Industry

Wholesale Transformation

Traditional risk transfer tools are no longer sufficient to cover losses.
By Peter Miller Posted on October 2, 2023

Insurance organizations are being squeezed financially as multiple factors accumulate including climate risk, economic pressures, and continued disruptions from the pandemic, the war in Ukraine, and the supply chain. Technologies are providing new solutions and also new risks, from increased cyber exposures to replacement costs for tech-enhanced autos.

This is why it is imperative for risk management and insurance organizations to shift their mindset from “detect and repair” to “predict and prevent” loss while still maintaining a clear ability to deliver on the promise of indemnity so they can continue to make insureds whole when loss does occur.

This transformation isn’t related to just one aspect of risk management and insurance. It is essential across the entire insurance spectrum, including in regulations, technology, underwriting, claims, customer service and elsewhere across the value chain.

Organizations can’t effectively navigate and thrive in this evolving landscape and go beyond the traditional risk management and coverage model without leaders who are willing to think outside the box. Leaders also must be willing to put themselves out there by stepping up to guide the next generation of leaders, educating society about risk and risk solutions, and finding creative ways to recruit emerging talent.

Each individual insurance leader can move their organization forward. Here’s where to start:

Educate. How is your organization educating staff on current issues? What educational opportunities and messages do you offer from the top? Are you asking great questions about what’s coming next, even if you don’t have all the answers? Are you holding company meetings on these topics?
Elevate. Keep discussing these topics at the highest level and challenge your executive team and the teams under them to challenge the status quo. Encourage participation in formal and informal conversations on the issues.
Connect. Stay up to date on the regulatory environment. Find opportunities to provide legislative input or rule changes.
Hire. Insurance leaders have a huge opportunity to bring in fresh leaders, to help solve some of the biggest challenges facing society, but you must actively tackle the challenge to be successful. Support DEI initiatives that will help foster a diverse workforce and find new skill sets for new roles.

Traditional Tools No Longer Suffice

Moving more rapidly from a “detect and repair” model to “predict and prevent” is not an easy undertaking for an industry that is not known to change quickly. The fact is that traditional risk transfer tools are no longer sufficient to cover losses, and more attention is needed to mitigate risk.

Underwriting losses are at historic levels, with U.S. p&c insurers recording an $8.2 billion loss in the first quarter of 2023, according to AM Best. This represents a six-point drop in insurers’ combined ratio compared with the same period in 2022. Insurers cannot increase premiums high enough to cover expected losses, and insureds are becoming more exposed as insurers are forced to cut back on providing certain coverages to remain solvent.

Risk management and loss control are more important than ever, and it’s clear that a more proactive approach to utilizing new innovation and technology initiatives must be taken to truly reduce risk.

The insurance experience must evolve from a coverage product to a program that includes built-in risk management tools. There must also be an expanded focus on climate risk and the creation of actionable resilience strategies that areas more prone to catastrophes and that are growing in population—such as Florida, Texas and California—can adopt.

For example, AI-powered wildfire science and climate risk models can provide a more accurate assessment of evolving wildfire risk by providing property owners with a snapshot of their exposure and steps they can take to harden properties. These tools also can provide underwriters data to better understand exposures in particular areas and how to price coverage or educate policyholders about their risk, how to mitigate it, and hopefully prevent losses from occurring.

In the case of the devastating fires in Maui, a provider of electrical grid-monitoring sensors detected faults on a power line “about 20 minutes before reports of fire,” according to the Wall Street Journal. It is still unknown whether the detected faults caused the fire, the sensor provider CEO is reported as saying; however, this type of information could hopefully enable communities to respond more quickly.

Insurance organizations also must work to educate businessowners on high probability risks like flood and available loss transfer solutions like flood insurance, or parametric insurance that uses satellite imagery and other data sources to provide policyholders with emergency funds when a major flood event occurs.

A predict-and-prevent approach can help insurers avoid losses and provides added value to the insurance transaction, which in many cases, insureds are demanding.

To be fair, the onus to tackle this shift does not completely fall on one carrier or even the risk management and insurance ecosystem as a whole. It is up to everyone involved in the entire ecosystem, including regulators, public policy makers, not-for-profits, consumer advocacy organizations, insurers, reinsurers, agents and brokers, insurtechs, and policyholders to demand these types of predict and prevent services. Education for policyholders, risk managers, and even regulators on areas such as preventive technologies, insurer incentives, and sustainable building is also key to more rapidly advancing a preventive approach.

Leaders who are successfully adopting a predict-and-prevent approach all share a common denominator: They are willing to embrace innovation.

All risk management and insurance leaders should champion a predict and prevent model and here’s why:

  • Insurers cannot profitably transfer risks when rates do not reflect current exposures, cost of reinsurance, and loss costs due to inflation and cost of goods/services.
  • Preventing losses from happening and boosting resiliency not only helps customers avoid painful loss, but also doesn’t result in a claim, leading to a more profitable book of business.
  • There are greater opportunities to generate new service revenues for brokers and carriers through risk mitigation services and solutions.
  • It enables you to partner with your clients to provide additional value through educating them on the risks they face, and the ROI of mitigating those risks.
  • It creates a new value proposition: one in which losses never happen and are not just responded to after a claim is made.

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