Optimizing your organization’s total portfolio of risks using analytics can help you take the lead on allocating risk capital more effectively and efficiently in different market conditions.
You’ll know that not every risk is priced the same way.
In a softening market, some lines are cheaper than others. Where insurance is relatively cheap, you may want to buy more by decreasing deductibles and increasing limits. Where insurance is relatively more expensive, you may want to 'spend' your risk tolerance on retaining more of these risks and spending on risk mitigation, increasing deductibles or lowering limits to save premiums.
But you won’t be able to take advantage of such insurance arbitrage if you’re still treating risks in silos and you’re not using analytics.
Analytics is what can help you set risk tolerance precisely and test combinations of risk mitigation, risk retention and risk transfer robustly to find the strategy that delivers the right level of protection for the business at the right cost.
This is about better risk capital allocation. And better risk capital allocation means better value and greater resilience for the business, plus more opportunities for positive visibility of risk management and your role.
To help you achieve just this, the below third insight in our risk insurance optimization series, shares five steps to lead on optimizing your portfolio of risks using analytics.
Establishing these parameters is crucial because they’ll guide your risk management decisions and ensure your risk protection aligns with your financial priorities. If you don’t know your thresholds, how can you adequately judge if your insurance coverage is leaving the business unduly exposed, or represents an overspend not aligned with business goals?
Defining your risk tolerance and appetite means engaging key stakeholders across the organization, which may include the board, senior management and cross-functional department heads. Their insights will help you understand the business's risk profile, the metrics they use to define risk and resilience, plus the acceptable level of risk.
Once defined, you’ll want to document risk tolerance and appetite parameters and share with others to ensure everyone is on the same page before you move to the next step below. However, we’ve also seen cases where simply defining these parameters delivered business value.
By example, a European conglomerate faced extreme risk exposure in one of its business segments. Working with the risk manager to define its risk tolerance and appetite, the conglomerate realized the segment's risks were too high to justify the returns. It decided to exit the segment, significantly reducing its overall risk exposure to align with the company's strategic goals.
The next step toward an optimized portfolio of risk and insurance is a comprehensive risk assessment. You can use analytics to both identify and categorize risks to reveal those most critical.
Analytics lets you assess each risks impact and likelihood, with impact referring to the potential financial and operational consequences of a risk, while likelihood being the probability of the risk occurring.
By focusing on high-impact, high-likelihood risks, you can allocate your resources more effectively and ensure you're ready to address the most significant threats first. To give an example, we worked with an airline that conducted a thorough risk assessment which identified how 89% of its residual risk in adverse scenarios wasn't directly related to aviation. This insight allowed the airline to focus its risk management efforts on these non-aviation risks, optimizing its insurance spending and improving financial resilience, saving the business millions of dollars.
By building models that simulate various loss scenarios, considering the likelihood and severity of risks, you can build a picture of what represents better value in terms of risk retention, mitigation and transfer.
You’ll need to analyze historical claims, exposure details and industry data to forecast the total cost of losses. Advanced analytics can help here and also in recognizing correlated and non-correlated risks. This can enable you to diversify your risk financing and take advantage of insurance arbitrage. For example, if certain risks are highly correlated, you might consider bundling them together to optimize your insurance coverage. On the other hand, you can manage non-correlated risks separately to avoid overconcentration of risk.
We helped a European manufacturer use advanced analytics to identify around USD$10m in potential total cost of risk savings across its insurance portfolio. With a detailed view of the financial impact of different risk financing strategies, analytics enabled more informed decisions on adjusting deductibles and insurer pricing to optimize risk financing and reduce overall costs.
With a clear understanding of the potential financial impact of your risks, you can develop and implement strategies to optimize risk financing. This may include investing in additional risk mitigations and controls you can be confident will deliver value, or exploring various risk transfer structures such as self-insurance, captive insurance and reinsurance.
Self-insurance, where you set aside funds to cover potential losses rather than buying insurance, can be cost-effective for low-impact, high-frequency risks. Reinsurance can help you manage large, infrequent risks and stabilize your financial position.
Captives can offer the business more control over the insurance process and potentially lower costs by covering risks that traditional insurance markets may price prohibitively expensive. We’ve recently seen a multi-geography manufacturer use analytics to identify it would be more financially resilient and the risk transfer more aligned with strategic goals if it directed more capital (around USD$75) into its captive.
Once you’ve identified the optimized combination of mitigation, transfer and retention, you’ll need to work with a broker able to bridge the gap between the theory of what represents the most efficient strategy for your portfolio and the realities of what’s achievable.
Regularly reviewing and updating your risk management framework using analytics helps ensure it remains effective and efficient across market cycles and that it continues to align with your organization's wider strategy.
This is about continuing to use analytical insights routinely and consistently to make informed decisions and prevent silos that too often lead to sub-optimal ways of managing and financing multiple risks.
Discover more on how you can take the lead on more strategic risk management using analytics. Get in touch with our Risk and Analytics specialists today.
