Risk Management Best Interests

Things are changing rapidly in risk and insurance. This is not unexpected given the changes in the world. Global warming, terrorism, rapid advancement in technology, ease of communication, cultural changes, advances and setbacks in business, and many other changes are creating a new environment that risk managers and insurers are scrambling to keep up with. In addition to changes in the world we live in, there are very important changes happening in our industry. Advancement in risk and insurance technologies, mergers and acquisitions, government intervention, civil and criminal investigations into practices, to name a few. More than anything, perhaps the biggest emerging change is the increasing awareness of consumers about risk and their need to manage it. Large organizations have known this for a long time, but it is now the “smaller risks” who are starting to understand.

WIN-WIN

The insurance industry still has a challenge to overcome in combating its negative image. I am not saying insureds are becoming understanding of insurers or sympathetic of their desire for profit, but insureds are starting to see the correlation between their efforts to minimize their risk, and their ability to get the best value for their money. But there is a long way to go. Consumers still do not understand how to work within the system to ensure that they get the best value, and it is in the industry’s best interest to help them do this.

There is a great deal of risk out there that is inadequately rated. This is especially true at the extremes of the market cycle. There are several reasons for this. Some underwriters are better than others, different companies have different rates and criteria, market competition, but I think the most likely reason is that the nature of the risk is ambiguous.

This ambiguity, and the resulting rate disparity and fluctuation, contributes greatly to the negative image of the industry held by consumers. Brokers spend a lot of time rationalizing rates to consumers, when that time would be better spent working with their clients to build a more comprehensive submission that accurately, and clearly describes the risk. Do not misunderstand, I am not blaming brokers, I think that the onus is on the client to make their risk understood, but brokers are the key to helping them accomplish that.

SUMMARY JUDGEMENT

No broker or insurance underwriter will ever understand a risk as well as the insured herself does. The next best thing is for the insured to be able to communicate the characteristics of the risk effectively. This is where the broker is of vital importance. First the insured has to understand the reasons why accurate and complete information is vital to achieving the most possible interest from underwriters, and the correct premium. Next, the broker has to work with the insured to build a submission that will achieve the desired effect. A successful insurance submission is comprehensive, yet concise. It must have all the necessary and relevant information, which must be well organized, with a very clear summary. People form opinions based on appearances, and first impressions, that is why the executive summary is so important. It must give the underwriter a good sense of the risk, a true understanding of what the insured does, and reasons why this particular risk is different or better than any other risk in the same industry.

It is in the best interest of all parties that rates be commensurate with the respective risks. This, after all, is one of the basic principles of insurance, yet it is perhaps the least pervasive. But ambiguity of the nature of individual risks is not the only cause. Underwriters and rate makers are under incredible pressure to try to select the best risks at terms and rates that will result in an acceptable loss ratio and a reasonable return. With risks becoming more complicated due to global business operations, technological advancement, and an increasingly perilous world, it is becoming more and more difficult for underwriters to consistently achieve rate adequacy.

DIFFERENTIATION

Increasingly, insurers are looking for ways to streamline their underwriting processes. Many are looking for ways to automate the underwriting process to help screen insureds and thereby decrease the workload of underwriters and increase their efficiency. Online insurance applications are becoming common. This will free up the time of underwriters, but might make it more difficult for insureds to differentiate themselves, especially in industries where the risk is perceived to be high.

Many industries including environmental, hospitality, adventure tourism, the volunteer and public sectors, face difficult hurdles in getting around preconceived notions about the nature of their risk. There is no denying that some in these industries are high risk, but others may be seen to be quite good risks if care is taken to look closely enough. Insurers could be losing out on some very profitable business if they do not have the proper processes and tools in place to accurately distinguish good risks from bad.

Automation and screening are not bad things, but care should be taken not to make the screen so restrictive that good risks cannot get through. Insureds are working harder than ever to improve their risk and reduce losses. Some of this is voluntary because of the rising cost of insurance and the increase in litigation, some is partially due to improved legislation, and some is due to efforts of prudent insurers to try to help insureds become better risks. Whatever the reason, insureds are becoming more risk sensitive, they do want to minimize their risk, and they are more willing to work with insurers.

There is a shift developing in the insurance paradigm unlike any we have seen in the past where insureds are becoming more aware and involved, and where insurers and brokers are being more transparent about their processes and relationship. There is an opportunity to embrace this change and to develop practices that will serve to create rate adequacy and stabilization. With brokers and insureds working hard to communicate the risks clearly, and insurers utilizing technology and processes that will help them to select, rate, and manage risks with precision, everybody wins.