It’s a Great Time to Be a Risk Manager

2017 has so far been a wild ride of change. Companies are navigating through a new U.S. administration, Brexit and cyber risks that are more daunting each day. We are bombarded with uncertainty and unchartered waters. Nevertheless, it’s a great time to be a risk manager.

This kind of disruption is the reason many of us got into the risk and insurance industry.  Addressing disruption is what we do best. According to a recent CNN report, in fact, Risk Management Director is the number-two Best Job in America for 2017. Recognizing the meaningful contributions and rewarding work of a risk manager, the report highlighted the role in “identifying, preventing, and planning for all the risks a company might face, from cybersecurity breaches to a stock market collapse.”

In the midst of a riskier environment, the insurance industry that serves risk managers faces highly competitive market conditions. The result is more choices and better services for the risk management community. Now is the time for the risk manager to take the lead.

As thousands of risk professionals soon head to the RIMS Annual Conference in Philadelphia, it’s a good time to consider the opportunities in this growing profession.

Why the time is right for risk managers:

  1. 2017 brings a new risk profile. Every company, regardless of industry or size, needs to evaluate the new risks from the shift to nationalist policies in the U.S. and abroad. Our new administration’s efforts to increase America’s manufacturing raises a host of new insurance needs—more U.S. production means more U.S. liability. We are also seeing a shift in global supply chain and an increase in the political risks of operating outside our borders. These changes require board-level and C-suite attention. We expect to see risk managers play a more significant role with management in building risk mitigation into their company’s strategic direction.
  2. Rise in specialists. This is your time to be selective about specialists that understand your business and the specific challenges you face. Insurers are differentiating through specialization. Work with an underwriter that knows the risks, regulations, complexities and nuances of your industry. Many industries, such as construction and health care, will experience rapid change this year. Find partners that have been in the same trenches and can help you navigate changes.
  3. Tailored products and solutions. The highly competitive insurance market is also driving product innovation for clients with more tailored solutions. Take the time to learn about less-understood products, such as accounts receivable insurance, which protects companies from non-payment risks and gives them the ability to borrow, receive loans, and as a result, improve their credit quality. In Europe, 70% of companies purchase this coverage, compared to only 8% of U.S. companies. Understand the risks across your supply chain and work with your broker to customize insurance programs and bring innovative solutions.
  4. At the center of technology and innovation. The insurance industry is on the front lines of the cutting-edge technologies: internet of things (IoT), robots and drones. These advances will only grow and thrive with the right risk and insurance programs. For example, the technology surrounding drones or unmanned aerial systems is rapidly evolving. The ability to collect and analyze aerial data has improved efficiencies, enhanced safety and lowered costs within the construction, agriculture, telecommunications, oil & gas and real estate industries. As usage  grows, risk managers will be central to the successful operation of drones by understanding and managing the risks and compliance needs.
  5. Ability to leverage the best in data analytics. Risk managers have the data, tools and skills to anticipate the risks from this tumultuous environment. The insurance industry views these challenges with a different lens, drawing on past catastrophes and predictive analytics to plan for the challenges ahead. Risk professionals who know how to leverage this information can bring a sense of preparedness and control at a time of heightened uncertainty. There is also a role for risk managers to advise senior management on the use of data. But because models are continually amended and updated after losses occur, it is important to avoid an over-dependence on data and false sense of security.
  6. Opportunity to participate in growing your business. Risk managers do not just protect a business, they grow a business. Companies are reevaluating strategies based on new policies. Will they build manufacturing plants? Will they buy a strategic target? Risk professionals have an important role in mergers and acquisitions deals as insurance can be used to help quantify contingent liabilities and allow for accurate pricing models. The most common is representation and warranties insurance, which can help strengthen and facilitate a transaction.
  7. Better risk management services. Insurers realize it is not enough to write a check for a claim. Take advantage of risk mitigation services that are built into your insurance policies. They include education, training, tabletop exercises and risk assessments.
  8. A thriving profession. With more and more universities offering undergraduate risk management majors, we will see a dedicated, high-caliber talent pool focused on careers in risk and insurance. The Spencer Foundation, for example, has completed an eight-month competition between students of 29 universities from around the country, analyzing, developing and presenting the most comprehensive risk management solutions for a case study. The top eight teams will be in Philadelphia to present at RIMS.

The risk and insurance industry is made up of some of the most agile and level-headed professionals. Risk managers have always moved with the changing environment and crisis situations, developing programs to address their entity’s risk profile. Hopefully, we will see more companies include risk management in their strategic planning and leverage the experience and skills of their risk managers.

Lloyd’s Finds Extreme Weather Can Be Accurately Modeled Independently

In a new report based on research from UK national weather service the Met Office, Lloyd’s has found that extreme weather events may be modeled independently. While extreme weather can be related to events within a region, these perils are not significant correlated with perils in other regions of the world.

The study’s key findings include:

  • Met Office research found that the majority of perils are not significantly correlated, but identified nine noteworthy peril-to-peril teleconnections, most of which are negatively correlated
  • Lloyds’ modeling finds that these correlations were not substantial enough to warrant changes to the amount of capital it holds to cover extreme weather claims
  • Even when there is some correlation between weather patterns, it does not necessarily follow that there will be large insurance losses. Extreme weather events may still occur simultaneously even if there is no link between them
  • An assumption of independence for capital-holding purposes is therefore appropriate for the key risks the Lloyd’s market currently insures
  • The methodology released in the report enables scenario modeling across global portfolios for appropriate region-perils

“This important finding supports the broader argument that the global reinsurance industry’s practice of pooling risks in multiple regions is capital efficient and that modeling appropriate region perils as independent is reasonable,” the report concluded.

According to Trevor Maynard, head of exposure management and reinsurance at Lloyd’s, “This challenges the increasingly held view among some regulators around the world that capital for local risks should be held in their own jurisdictions. Lloyd’s believes this approach reduces the capital efficiency of the (re)insurance market by ignoring the diversification benefits provided by writing different risks in different locations and, in so doing, needlessly increases costs, to the ultimate detriment of policyholders. Insisting on the fragmentation of capital is not in the best interests of policyholders.”

Check out the map below for further insight from the Met Office about large-scale weather perils that do demonstrate statistically significant correlation:

lloyd's extreme weather perils

Small Villages Hit Hardest by Italian Earthquake

A strong 6.2 magnitude earthquake that stuck Central Italy in the early morning hours of Aug. 24 has caused about 250 deaths and hundreds of injuries. The temblor stuck 10km (6.2 miles) southeast of Norcia and 100km (62.13 miles) northeast of Rome. Areas with the most damage are smaller, older towns consisting of unreinforced masonry buildings. One such town was Amatrice, which the town’s mayor has said “no longer exists.”

Dozens of aftershocks have since occurred in the area—the strongest a magnitude 5.5. Because it was a shallow quake, occurring about six miles below the surface, it was more destructive, the New York Times reported.
Italy map

Map: USGS.gov

The vicinity of Wednesday’s temblor has also experienced significant earthquakes in the past, including one with a magnitude of 6.3 near the town of L’Aquila in 2009. According to the Times. That quake killed at least 295 people, injured more than 1,000 and left 55,000 homeless. Bloomberg reported that only about 2% of the economic loss from the 2009 quake was insured.

Catastrophe modeling firm AIR Worldwide said that Italy’s nonlife insurance market is the eighth-largest in the world and the fifth largest in Europe, and its property insurance market is the second-largest nonlife market in the country after automobile. Earthquake coverage, however, is often not included in standard homeowners’ policies and is typically issued as an extension of fire policies. Earthquake coverage for industrial and commercial structures may be offered for an additional premium, which varies by region.

Fitch Ratings said on Aug. 26 that it expects to see limited impact on Italian insurers. According to Fitch:

We estimate insured losses of EUR100 million-EUR200 million, arising mainly from property lines. Our estimate reflects the low density of population and businesses and limited insurance coverage in the region. Claims of this magnitude would not have a material impact on Italian insurers’ underwriting results or credit profiles. Italian non-life insurers wrote EUR2.3 billion of gross written premiums of property insurance in 2015.

Italy has declared a state of emergency in the region hit by the earthquake and the government has pledged EUR50 million for first aid. The declaration of a state of emergency means that certain losses will be covered by a state fund for emergencies, limiting losses for insurers.

We expect the insured losses to be EUR40 million-EUR80 million for primary insurers and EUR60 million-EUR120 million for reinsurers. A similar event that struck a nearby area in 2009, where the insurance exposure was higher, caused insured losses of around EUR250 million.

Planning for Extreme Floods

Flooding

Companies in the United States should begin preparing now for climate change, which is predicted to cause extreme weather conditions, according to FM Global’s report, The Impact of Climate Change on Extreme Precipitation and Flooding. As the climate warms, areas that are dry will become drier and moist areas will see higher precipitation. The characteristics of precipitation will also change. “We feel cli­mate change not so much through subtle changes in the mean, but through changes in the extremes,” MIT Prof. Kerry Emanuel said in the report.

While the overall amount of precipitation might remain the same, it will become less frequent but more intense. A specific region of the country that has historically seen 10 inches of rain each May might see the same volume that month, for example, but those 10 inches may occur in a much shorter period of time, increasing the risk of flooding, according to the study.

By the end of the century, as temperatures rise, it is possible for precipitation to change by 8%, which could exacerbate wildfires in some areas and flooding in others. The danger is that, because these extreme events are infrequent, they lack urgency, so planning can easily be put off. Risk managers are advised to check their facility’s resilience in terms of the building’s ability to withstand flooding, focusing on 500-year flood levels rather than 100-year.

Extreme wet or dry conditions can affect a company’s buildings, machinery, data centers, transportation networks, supply chains, people and sales. Organizations should focus on water management—diverting water from property, optimizing drainage and protecting water supplies, and they should consider new weather extremes when managing supply chains.

Flood hazard mapping is increasingly proving helpful as understanding of water risk is improving, Louis Gritzo, vice president and manager of research with FM Global, wrote in “Mitigating Evolving Water Threats,” from this month’s Risk Management Magazine. Advances in technology have led to improvements in weather satellites, geospatial data acquisition and physical model development, making old models obsolete. Anyone working with information from a flood map that is more than 15 years old should consider an update, he wrote.

Those with a flood map should make sure it includes potential coastal flooding areas as well as river flooding, also taking into account the local topography of coastal locations. “Areas along the coast that are surrounded by hills and mountains will likely experience far more wind-blown water (storm surge), as the local terrain directs more water in spaces between steeper slopes,” Gritzo wrote.