The Caveats of Qualitative Benchmarking
Risk managers find themselves continuously challenged by senior management to develop meaningful and relevant benchmarking data to determine how well their insurance-related cost of risk compares to that of their peers.
The key words here are “meaningful” and “relevant”. Risk managers are well aware of the inherent difficulties of securing such data from their peers.
Compiling a lot of insurance industry- related data doesn’t assure that we will get an apples to apples comparison. Regardless of the data source, whether it be peer-related or insurance industry-related, risk managers must be focused on aligning the data to their respective company and its operations.
…a risk manager must be cognizant of the key considerations in any benchmarking exercise to arrive at a “meaningful and relevant ” conclusion before presenting that conclusion to senior management.
I have outlined below some of the key questions which need to be considered to get the right alignment.
• What drives your insurance costs, retained losses or commercial premiums?
• Regardless of whether your company operates regionally or nationally – for as we know workers’ compensation, general liabilities and auto liability laws and regulations vary by state – comparisons should be broken down regionally versus nationally. Comparing performance in the Northeast to the Midwest is probably not relevant.
• Is your workforce comprised of union and/or non-union employees? Costs for workers’ compensation may vary considerably and comparisons should be union to union and non-union to non-union.
• In regards to retained losses, is your actuarial forecast of ultimate losses conservative? Do you reserve at or above the midpoint of the actuarial forecast? Does your forecast include a risk margin?
• Are safety, loss control and claims management initiatives receiving credit for impacting ultimate retained losses?
• Are retained losses under your supervision as opposed to outside of your purview?
• Is your company actively engaged in mergers and acquisitions?
• What is the primary focus of your business?
• Does your company actively utilize a captive insurance company?
While the above considerations can be applied to benchmarking both commercial premiums and retained losses, it’s essential to understand that risk managers in most instances will have much less control over commercial premiums.
Such premiums are often driven by less predictable and unforeseen global events such as natural disasters and class-action lawsuits, to cite a few. As such, a risk manager must be prudent to not assume too much credit for premium decreases in a “soft” market so as not to assume inappropriate blame in a “hard” market.
On the other hand, a risk manager generally has greater control over retained losses such as workers’ compensation, general liability and auto liability.
From an actuarial perspective, such losses lend themselves to more predictability. A risk manager, through a variety of aggressive loss control, safety and claims management programs and practices may be able to positively influence and mitigate such costs.
As indicated at the outset, a risk manager must be cognizant of the key considerations in any benchmarking exercise to arrive at a “meaningful and relevant ” conclusion before presenting that conclusion to senior management.
Given the uncertainty and limitations on the kinds of peer group data a risk manager would need to perform a truly “apples to apples” comparison, the most “relevant and meaningful” data may be that which a risk manager already possesses: His own.
The Positively Disagreeable Nature of Risk Managers
I don’t know about you, but I often spend my free time (usually stuck in traffic) trying to occupy my mind with positive thoughts. I often think about not just the “what” of things, but “how” and “why.” On the highway one day, I thought … as a risk manager, I am positively disagreeable. And that is not a bad thing at all.
It would be easy to perceive disagreeableness as negative, but it is actually quite useful in risk management. The practice of being disagreeable emphasizes critical thinking skills, which is something that many risk managers encounter all too frequently in their organizations.
No offense to colleagues, but lack of critical thinking skills tends to keep risk managers employed.
When I speak of being disagreeable, by no means do I intend it in a negative sense. Those who infer negativity may lack a complete understanding or appreciation of the exact role of risk management in an organization.
The fact that the risk role differs among organizations, even within the same industry, might add to the confusion.
I speak of being disagreeable in the sense that complete permission and total consensus may not occur and a risk manager must forge ahead. Some may refer to this as “the high wire act without a net.”
Risk management professionals do think differently and look at issues through a different lens from our corporate colleagues. Good risk managers must think from an alternative perspective and be risk innovators. It is all about the complementary nature of the leadership function within effective organizations.
The following is a passage from a 2013 Malcolm Gladwell speech, as referenced in a Wall Street Journal blog:
“‘Part of the role of senior management of creating an atmosphere of innovation is allowing people to be disagreeable,’ said Mr. Gladwell. He stresses that disagreeable doesn’t mean obnoxious but, rather, indifferent to the ways others see them. It’s the characteristic that lets innovators pursue breakthrough ideas even when faced with objections and derision, he said.”
Risk management professionals do think differently and look at issues through a different lens from our corporate colleagues. Good risk managers must think from an alternative perspective and be risk innovators.
When I thought about the above, while stuck in traffic, I came to the conclusion that the same applies to my function. Being the risk leader or risk voice in an organization can be a challenging job given the fluid nature of perceived risk. Alignment of risk strategies with corporate and finance strategies is essential and provides a stable platform to work from.
The rhetorical question flowing from my answer is as follows. If risk managers don’t think in a critical and disagreeable manner, are risk managers really doing their job? The challenge is to remove the doubt. Because we deal with ambiguity on a daily basis, it would be a nice to have at least one certainty.
What Is Insurance Innovation?
Truly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.
Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.
“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”
To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.
“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”
An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.
“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company
Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.
“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”
Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”
Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.
The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.
Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.
“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.
Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.
“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.