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Talent, analytics and adaptability are vital for insurance brokers, clients alike

Captives|Corporate Risk Tools and Technology
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By Marc Paasch and Vittorio Pozzo | July 29, 2021

The ever-changing risk landscape has long-term consequences for the insurance industry’s three basic components: clients, insurers and brokers.

The insurance industry and, for that matter, broader risk management are often said to be unexciting, slow-moving professions. The world is changing quickly; organizations face more extreme, varied, and complex risks than ever. Is risk management keeping up with the risks of today, like a global pandemic? Are we prepared for the of tomorrow, like the impact of climate change?

I contend that we are no longer the slow-moving industry of yesteryear. The speed and scale of the COVID-19 outbreak caught some of the industry off guard, but risk management rose quickly and effectively to meet the challenge. As for climate change, Harvard Business Review, citing Swiss Re and other industry experts, wrote as early as 2007 about mitigating climate-related risks.

Having said this, the risk landscape continues to change and will have long-term consequences for the industry’s three basic components:

  • Clients, the definition of which has broadened from risk managers to senior financial officers and other senior business leaders
  • Insurance markets, including new entrants and alternative risk-financing options
  • Broker adaptations like the heightened use of data and analytics

Even new or emerging risks are often variations (and combinations) of risks that we’ve seen before, complicated by the challenge of mitigating these exposures on a global level. Major events such as the 2008 financial crisis or COVID-19 have had the salutary effect of awakening our awareness and goading us to new levels of effective risk management.

A bigger question is whether brokers, their clients and insurers will emerge from today’s risk management challenges better positioned to deal with a prolonged period of uncertainty in the overall risk landscape?

Clients

Chief financial officers and treasurers increasingly engage with risk management as they come to understand its organizational and financial impact. They bring valuable and complementary insights to professional risk managers in their desire to reduce risk, thereby making financial performance more predictable. COVID-19 and persistent hard insurance market conditions have intensified the urgency of collaboration between finance and risk management to find cost effective risk transfer options protect the organization’s financial resilience.

Risk managers to a large degree have encouraged closer links with other parts of the business as well. For example, with growing pressures on supply chains and heightened geopolitical conflicts, risk managers find it valuable to work with procurement and other business functions as well as third-party business partners to identify, measure and mitigate supply-chain risks.

Behind all of this is a growing dependence on the gathering and use of data and related technology to better anticipate and quantify risks. This process has shown its value in several ways, including more efficient risk financing. Armed with data-backed analyses of key risks, clients are finding themselves in a much stronger position to find coverage and negotiate with carriers where insurance is the right path forward. Perhaps more importantly, data and analytics enable risk managers know what risks and costs can be financed in non-traditional markets or even retained when the cost of insurance exceeds the value of risk reduction.

These two trends — cross-functional collaboration and better use of data — contributed significantly to the resiliency that most companies demonstrated in the face of the pandemic. They also will be essential with the increased complexity of risks and interdependencies, the latter including property exposures, and changing immigration and employment patterns that will become more pronounced with the growing impact of climate change.

From an insurance perspective, coverage that previously has been based on historical benchmarks increasingly will be based on exposure modeling and data-backed cost-and-value optimization for transferring risks. For too many companies, particularly midsize organizations, this is an area of vulnerability.

Insurance markets

Insurance markets are constantly moving, especially these days. The segment is roiled to a degree with mergers and consolidations, new entrants, digital transformation and other disruptions. Solvency II and related regulatory burdens sometimes make the industry more akin to banking.

Pricing conditions in key lines are also stressing business relationships as clients bristle at costs and coverage limitations when risks are growing more complex. The more successful insurers are effectively deploying new products and services, such as insurance on demand or index-triggered parametric solutions that provide additional capacity, transparency and clarity of coverage while accelerating claims settlement.

The insurance industry, however, is likely to face an extended period of cyclical markets and earnings volatility. They will face the challenge of meeting investor and regulatory expectations while investing in new solutions and cutting-edge technology and stopping short of losing their pricing advantages to retention, alternative risk transfer (ART), captives and other sources of capital.

Insurers must also continue to find ways to add transparency and speed to underwriting and claims handling practices that many clients find frustrating and obtuse. Parametric solutions, as mentioned earlier, show significant promise, but more needs to be done to simplify procedures while adding value to insurance solutions.

Brokers

Brokers are no less obligated than clients and insurers to adapt to the evolving risk environment. The traditional value propositions — independent, objective recommendations and transaction know-how — are no longer enough.

We are obliged to be better informed than our clients about such things as insurance market conditions, alternative sources of risk capital and best risk management practices that might not have been recognized by a particular client. Consider, for example, how we might help a client prepare for a natural disaster. A good broker can provide the following:

  • An engineer to measure the strength of exposed structures
  • A consultant to geo-localize exposed sites and to measure exposure to different perils
  • Disaster modeling to identify and quantify the financial impact
  • Actuarial support to model a program, its limits and sub-limits
  • Deep knowledge of insurance markets and the ability to make the best case for coverage scope and pricing
  • ART expertise to analyze solutions from the alternative markets
  • Financial expertise to calculate potential business interruption losses before making a claim

Brokers must constantly add the talent and tools (digital and otherwise) to meet emerging client needs. This requires heavy investments, especially around data gathering and analysis associated with exposures, coverage adequacy and claims. We need the ability to make optimal recommendations for hedges with potentially significant reductions in the total cost of risk.

Industry consolidation is also a factor for both brokers and insurance markets. Market consolidation in some respects is a challenge for brokers as it may apply upward pressures on pricing. At the same time, clients may benefit from larger, better capitalized, and better resourced insurers and brokers.

From a broker perspective, the challenges and opportunities will surface as we find more options to remain agile and dynamic in helping clients address a portfolio of risks ranging from climate and geopolitics to cyber and intellectual property exposures. It’s not a question of market share; it’s a question of geographic spread and the ability to invest in such areas as talent and risk analytics to help secure the viability and profitability of our clients.

Authors

Managing Director
Global Head of Alternative Risk Transfer Solutions
Global Head, Strategic Risk Consulting

Captive Advisor, Western Europe and Great Britain

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