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Article | Managing Risk

5 surprising risk optimization realities and how to tell your board about them

April 20, 2022

If you’re doing what you’ve always done with your insurance program, the chances are, you’re doing it wrong. We look at five surprising truths to wake up to the new order on risk optimization and take the board with you.
Risk & Analytics|Corporate Risk Tools and Technology|Risk Management Consulting
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The pandemic and ongoing global turbulence have left too many businesses sticking with old-world order approaches to their risk portfolios. This is leaving them vulnerable to a range of potentially damaging scenarios, including not having cover for losses that actuarial forecasting may have reasonably anticipated and significantly overpaying for insurance, therefore constraining the Capex needed to compete. These businesses may also be paying for insurance they simply do not need.

Too many business leaders are failing to get value from their insurance structures. Like passengers at the back of the car, they can’t fully see the road they’re on.

Better conversations between risk managers and C-suite executives powered by analytics can enable boards to take better quality decisions and avoid car-crash outcomes for the businesses they lead. Here, we suggest five statements likely to pique your board’s curiosity and, importantly, also show ways analytics can help you to speak their language when it comes to better protecting your organization against the turbulence that looks set to continue.


We’re retaining more risk than you think we are.

One of the outcomes of the pandemic is that many companies are now retaining significantly more risk than they perhaps ever have, or ever intended to. Some business leaders may have little idea their risk thresholds have even been breached through not knowing the true state of affairs.

We do recognize the specific tension at play here. Lots of companies in the pandemic have seen risk tolerance go down as revenues have dried-up. But somewhat perversely, they’ve actually taken on more risk due to the ongoing hard market.


Cutting insurance could hit our bottom line and I can show you how.

Perhaps this scenario is familiar to risk managers: revenues take a hit, so the board decrees a 15% cut everywhere, including insurance. While the knock-on effect this move may have on something like sales should the marketing budget be slashed might be broadly understood, the same is not true for insurance spend. Today, risk managers are under pressure to fight back against cuts that could leave the business vulnerable to those 1-in-50-year events that make companies fail.

Analytics can put numbers around the chances of a large retained loss, as well as the severity of such occurrences. It’s this kind of numerical storytelling that can help you approach the board fearlessly and prevent them from experiencing a loss and only realising then they should have had more insurance.

Risk managers will, of course, recognize there are always difficult dilemmas boards must wrestle with when it comes to insurance, as do we. Some boards will always struggle with the fact insurance is not a bank account and if you don’t get your money back, it’s likely to be a good thing because you didn’t experience a loss.

We also understand the vocabulary around ‘deductibles’ and ‘premiums’ may engage people like risk managers and brokers, but not so the board.

Being able to express the consequences of cuts, or additional spend, in terms of cash flow, earnings per share or EBITDA, as we’ve supported some clients in doing, allows the risk manager to act both as mediator with the new world order, and translator. Articulating to your board what an alternative insurance program may look like if done well, or otherwise, in terms of the company’s financial performance could prove an integral part of the ‘waking up’ process.


We can de-risk and save money.

We know boards want options from their risk management function, ideally, ones that quantify insurable risk, give them a better understanding of the trade-off between cost and retained risk, and provide clarity around how much additional risk the business may be able to retain.

Going into renewals with a stronger view of your risk means you’re able to calculate the value more easily from insurance and any captive participation.

This not only provides the opportunity to de-risk, but also the chance to ensure the insurance spend is more efficient. It may potentially be less than you may have paid historically because of the improved presentation of risk to the market that quantification can offer.


I can find out where we don’t need insurance.

The notion of a risk manager telling the board the business doesn’t need insurance may sound far-fetched, but using the right analytics puts this within your grasp. Analytics that consider your industry’s wider experience can help you to understand whether you need insurance or not.

Your organization may well have faced unusual losses in certain areas or happily avoided ones where peers have been hit, but you won’t know if either scenario is atypical without a panoramic view of what contemporaries in your sector and/or territories have faced. This broader understanding will allow you to better project the impact and likelihood of losses.

Undertaking a full analytical risk review allows you to identify opportunities to reduce cost of risk. By quantifying and improving the understanding of the cost of risk and its variability, the business can potentially optimize insurance purchasing and strengthen its negotiating position with insurers. It’s entirely possible this process may uncover where the capital spend on insurance is demonstrably not worth it.

Risk optimization analytics can provide answers to the following questions: What additional losses can we comfortably retain? What losses can we expect in the next 12 months? Is our current program effective? Are we getting value for money from our insurers (and broker)? Can we reduce our total cost of risk and better utilize our captive?

We suspect in many cases, the answer to at least the last question is ‘yes’, but it cannot be understood without proper analysis.


We can find alternatives within our business constraints.

Perhaps when risk managers seek discussions with boards on risk optimization, the natural response is to assume this is the precursor for asking for the impossible, such as an insurance spend that covers all and any losses and therefore also eats up so much capital it restricts innovation or acquisition.

Typically, when we work with clients, we might design several potential alternative insurance structures and provide commentary on their merits and costs within the context of those specific constraints we’ve been made aware of.

Ultimately, while we realise you can’t give business leaders all the answers, you can work to inform better quality decisions, ones rooted in the way things really are as revealed by analytics, not as the board imagine or hope they might be.

If your organization needs help identifying the risks and opportunities around their current insurance program, get in touch.

Contact

Andy Smyth
Strategic Risk Consulting Global

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