks. That’s what makes telling your company’s story so critical. For example, not all property risks are CAT exposed. In fact, many CAT-exposed risks may be protected by investments in planning and construction which significantly set them apart from other exposures. Similarly, due to your investment in risk control and safety, your claims history may put you in the favorable quartile. Now is the time to reap the benefit of that investment, but you can’t unless you’re able to communicate it effectively.
Start early on renewals
My former team and brokers will likely remember that in about 2007, I “outlawed” the phrase ‘renewal strategy’. My point is that if you are sitting down for the first time to talk about the upcoming renewal six or even nine months before the renewal date, you are too late. I suggest replacing the term with ‘program strategy’ as it should have a target three to five years down the road and be focused on alternatives that do not leave you in a tight spot if market conditions change. Start by analyzing alternative program structures that you could migrate to in the event you need to make changes down the road. Initiate early discussions about these alternatives with your finance leadership so they have heard them a few times before it may become necessary to implement. And immediately following a renewal, take just a short break to catch your breath and then start thinking about the next renewal.
Talk with your peers
One of the strongest assets I have had in my risk management career is my peer network. I encourage all risk managers to invest the time to build a network of diverse individuals — in and outside of their industry — who they can regularly converse and compare notes with. When combined, your peer learnings, market research and expertise from your broker and consultant network will equip you to essentially triangulate on knowledge and develop better instincts about the industry and possible solutions. And despite the deep trust I had in my brokers, I was better served when appropriately challenging their advice.
Invest in risk mitigation
With insurance being so inexpensive all these years, it is possible that your company’s investment in risk mitigation was decelerated. Today, with more of the exposures falling within your retentions, new analysis of the ROI is warranted. Some risk mitigation that comes to mind includes facility cameras, ergonomics and safe lifting training, as well as analytics to identify emerging trends in your business, in-cab and forward-facing cameras in trucks, driver behavior monitoring, and construction planning and specifications. In addition to helping control costs within your retention, you are building a better story to tell your underwriters.
Risk managers are in a different place than we were during the softer market, but we don’t have to sit around and simply accept the challenges. Being proactive and dusting off our basic risk manager tools will enable us not only to survive, but thrive — making our companies less dependent on insurance and placing them in a situation where they have a choice. Remember, what got you here won’t get you there.