Actuarial Data Is The Key To Securing Funds For Safety Programs
In today’s difficult and challenging economic environment, risk managers (RMs) find themselves under continuous pressure to pursue opportunities to reduce the cost of risk and minimize balance sheet volatility for their respective companies.
For many risk managers this means finding opportunities to address their most significant cost drivers: workers’ compensation and general liability.
To reduce/mitigate such cost drivers, RMs can implement a variety of safety initiatives. The challenge for RMs, however, is to secure the appropriate funding required for such initiatives in a climate where competition for such investments is fierce.
It is equally as challenging to show an immediate impact from a cost/benefit perspective for such an investment, since returns on safety initiatives may require 36 months or more to mature.
What are some of the possibilities, therefore, that a RM may want to explore, so as to “level the playing field” in securing funding for safety initiatives in such an environment?
Safety initiatives are one of the most powerful ways RMs can reduce their cost of risk.
In planning such an initiative, it may be prudent to consider targeting a “test site(s)” for a six-month period that has experienced both frequency and severity.
The site(s) selected should also consist of employees who are more readily adaptable to accept and adjust to changes in protocols and processes.
The limited time frame associated with this approach will also significantly reduce the amount of “upfront” funding required and may facilitate approval.
At the same time, the protocols for the “test site(s)” are being developed; the RM should engage actuarial support.
The RM’s actuary will have a solid understanding of the company’s claims practices and loss history, as well as the company’s overall operations and commitment to safety. It is essential the RM should fully brief the actuary on the proposed plan and secure validation, from the actuary, on what particular location(s) may be best suited for a “test site.”
Once agreed upon, the RM and the actuary must agree on an approach that incorporates the potential to extrapolate results — once the trial period has ended — to all the operating locations.
The capability to extrapolate and validate results to all locations is a compelling reason for actuarial engagement in the plan design and monitoring of the safety initiative.
If such an extrapolation proves feasible, the RM will be well-positioned to present a cogent plan to management for fully funding the safety initiative. The sign off from the actuary is essential since the resulting benefits (reduced premiums and lower IBNR) will need to pass the scrutiny of internal and external audits, and the company will want to immediately recognize these financial benefits.
Safety initiatives are one of the most powerful ways RMs can reduce their cost of risk. While there is general agreement on this point, securing funding for such initiatives is most challenging.
RMs afford themselves the best opportunity to secure funding for such initiatives when they can produce hard qualitative and quantitative data that effectively competes for scarce corporate capital. In this regard, actuaries are essential partners.
Has Anyone Noticed That Our Underwriter Is Missing?
Large account property/casualty underwriting has undergone a fundamental shift over the last 4-5 years. Casualty underwriting and pricing has been ceded to actuarial departments and property underwriting is now dictated by Cat Modeling (RMS 2013).
These days just about every underwriter comes up with very similar expected loss estimates on any given account. Once this “loss pick” has been established, it is a simple matter to add on expected profit and expenses which becomes the basis of the quote.
A few higher-level underwriters have the authority to release their quote to the broker, but most still have to run this statistically derived quote by an underwriting manager or even higher authority before it can be offered as a quote.
The Underwriter’s Dwindling Authority
In reinventing the process of underwriting and quoting, the insurance carriers have fundamentally changed the position of “underwriter.” This new type of underwriter is essentially a clearinghouse for underwriting data between the broker and the carrier.
The actual inputting of the data is performed by clerical level employees that are paid significantly less than the traditional underwriters while the actual quoting and binding authority has been pushed up to the level of an underwriting manager or higher authority.
This has basically stripped away the responsibility and authority of the underwriting position that brokers have been acquainted with for the last hundred years.
Raising the Bar for the Broker
It has become very difficult for brokers to produce significant amounts of new business because most still sell based on price. Brokers will no longer be able find an underwriter that will provide a quotation on an account that is 30-40 percent lower than other competing underwriters.
Advancing technology has allowed actuaries to insinuate themselves into the individual account underwriting function instead of simply giving pricing guidance on large books of business or classes of risk.
From now on, if a broker does not have a compelling reason other than price for a client to fire their current broker and sign on with them, the account almost never moves.
Predicament for the Buyer
This new phenomenon masks the inefficiency of the broker system because competing brokers will be unable to deliver proposals with premiums low enough to justify changing brokers.
The insurance buyer will be led into the belief that their current broker is doing a good job since it appears that no other competing broker can offer pricing low enough to justify changing brokers which is a disservice to the buyer.
What Can Buyers Do?
Buyers should pay as much attention to the services offered by a broker as they do to the “premium summary page.” The one surefire way to lower costs is to lower losses.
Challenge the broker to outline a specific plan to reduce losses in addition to just placing policies. Request a proposal that details the services the broker is going to provide and find out how the broker proposes to measure the effectiveness of their program.
5 & 5: Rewards and Risks of Cloud Computing
Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.
ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:
5 benefits of cloud computing
1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.
2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.
3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.
4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.
5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).
1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.
2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.
3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.
4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.
5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.
Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.
Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.
To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?