RISK MANAGEMENT: Maximizing Risk Evaluation Process

In addition to higher pricing of insurance, today’s risk management profession is facing a new set of challenges through global corporate expansion which has given rise to business risks and exposures that did not exist before. Risk managers are shouldering new responsibilities that can have a major impact on the delivery of products and services, bottom-line results, as well as the interests of investors.

The growth of technology and e-commerce has been the dominant catalyst for this change. Risk managers, insurers and reinsurers all need to adapt their thinking to a highly charged business environment in which business risks and exposures are skyrocketing. We operate in a more intellectually based e-business world, with dynamic new growth possibilities and the potential for costly error. Savvy companies are requiring and training their risk managers to become more knowledgeable about the emerging risks that can have a serious impact on the company’s financial viability and its position in the marketplace.

Businesses are gaining competitive advantage by adopting e-commerce into business models, integrating web-based communications and data transfer capabilities into their operations, and leveraging advanced network and technology architecture for maximum benefit. Even if we informally identify these new exposures as “cyber-risks”, it widens the interpretation of what constitutes insured property damage, especially as it relates to information technology and data. How a company identifies, quantifies, qualifies and manages these new exposures – in addition to traditional risks – is becoming an important factor in creating and protecting shareholder value.

Many organizations have taken the wider view of risk management responsibilities, recognizing the value of risk management and property protection to their future financial stability. Insurers who are truly listening to their customers should anticipate the types of requests they will be getting, and understand the value that their client is seeking to protect. For example, insurers need to develop and expand information technology platforms to ensure that the vast amount of policyholder data collected can be converted seamlessly to valuable information for risk managers. Then, the insurer needs to be able to swiftly deliver this data to customers anywhere in the world so customers can use it as a tool in their strategic planning.

The “E” factor

E-business is expected to grow by 33% annually to become a trillion-dollar business by 2003, say some experts. Ready or not, companies are becoming data and technology dependent. And, as a consequence, they are vulnerable to new exposures that can affect their business operations, profitability and shareholder value.

These exposures include business interruption and shutdown because of data corruption, data loss, and software and operating system damage, service interruption in electronic commerce networks, and attacks by hackers, widespread viruses, and a myriad of other computer-related security incidents. Since property damage is necessary for risk transfer in traditional property insurance policies, many policyholders have no mechanism to manage and reduce these new exposures. Insurance providers have to be a partner with their customers in rising to this challenge. This partnership entails:

Helping clients assess their current business model;

Addressing client exposure to electronic commerce;

Quantifying the impact of information technology, service providers, and third-party operations on business continuity, supply chains and revenue streams.

Risk tools

Today’s economy puts companies under greater pressure to achieve profit and to protect cashflow. Yet, as more companies outsource work, use single-source suppliers and implement shorter supply chains, their business risk exposures broadens. Astute risk managers and financial executives are taking the risk assessment process a step further, working with their insurers to study the potential impact of loss from a financial as well as operational standpoint.

This is a ripe opportunity for risk managers to quantify and manage risk in the modern economic environment through such means as a “business impact analysis” (BIA), a tool that allows for combined assessments of financial and physical property exposures across an organization. It takes standard property loss prevention analysis and moves it to the modern era of “strategic value management”. Customers obtain an infinitely deeper understanding of their risks and the way they can affect their ability to operate profitably.

By analyzing business operations, risk exposures and financial data, insurers can present customers with a review that is broad in scope and deep in information, and therefore solutions that relate directly to a company’s budget plan and earnings. The analysis quantifies exposures like fire, mechanical or electrical breakdowns, and natural hazards in lost dollars and time. The customer gains a thorough knowledge of their property exposures and can identify areas to minimize or control the risk of loss.

A fiscal analysis calculates financial exposures such as direct labor risks and interdependencies with suppliers and other third parties. It can even detail an exposure’s potential impact on a company’s margins and earnings per share. In the end, financial officers find such an analysis a valuable component for strategic business development, business continuity planning and determining the most effective areas to spend limited risk management dollars.

We have found at FM Global that BIA services are a logical evolution to detailed, location-specific risk assessments. BIA incorporates engineering and financial skills in a single package that recognizes that insuring for a loss is not enough. It also works on the logical basis that risk assessment is not a simple or one-time task but a continuous process.