When Coverage Isn’t Enough: Managing Risk a Challenge for Insureds

By Amy O' Connor | December 2, 2013
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Companies of all types and sizes are facing increased risks, but many are not putting adequate programs in place to manage those risks, according to a Zurich-sponsored study by Forbes Insights. As a result, companies are suffering financial losses from unexpected events or risks.

The study polled more than 400 executives in four industries: banking and financial services; real estate; healthcare; and construction. All of the companies that participated had between $25 million and $750 million in revenue.

Results indicated that 30 percent of executives in those segments didn’t understand how to best mitigate risk; 29 percent said they lacked understanding of the sources of risk; and nearly 25 percent claimed their company’s budget for risk management was “insufficient.”

Linda Conrad, director of Strategic Business Risk Management for Zurich Services Corp., says it has been a slow learning process for businesses to realize the link between risk management and better performance at the business level. She says the survey results confirm that many executives don’t spend a lot of time looking at their long-term risks.

Agents and brokers should be shifting discussions with their clients from just a product or insurance line focus to a customer focus and what their business strategy is.

“Companies are so focused on trying to survive and trying to be profitable and protect shareholder value,” Conrad says. “Because of that, they are busy with the task at hand and managing short-term execution. They don’t have the time or foresight to spend with the executive team on not only what things could impede them from hitting their targets this year, but also what could affect them down the road.”

But with the increasing complexity of the world, Conrad says companies of all sizes and in all geographies need effective risk management tools. She says business disruptions can be devastating, with one Zurich supply chain study showing that 35 percent of disruptions have totaled $100 million or greater for an individual company. A Zurich study also found that 85 percent of companies have had a disruption and 50 percent have had more than one.

“One thing that has come full circle as a result of the economy and catastrophes is people are becoming increasingly aware of the cost of disruptions,” she says. “Companies are finding they need to identify and proactively prevent the risks they are facing that could impede their strategic execution.”

Anticipating Risks

Some unanticipated events that can lead to a business interruption are obvious but impossible to predict – natural catastrophes including earthquakes, floods, tornadoes or hurricanes. But Conrad says there are other supply chain disruptions that people don’t typically think of, including workforce strikes, issues with third-party suppliers, and cyber or privacy breaches. Incidents like these can often cause complex or multiple claims for a company.

“The losses are huge numbers in large part because of business interruption. It’s not just the loss of products but also decreased market share, damage to reputation, and the increased cost of recovering from an event,” she says. “As more of that information gets out in to the public domain and everyone sees the impact, companies are realizing that it’s worth investing in the [risk management] process.”

There has also been more emphasis on risk management from outside influences like regulations and rating agencies, plus stock prices and shareholders who may have more confidence in a company that has an effective risk management strategy.

“If you look at the 10-K’s of companies, there is a risk section that shows some of the exposures a company may be facing, and yet many of those exposures have not been analyzed or vetted to see what the impact to the company would be and what steps the company would have to take to mitigate the impact,” Conrad says. “But they are out there in the public eye. Risk management has a role to play in how to manage those risks.”

The increasing awareness of insureds is not enough, Conrad says. Clients need help implementing company-wide risk management approaches. Zurich has put more effort into studying and developing risk management techniques. The carrier employs a holistic approach that embeds support for the customer as part of the risk management program. Conrad says when the company partners with the client, they can deal with risks before the insured is in crisis management mode.

Better Risk Management Programs

Conrad says the insurance industry needs to be more proactive in helping insureds set up and manage successful risk management programs. One way to do this is to look at an insured’s entire risk profile.

“Agents and brokers should be shifting discussions with their clients from just a product or insurance line of business focus to a customer focus and what their business strategy is,” she says.

Cost can be a risk management obstacle because insureds think working with an agent or carrier will be too expensive, but Conrad says disruptions are more costly. When agents and carriers work with a client and better identify what the insured’s exposures are, they can find the right insurance program and determine what should be covered by insurance and what can be better managed through risk management.

While each industry faces different issues, Conrad says the risk management framework and processes to manage the risks are similar. Having the tools and insights into what works to manage risk is where the insurance industry can provide value to clients. “We have been helping industry groups identify what exposures they are facing as an industry and from there we can take those findings and say which one applies to them on a company level,” she says.

The full Zurich/Forbes Insight report is available online.

About Amy O' Connor

O'Connor is associate editor of MyNewMarkets.com. More from Amy O' Connor

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