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Hit by a one-two punch? A risk framework can have you sparring again

Risk & Analytics|Corporate Risk Tools and Technology
COVID 19 Coronavirus|Risk Culture

By Ben Fidlow, FCAS, MAAA | July 10, 2020

Insureds can better manage the economic downturn and hard insurance market with data-driven modeling and a clearer view of their risk tolerance.

These are extraordinary times for us all, but for organizations, a sudden and brutal one-two punch of an economic downturn caused by the COVID-19 (coronavirus) pandemic coupled with an already hardening insurance market is creating a seismic shift in the risk landscape. The hardening of the insurance market is pushing certain buyers of risk transfer to make unsupported, and in many cases, expensive decisions. But a risk framework that includes data-driven risk modeling and an explicit view of risk tolerance can empower decision making for the short and long term.

There are many variables at play including a few key drivers for today’s insurance buyer:

  • Shorter-term macro business risks are dominant.
  • Insurance is viewed under the “cost lens.”
  • There’s a lack of insurance pricing transparency.
  • Risk appetite may be poorly defined and not aligned with broader corporate strategy.

These realities may lead many to devalue the contingent capital provided by risk transfer in a time when it is more valuable than ever.

The ongoing hardening market requires insurance buyers to take a thoughtful approach. As a base, it is important to keep in mind that insurance allows organizations to take risks that would otherwise not be viable from a risk/return perspective. While it is not a short-term liquidity solution like a revolving line of credit, it can:

  • Ease the pain of short-term business shocks
  • Buffer your income statement
  • Support your balance sheet over the longer term

How to prepare for the next ‘unprecedented’ event

Every organization purchases insurance for a particular reason, or as part of a particular strategy. Consequently, we believe that each insurance policy should be evaluated based on its own merits, how it supports your current business strategy and how it protects stakeholders more easily damaged by a severe shock to the income statement and balance sheet.

Once this specific assessment is completed, the value of risk transfer can be evaluated by combining three elements of risk analysis:

  • Prioritize risk transfer products that empower your core business by securing liquidity or facilitating a critical business strategy.
  • Use data and technology to model your risk. Relying only on your organizational loss history can lead to dangerous miscalculation of loss potential. Broad data sets and the technology that enables you to quickly analyze them are essential to measuring the value of a given risk transfer strategy.
  • Establish clear risk tolerance thresholds indicating loss amounts that will result in financial damage to the organization (operations affected, debt covenants violated, etc.). A well-defined “danger zone” allows you to use risk modeling to prioritize and value risk transfer solutions.

Risk modeling and risk tolerance analyses will most likely yield very different results than before the COVID-19 pandemic, but if you start now and establish a framework, you will not only reap immediate benefits for your upcoming renewals but, more importantly, across all risk management decisions when the next “unprecedented” event happens so you can avoid another potential one-two punch.

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Managing Director - Risk

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