Global Risk, Global Defence

The world is becoming a riskier place for the insurance industry, and so it is more important than ever for insurers and brokers to work together to provide solutions for clients that deal with new and emerging potential threats. Events such as Hurricane Katrina, which caused damage on an unprecedented scale and increased losses from natural disasters, have had an impact on the global property and casualty insurance industry. We are also facing new, emerging risks across the globe, such as fears of a bird-flu pandemic and the increased problem with obesity in North America and the United Kingdom. Risks such as these should be taken into consideration when underwriting new policies.

With insurers facing this increased uncertainty, global risk management and underwriting expertise across a broad range of risks will be important to ensure we are providing the best product and services solutions for brokers and customers. Insurers should be taking a proactive approach to portfolio and enterprise risk management. This means understanding and preparing to manage the risks we write, as well as the changing dynamics in the global property and casualty marketplace.

EMERGING RISKS

Global Weather

The one-in-100 year catastrophic event appears to be happening more frequently around the globe – and with larger severity. Hurricane Wilma, the largest-ever recorded hurricane (measured by pressure), cost US$3 billion insured damage to Cancun and Cozumel and approximately US$6 billion to Florida after leaving the Yucatan peninsula. Hurricane Katrina had estimated insured damage in excess of US$40 billion and was a very high-profile disaster, but most of the damage was caused by a source that was not well understood by the industry (levies breaking). Notwithstanding these large losses, the industry proved to be very resilient and prepared. This is a testament to learning from the past and applying good risk management.

We have seen weather patterns changing all over the world. Flooding has become a big problem in many places, particularly Europe and India. In managing climate change risks, insurers must also focus on the other side of the equation: effective claims management.

All of these events have redefined how bad the “Big One” will be. It is important to be prepared, understand the risks and make sure underwriting solutions and claims management practices are in place to protect all shareholders – including investors, brokers, customers and employees. Where possible, Canadian insurers should leverage their global property and casualty resources to understand the trends and risks. The Insurance Bureau of Canada, for example, has an earthquake committee and is currently looking at how the industry is capitalizing itself.

Pandemics

As an industry, we need to closely monitor and understand new, emerging risks such as pandemics. Bird flu has garnered a lot of media attention this year and is being monitored to better understand how this might develop and affect people and businesses globally.

Nanotechnology

Nanotechnology is an emerging risk in the industrial production sector. It is used, among other things, to produce faster computer chips. Insurers need to understand the potential problems the small particles in this technology might cause, and the potential impact this technology could have if released into the environment.

Commercial Risks

The environment in which businesses operate is constantly changing; understanding the current and growing risks facing commercial clients is critical. Enterprise failure has received a great deal of attention over the last few years, as the media followed investigations into major corporate bankruptcies. Many of these were characterized by poor internal controls and fraudulent activities. Risk management must extend beyond the traditional insurance and market risks and encompass compliance, governance and a strong control environment. All businesses must be prepared with well-rehearsed business continuity plans in place.

Closer to Home

Canada has had its fair share of major events in the last decade. In 2005, floods swept across Ontario and Alberta causing great losses. In Calgary alone this cost more than $400 million worth of damage of which approximately $220 million was paid by insurance companies. Insured damages of the August 2005 Toronto cloud burst caused more than $400 million of insured damage.

STRATEGIES FOR EFFECTIVE RISK MANAGEMENT

Where possible, Canadian insurers should pool the resources of their international affiliates. Royal & SunAlliance, for example, has a global team that continually monitors trends and risks such as pandemics, genetically-modified food products, global warming, terrorism and other risks that we need to understand in order to assess the risks they may provide. This global team not only helps with risk mitigation but also identifies opportunities and solutions.

It is more important then ever for insurers to have solid risk management strategies in place. Understanding our business will be key to providing appropriate solutions that will help maintain stability. This starts with underwriting and claims management as a core competency of all insurers.

Global learning centers represent one means for underwriters to amass and pool their knowledge about global risks. Royal & SunAlliance underwriters, for example, have an opportunity to go to the National Learning Center in Nova Scotia. Global technical academies can also provide a forum for employees from around the world to share best practices and expertise.

Learning centers and training academies such as these help provide underwriters with the technical expertise they need in today’s environment; they empower underwriters to make decisions on risk selection, based on a solid grounding of knowledge and skill. This plays an important role in ensuring value for all stakeholders.

Insurers must continuously update the tools and systems they have in place to assess the risk of different perils. This includes an analysis of how we can monitor the weather to ensure emergency claims teams are ready to respond to events. Catastrophe models are continuously improving, helping insurers understand accumulation and potential losses.

Technology such as satellite imagery and real-time weather information is now available and can help insurers identify potential losses immediately after an event. This helps insurers meet and prioritize service standards. Had such technology been available in 1998, when an ice storm dumped three inches of ice on eastern Ontario and Quebec, insurers could have better assessed where potential losses may have been and responded quickly, resulting in a higher service level. The industry constantly needs to evaluate new technologies: these types of investments are key to delivering our value proposition and providing the appropriate solutions to our brokers and clients.

It is also important for insurers to understand and manage their surplus capital positions. The industry must prepare itself by maintaining levels of surplus that adequately address the risks they are assuming. Insurance companies should be able to demonstrate they understand the risks they are taking, and that their response is in the best interests of all shareholders – including brokers, customers and employees.

Effective claims management is where insurers are put to the test. By developing and adhering to claims service commitments, customers and brokers know what they can expect from their insurance company. This means not only managing day-to-day claims handling, but enhancing claims plans for dealing with catastrophes, updating claims tools in order to deliver an excellent claims service to brokers and understanding the ever-changing legal environment.

CONCLUSION

As insurers, it is our responsibility to understand global an d local risks and issues. We must continuously look to provide products and solutions to monitor and prepare for them. Being a global company that focuses solely on property and casualty insurance does provide an advantage to local markets. Where possible, insurers should be prepared to leverage experiences and identify trends from their many operations around the world.

As risks change, the insurance industry is stepping up to the plate and becoming more sophisticated and advancing technology. This continuous evolution will help build strong risk management capabilities and lead to better products, services and solutions for all involved.