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Insurance, behavior and reputation: What happens when aviation meets insurance

Aerospace and Space
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By Hélène Galy | April 30, 2019

While insurance and risk reduction are almost always worth the investment, there is no silver bullet. Effective risk management requires an altogether deeper understanding of the risk, based on data and observation.

A Venn diagram of the interests of the aviation and the insurance industries would show a pair of nearly overlapping circles. This is why conferences bringing together people from both are a valuable opportunity to learn from each other, and why Willis Towers Watson hosted its 17th aviation conference in Danang, Vietnam. It was impossible to leave after three days without having learned something new. Here are my top three lessons.

Lesson one: Insurance is never the only answer

While insurance and risk reduction are virtually always worth the investment, there is no silver bullet. Effective risk management requires an altogether deeper understanding of the risk, based on data and observation.

This was made evident when attendees considered bird strikes. Looking at data collected by the International Civil Aviation Organization (ICAO) in a database ironically called IBIS (ICAO Bird Strike Information System), we were reminded that although only 8% of bird strikes cause damage, they can be very disruptive and  have devastating effects.

In the 1980s, an airline conducted a controlled experiment and painted menacing-looking eyes on its engines to frighten away birds and prevent collisions. Had the results been conclusive, all planes would now have eyes. Ornithologists are clear that birds have adapted to avoid predators at certain speeds, but even the wiliest bird would struggle to avoid a predator whose speed far exceeds 70 mph, so there is clearly a mismatch with the speed of a commercial jet.

However, looking at bird behavior is key to developing tailored solutions to reduce the risk of bird strikes. Investing in this understanding can bring very simple solutions: using the right distress calls for the target species, cutting tall grass to discourage birds from hunting on the airport perimeter, being aware of migration paths, removing ponds near the runway and so on.

A holistic approach may take you even further from the presumed site of the risk; for example, if the airport is on the shortest path between a feeding ground and a nesting ground, tens of kilometers away. This is a reminder that risk management requires us to look further than our noses. And in any case, given that the risk cannot be eliminated, insurance is obviously still required to compensate for damage and liability.

Lesson two: Take a behavioral approach

A behavioral approach is recommended to tackle a risk often mistakenly seen as purely technological: cyber risk. One of the speakers highlighted the importance of analyzing causes of directors and officers (D&O) claims and boardroom’s attitudes toward risk. A key insight is that much improvement is needed in the area of workforce resilience and risk culture, as highlighted by this infographic and global survey conducted by The Economist Intelligence Unit and sponsored by Willis Towers Watson.

Understanding how employee behavior drives cyber risk is key to reducing vulnerability. It is worth bearing in mind that employee negligence or malicious acts are responsible for 58% of cyber breaches. Risk culture amongst employees has therefore been found to be a very good predictor for cyber incident frequency, so risk culture surveys can provide critical insights, to identify groups of employees more likely to cause a cyber incident.

Lesson three: Reputation is an intangible asset worth protecting

Cyber breaches can put a serious dent into a company’s reputation, and reputation is one of those assets for which it may be challenging to find the right insurance solution.

Reputation insurance products have multiplied in the last 20 years, and the insurance industry recognizes that it is not only there to insure and settle claims, but also to rebuild reputation. This seems to emphasize the value of long-term partnerships between airlines and their risk advisers, insurers and legal advisors, rather than a purely transactional relationship.

Such newer, less conventional insurance products can benefit from modeling, which can help quantify the risk to design appropriate covers, but also pre-empt crises and losses. A pioneer of reputation intelligence asked how artificial intelligence can be leveraged to monitor a brand’s reputation and quantify its value. How much of a company’s performance can be explained by reputation? Can this model be used to understand the downside and the upside of reputation? How does a brand compare to its competitors?

Final thoughts

One of the speakers at the conference introduced himself as a “futurologist,” whose job is to look into the future and to try and draw actionable insights from it. He reminded us of the wise words of the economist John Maynard Keynes, who is reported to have said that it was “better to be roughly right than precisely wrong.”

Reputation modeling is in its early days, but an area boards of directors should monitor, given the financial impact of reputation mismanagement in an age increasingly dominated by 24-hour news cycles, social media and an increasing focus on corporate social responsibility. But yet again, this is where a sophisticated understanding of behavior will be of the utmost importance. With all the talk of artificial intelligence, machine learning and the automation of jobs, isn’t it interesting that human behavior is still a key driver of risk?

Author

Hélène Galy
Willis Research Network Director

Hélène leads the Willis Research Network, an award-winning public-private partnership, which harnesses over 50 partners in science, academia, think tanks to form innovative collaborations with the risk management and insurance industries, improving our understanding of risks (natural hazards, technological risks, geopolitical drivers of risk…) for the benefit of our clients and society. She is an economist, with a BSc in Economics and Political Science, and an MSc in Environmental Economics.


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