2013: The Pendulum Swings

By Christopher H. Perini

Familiar risks have grown, and new risks have emerged — both of which augment the need for far greater actionable knowledge on the part of underwriters, risk professionals, and business leaders.

Last year may have been a turning point. The pendulum of the economic downturn seemingly reached its limit and began its reverse swing. Of course, potential threats continued to exist — and likely always will. Nevertheless, unemployment went down slightly, the real estate and construction industries saw some improvement, rates for borrowing remained low, and the financial markets appeared more stable.

Despite the apparent emergence of a rebound, no one expects the world to look as it did before the recession. The events of the last several years, such as Superstorm Sandy, have been an excellent teacher. One thing we’ve learned: The value of risk management to our industry cannot be overstated. This value becomes increasingly evident as our industry grows more global, as we heighten our focus on understanding the new exposures emerging risks can create, and as we comply with stronger regulator and rating agency scrutiny of our risk management activity. Risk management has evolved into a fundamental and indispensable tool for improving our financial results.

Industry studies have shown how the art and science of risk management has matured since 2008. To learn how risk managers are responding to this new world of risk, the Risk and Insurance Management Society (RIMS) and Marsh have jointly crafted an annual survey of RIMS members to determine the ongoing state of risk management. Over the years, their survey results have indicated that, despite difficult and unpredictable times, risk management spending has remained stable. The issue usually isn’t about spending less but rather using those dollars as efficiently as possible. Many (though not yet all) senior-level executives realize the strategic value of risk management for the entire organization, and according to the surveys, expectations about the value of risk management are rising.

Risk managers who traditionally focused on hazard risk are beginning to recognize that the contribution they make in addressing operational, financial, and strategic risks can directly influence the bottom line. Similarly, insurers and their clients are becoming more sophisticated in their understanding not only of what constitutes risk but how to manage it. Familiar risks have grown, and new risks have emerged — both of which augment the need for far greater actionable knowledge on the part of underwriters, risk professionals, and business leaders.

Hard Times, Magnified Risks

Nowhere is this more evident than in the challenges we’ve faced in dealing with the repercussions of the economic downturn. Numerous commercial and personal lines exposures in the current economic environment have been magnified. What was previously seen at the micro level is now rippling through the broader spectrum of society.

Examples abound. Many municipalities are struggling to deliver basic services because of budgetary pressures. Emergency services have been curtailed, and fire and police departments have consolidated or closed — to the detriment of community safety. After 9/11, tremendous strides were made in community policing and homeland security, which also helped hold down theft and other crimes. But many areas are now straining to provide those basic services and keep crime rates down.

As for business risk, a company can look right down the list in its insurance portfolio. Start with workers' compensation risk: With large losses in retirement savings in the last several years, many people have remained in the work force longer than anticipated, and older workers present unique exposures. Rumors of impending layoffs or downsizing can result in an increase in compensation claims as workers brace themselves for what’s to come.

On the casualty side, difficult economic conditions have forced many commercial businesses to consolidate, which may involve added exposures not fully evaluated or understood when insurance coverage was initially purchased. On the property side, vacancies have grown in the commercial strips along the highways of America, raising the issue of how well they are maintained and secured. Abandoned buildings are prone to vandalism, including the removal of metal pipes and wiring for their salvage value and damage caused by squatters and fire. Unfortunately, such risks are not limited to the vacant buildings. Adjacent structures can become vulnerable to those exposures too.

The value of risk management becomes increasingly evident as our industry grows more global, as we heighten our focus on understanding the new exposures emerging risks can create, and as we comply with stronger regulator and rating agency scrutiny of our risk management activity.

Maintenance of any structure is a critical factor today. Owners who defer repairs to save money can increase the hazard of losses — a penny saved is not always a penny earned. At Verisk Analytics, many of the studies we’ve conducted on wind peril underscore the importance of the integrity of a building’s envelope. Something as simple as the condition of flashing around a roof can significantly influence the extent of wind damage. Home owners may opt to do repairs themselves rather than pay for a professional, creating quality-of-repair issues over time.

For commercial or personal auto, vehicle owners who defer maintenance can trigger the potential for loss down the road. On the home front, a household may underreport the number of drivers or reduce personal injury or property damage limits to save on premium. A recent study by our Verisk Insurance Solutions – Underwriting division estimates that undisclosed drivers account for more than $3 billion in lost premium.

Commercial exposure can also suffer from the results of an aging and inadequately maintained infrastructure. If a company can’t deliver goods because of infrastructure problems — communications, utilities, transportation — its risks, including those of its supply chain, invariably increase.

Impact on Carriers

For all those reasons and more, the risk of loss has risen during the recent economic crisis. And the kinds of risks are changing, thus escalating the importance of sufficient due diligence at time of quote to recognize and comprehend exposures and match them with commensurate premiums.

Regarding premium, the value of premium audit is easy to ignore, especially during times of stress on combined ratios and expense reduction. However, appropriate premium audit can uncover, for example, when sales reported on various government databases don’t match the exposure used to rate the policy. This can translate into loss of premium — sums that could be invested and the proceeds used to cover losses generated by insureds.

Particularly in times of financial stress, technology plays a vital role in managing risk. Throughout the insurance transaction, analytics can benefit the process: prefilling and verifying application information and predictive modeling to improve risk evaluation. The National Insurance Crime Bureau has indicated questionable claims referrals are up, which intensifies the need for crime analytics tools to identify false claims.

At the same time, an insurer must not lose sight of what it’s selling — not just a product but also a relationship. From sales and underwriting to claims management and service, especially in the current business climate, it’s important for insurers to be fully informed of the risk they’re assuming. In doing so, they aid their clients and ensure relationships that fulfill clients’ needs in a risky world. Technology is essential to support the appropriate handling of risk, but it’s people who make the relationship work — a fact that remains constant no matter which way the pendulum swings.

Christopher H. Perini, CPCU, is vice president and chief marketing officer of Verisk Analytics.