Can Brokers Keep Pace?
Technology and globalization offer opportunities for innovation, expansion, increased efficiency and improved customer service. But they also involve a rapid pace of change — and evolving risks — that keep every company on its toes.
“Changing global landscape, economy, regulatory environments, technology … this is changing the way companies manage both their financial and human resources,” said Tim DeSett, executive vice president of risk practices, Lockton.
“For brokers, this is really a transformational opportunity.”
The traditional role of the broker is transactional. A company hires a broker to buy insurance. But that model has been changing for years, with brokers becoming consultants and risk advisers in addition to procurers of policies.
“The traditional ways are shattered,” said Mary Ann Cook, senior vice president, risk and insurance knowledge group at The Institutes, a leading education provider for the industry.
“Those brokers that come to terms with that more quickly will be the ones out in front.”
But if brokers are to be effective risk consultants, they have to be a half-step ahead of the pace of change, anticipating the challenges their clients will face and understanding what mitigation strategies best fit their long-term goals and capabilities.
That takes a mix of forming key relationships and expertise within a client’s industry, and gaining a deep understanding of data.
Broker as Expert Consultant
“The best brokers are businesspeople,” said Brian Elowe, managing director, global risk management, Marsh.
“In a fast-paced world, I don’t see how you can be an effective adviser to a client without specializing in their industry. Client organizations have higher expectations that they won’t have to train their broker, but that the broker will bring insights to the table.”
To best understand a client’s risk, it is incumbent upon brokers to familiarize themselves with every aspect of the client’s business, from macro industry trends, to the regulatory environment, to the strength of its competitors in the market, and down to the nuts and bolts of their operations and financial standing.
Today, brokers also have to take into consideration a broad range of issues like the impact of increasingly unpredictable weather, migration patterns and political climate, impending local regulatory changes, and the now eternal question of data security. Conversations with experts are often the easiest and most reliable way to stay updated on broad trends.
The Institutes, in the course of assembling its seminars and educational materials, seeks input from policymakers and legislators, regulatory bodies, the NAIC, various conference attendees, social media platforms and multiple advisory groups.
Additionally, “belonging to industry associations is a great way to ensure you’re around the conversation of what those businesses are facing, and what strategies they’re developing in response,” Elowe said. “Our account executives are really experts in health care, technology, real estate or whatever sector they’re serving.”
Marsh works with several organizations to put together its annual global risk report, which is presented at the World Economic Forum each year.
Elowe described the process of consulting with leading economists, often working with the world’s top universities, as “an opportunity to challenge our thinking and get a better idea of the conversations we should be having with our clients.”
That in-depth understanding is critical if brokers want to get the attention of the C-suite.
“To have a conversation at that level, we need to translate our risk management initiatives into language that relates to the company’s goals and objectives, and what global resources are available,” DeSett said.
“To do that, we have to know what they’re saying to Wall Street and to their shareholders.”
The broker’s role as a consultant also involves adjusting to greater demand for alternative risk transfer strategies that don’t involve insurance. Emerging exposures like cyber, climate, political and reputational risks are often difficult to insure in the traditional market, pushing more risk managers to look for creative ways to retain it themselves.
“As a broker, it’s about ensuring capital efficiency and helping clients set up internal finance mechanisms to prepare for risks that may not be insurable,” Elowe said.
“Pooled risks and captives are situations where a broker wouldn’t be involved in a transaction, but would fill a role providing guidance to clients on how to utilize those models,” said Cook of The Institutes.
Big Data and predictive analytics also are useful tools in identifying emerging risks and vulnerabilities, but could also be a stumbling point for brokers as technology continues to evolve.
“Big Data is an incredible asset and opportunity to leverage, but takes a lot of energy to manage and can also be a distractor,” DeSett of Lockton said.
“Predictive analytics is a tool that should be a part of a broader strategy of measuring potential outcomes of potential risks.”
To paint a picture of just how rapidly data has grown as an asset for businesses, the McKinsey Global Institute (MGI) estimated that U.S. retailer Wal-Mart’s data warehouse in 1999 held about 100 terabytes of stored data; by 2009, nearly every sector in the U.S. economy was gathering and storing at least twice that amount.
Fifteen of 17 U.S. sectors have more data stored per company than the U.S. Library of Congress, it said.
McKinsey also projected 40 percent growth in global data per year, although with only 5 percent global growth in IT spending, according to its 2011 report, “Big Data: The Next Frontier for Innovation, Competition and Productivity.”
The insurance industry in particular not only has access to large amounts of data gathered from policyholders, but also the analytical talent to process it in its field of actuaries.
The study by MGI analyzed nine occupations that require the skills needed to execute big data analytics and in what industries they could be found, based on reporting by the U.S. Bureau of Labor Statistics.
Insurance carriers employed more of these individuals than any other segment included in the study, which also included telecommunications and internet service providers. In 2009, insurance carriers employed about 18,400 people considered to have “deep analytical talent;” the runner-up, scientific research and development, employed 13,000.
The report concluded that the financial services and insurance industry is “positioned to benefit very strongly from big data as long as barriers to its use can be overcome.”
Brokers have the opportunity — the obligation, even — to tap into carriers’ wealth of data and analytical talent.
“It will be critical to partner with a carrier willing to work with brokers on the analytics side,” Cook said.
“The data wars are coming. Brokers have to be able to capture it and work with it better; don’t defer an obligation to help clients build out an insurance program today that is comprehensive, flexible and integrated with data analytics.”
DeSett said, however, that barriers to effective use of data analytics are significant. The ability to store large amounts of data and run analytical software requires heavy investment in technology updates and training.
Aggregating large amounts of data is a useful tool for spotting trends, Elowe said, but it remains difficult to “get out in front” of emerging issues. Even those organizations with access to data and the talent to utilize it will struggle to keep up with new analytical tools and techniques.
For now, brokers’ predictive capabilities may be behind the pace. But this may be an even stronger reason for brokers to, as Elowe advocated, “Get a higher level of understanding of the business first, risks second.” &
International Travel Risk: Can You Keep Your Workers Safe Abroad?
When employees traveling the globe suffer a health or safety incident, it can leave them wondering where to turn. Here’s what you need to know to prepare for an emergency overseas.
Companies need a face-to-face presence to cement overseas business relationships. That’s inarguable. Less clear is what resources employees will have available to them should they become ill or injured in a natural or manmade event in a foreign country. This is the outcome of what UnitedHealthcare Global refers to as “healthcare insecurity,” and it can lead employees to make less-than-optimal care decisions in emergency situations.
Adding to the complexity is the fact that many overseas employees bring dependents with them who could also be placed in harm’s way.
This one-hour webinar will delve into the risks that overseas employees face, and the combinations of insurance and benefits that should be considered to protect valuable human resources and a company’s bottom line.
An expert panel will discuss:
- Pre-Travel Prep. Clear policies should spell out what kinds of support an employee can expect when deployed overseas and where to turn at a moment of crisis.
- Finding Local Care. Companies can avoid delaying care by accurately identifying local health care options and understanding local norms.
- Security Updates. Global programs can provide employees with timely updates on issues that could impact their health and well-being, including political instability, pandemics, or terror threats.
- Aligning Vendors. A streamlined approach to vendor services for overseas employees might be the right fit.
- Insurance. Finding the right mix of insurance coverages to both protect the company’s bottom line and provide for the health and welfare of overseas staff.
Why Marine Underwriters Should Master Modeling
Better understanding risk requires better exposure data and rigorous application of science and engineering. In addition, catastrophe models have grown in sophistication and become widely utilized by property insurers to assess the potential losses after a major event. Location level modeling also plays a role in helping both underwriters and buyers gain a better understanding of their exposure and sense of preparedness for the worst-case scenario. Yet, many underwriters in the marine sector don’t employ effective models.
“To improve underwriting and better serve customers, we have to ask ourselves if the knowledge around location level modeling is where it needs to be in the marine market space. We as an industry have progress to make,” said John Evans, Head of U.S. Marine, Berkshire Hathaway Specialty Insurance.
CAT Modeling Limitations
The primary reason marine underwriters forgo location level models is because marine risk often fluctuates, making it difficult to develop models that most accurately reflect a project or a location’s true exposure.
Take for example builder’s risk, an inland marine static risk whose value changes throughout the life of the project. The value of a building will increase as it nears completion, so its risk profile will evolve as work progresses. In property underwriting, sophisticated models are developed more easily because the values are fixed.
“If you know your building is worth $10 million today, you have a firm baseline to work with,” Evans said. The best way to effectively model builder’s risk, on the other hand, may be to take the worst-case scenario — or when the project is about 99 percent complete and at peak value (although this can overstate the catastrophe exposure early in the project’s lifecycle).
Warehouse storage also poses modeling challenges for similar reasons. For example, the value of stored goods can fluctuate substantially depending on the time of year. Toys and electronics shipped into the U.S. during August and September in preparation for the holiday season, for example, will decrease drastically in value come February and March. So do you model based on the average value or peak value?
“In order to produce useful models of these risks, underwriters need to ask additional questions and gather as much detail about the insured’s location and operations as possible,” Evans said. “That is necessary to determine when exposure is greatest and how large the impact of a catastrophe could be. Improved exposure data is critical.”
To assess warehouse legal liability exposure, this means finding out not only the fluctuations in the values, but what type of goods are being stored, how they’re being stored, whether the warehouse is built to local standards for wind, earthquake and flood, and whether or not the warehouse owner has implemented any other risk mitigation measures, such as alarm or sprinkler systems.
“Since most models treat all warehouses equally, even if a location doesn’t model well initially, specific measures taken to protect stored goods from damage could yield a substantially different expected loss, which then translates into a very different premium,” Evans said.
That extra information gathering requires additional time but the effort is worth it in the long run.
“Better understanding of an exposure is key to strong underwriting — and strong underwriting is key to longevity and stability in the marketplace,” Evans said.
“If a risk is not properly understood and priced, a customer can find themselves non-renewed after a catastrophe results in major losses — or be paying two or three times their original premium,” he said. Brokers have the job of educating clients about the long-term viability of their relationship with their carrier, and the value of thorough underwriting assessment.
The Model to Follow
So the question becomes: How can insurers begin to elevate location level modeling in the marine space? By taking a cue from their property counterparts and better understanding the exposure using better data, science and engineering.
For stored goods coverage, the process starts with an overview of each site’s risk based on location, the construction of the warehouse, and the type of contents stored. After analyzing a location, underwriters ascertain its average values and maximum values, which can be used to create a preliminary model. That model’s output may indicate where additional location specific information could fill in the blanks and produce a more site-specific model.
“We look at factors like the existence of a catastrophe plan, and the damage-ability of both the warehouse and the contents stored inside it,” Evans said. “This is where the expertise of our engineering team comes into play. They can get a much clearer idea of how certain structures and products will stand up to different forces.”
From there, engineers may develop a proprietary model that fits those specific details. The results may determine the exposure to be lower than originally believed — or buyers could potentially end up with higher pricing if the new model shows their risk to be greater. On the other hand, it may also alert the insured that higher limits may be required to better suit their true exposure to catastrophe losses.
Then when the worst does happen, insureds can rest assured that their carrier not only has the capacity to cover the loss, but the ability to both manage the volatility caused by the event and be in a position to offer reasonable terms when renewal rolls around.
For more information about Berkshire Hathaway Specialty Insurance’s Marine services, visit https://bhspecialty.com/us-products/us-marine/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.