Traditionally companies consider insurance as a risk management tool by allowing them to take on the small negative of having to pay premiums while giving up the potentially large negative impacts of being victim to an uninsured event.
To some extent, this model is breaking down. As the risks that businesses deal with getting more and more expensive to mitigate, insurance premiums also go up. In recognition of this, insurance companies are starting to become stricter in how they price their policies.
Insurance policies have historically provided businesses with robust enough coverage for a variety of risks. But given the complex and evolving nature of risk today, many insureds are finding these policies to be limited in scope and not customizable, which can lead to protracted claims settlement negotiations and capital transfer delays. That is partly why demand for alternative risk and non-standard solutions has grown in recent years.
Insurance cycles are associated with a mystique that few topics in the area of risk and insurance share. The insurance cycle is typically defined as repeating, periods of soft and hard markets. In a soft market, insurance coverage is readily available at “reasonable” prices, while a hard market is characterized by high prices and unavailability of coverage or limited coverage for potential policyholders.
Those were the days, the insurance market cycled from hard to soft and back to hard again in a pattern that was reasonably predictable – about every 5 to 7 years. For the past 25 years or so, however, there has been no discernible pattern, and soft, or buyers’, markets prevailed. We recently entered a hard market for most commercial lines of insurance, characterized by significant increases in rates and reductions of coverage with much tighter scrutiny by underwriters.
Hard, or sellers’, markets being much more difficult to navigate for insurance buyers, agents/brokers, and even insurers themselves.
With lengthy soft markets the norm, many insurance buyers and risk professionals have never experienced a hard market, and those who have may still find themselves brushing up on the fundamentals.
Insurance vs. Risk Management
Companies that have a risk management regimen in place don’t just benefit from a lower rate of claims, they are also eligible for lower insurance premiums.
Risk managers, insurance buyers, and their brokers are responding in kind with analytics. This gives them the opportunity to differentiate their risks. While underwriters look at mega trends, good risk managers and brokers use granular analytics to demonstrate where a prospective insured differs positively from those trends. Where an insured differs negatively, a good risk manager, with a consultative broker, can devise a risk management plan to remediate the deficiencies and articulate that plan to insurers.
Insureds who embrace analytics in 2021 should start with a fresh look at their organization’s tolerance for risk. Every organization has been changed by the pandemic. Some positively, many negatively. Exposures have changed, financial wherewithal has changed and, no doubt, risk tolerance has changed. The strategic risk manager, armed with a fresh understanding of the organization’s risk tolerance, can use analytics to sort through retentions, limits and alternative risk financing structures and determine the value trade-offs of each. Insurance buyers in 2021 should be their organizations’ “first underwriter”, determining which risks to retain and which to transfer. They need to become “traders of risk”, making smart, real-time buying decisions based on risk tolerance and point-in-time market conditions. Finally, just as strategic underwriting is a combination of analytics and judgment, the strategic risk managers will not only use analytics, they will also tend to their strategic insurer relationships, since these have proven, in most cases, to be assets in this hard market.
At EXL Consulting with our long and in-depth strategic risk management expertise we help clients manage their exposure before we sell a policy to them. Our risk management specialists work with you to reduce your risks and prevent them from occurring in the first place. It is our unique way to protect your business and lower your total cost of risk. Honored both by local enterprises and multinational conglomerates alike.