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Complex risk is ripe for commoditization, and that's good for risk managers.

By Cyril Tuohy, managing editor of Risk & Insurance®


With all the advances in technology around insurance placement, underwriting and claims, for the bulk of buyers, insurance has become a commodity with an increasing focus on price. That is a welcome trend as it benefits the marketplace as a whole.

Most commercial risks are not as complex as they seem, not with all the data risk managers have at their fingertips.

Thousands of small businesses and hundreds of midsize companies benefit most when risks are run through standard algorithms. Many of the risks faced by global Fortune 500 companies can be commoditized to a large extent.

Commoditization means less differentiation, which makes it easier for buyers to compare one insurance program with another based on price.

With the Council of Insurance Agents & Brokers' initiative to streamline and computerize insurance application and placement, there is a national system in place that could lend itself to both the streamlining of the process and greater price competition. All the major brokers have developed technical systems for the most effective placement of insurance, and allow bidding on the best placement in regard to both price and terms and conditions.

Think of how competitive pricing for auto insurance has become in personal lines, or how cheaply we can trade stocks today compared with 20 years ago.

In the late 1990s, I bought an odd lot of Sunbeam stock worth $2,000, minus the $55 commission. Sunbeam subsequently went bankrupt. It was the first and last stock I ever bought. Were I to buy stock today, my prowess would likely have cost me another $2,000, but at least I'd only be charged $7.

As these insurance systems collect more data on hurricane modeling or global warming, for example, the industry will be able to offer greater coverage for a wider range of risks, at a better price. Commoditization is fundamentally democratic. It does the greatest good for the greatest number, and it plays an important role in making insurance markets efficient, competitive and open.

In personal lines, we've all benefitted from the speed with which we can get quotes. Why can't corporate risk managers?

Efficiency, competition and openness are ingredients that have been in short supply in the commercial insurance industry. The time has come to inject a heavy dose of each into the industry. We all stand to benefit.

Businesses need to align risk management with different goals, so risk transfer can never be a commodity.

By DAN REYNOLDS, managing editor of Risk & Insurance®


That's why products such as business interruption coverage, or property coverage are so often the same in name only. Ask to look at the sales and loss experience of Company A and it will vary greatly from that of Company B. Business interruption policies for the two companies could never be the same and still fulfill the needs of each buyer.

The engineering of the buildings owned by Company A won't be the same as those for Company B. The wind storm exposure pattern for Company A will vary from that of Company B. That's where brokers and risk managers make all the difference.

It's the narrative that matters, the story told to the underwriter and the data to support it. Only people deliver that value, not commodities. In the insurance market, no commodity will ever replace that value.

The claims side is just as complex, and varied. The forensics of claim experience, how one company manages risk and how that impacts its claim experience, varies greatly from company to company. As with so many things in business, it's the relationships that really matter.

The claims handling experience of a company that has clear lines of communication and good relationships with its brokers and underwriters will tend to be better than that where the relationships are not as well maintained. Where litigation enters the picture, isn't it a case where those relationships might not have been as well maintained as they should have been? What about that smacks of a commodity-like approach?

A second reason that insurance can never be a commodity is that insurance regulation is different in 50 states. In workers' compensation, one state's approach to pharmacy regulation will vary greatly from that of another. The exposure is simply not the same. So how could the price or the product ever be?

Data, the mastery of recording it and effectively using it to make risk management decisions, will eventually soften these edges somewhat.

But business itself will continue to innovate and as it innovates and creates new markets, insurance and risk transfer will have to sprout wings and follow. Perhaps risk management that is unthinkingly practiced resembles the purchase of a commodity.

But risk management is far more demanding and complex than that. It requires the skills of a mathematician and a storyteller and no commodity can do that.

The Price May Not Always Be Right

By E. RANDALL CLOUSER is Head of Marketing, Distribution and Regional Management for Zurich in North America.


There has always been a need for standardization in the insurance industry, but price competition is not the sole differentiating factor for evaluating coverage. Certainly strong price competition characterizes personal auto insurance. But despite the commercials that promote switch and save, consumers still look for value. A basic example is claims. Is the process efficient? Are they paid quickly?

More frequently, risk managers and insurance purchasers are considering Total Cost of Risk (TCOR) as part of values-based decision-making. Rather than evaluating price exclusively, a holistic approach is used, looking at self-retained losses, risk management administration costs and insurance costs. TCOR can be a valuable tool and offer improved benchmarking, transparency and other insights.

Technology also factors into the equation. Carriers and brokers have developed new platforms, allowing greater opportunities to speed the insurance buying process with improved customer efficiencies. So, for many customers, decisions will be based on the ease of doing business, not just the price of a policy. A more holistic approach to insurance and risk management will focus on developing solutions that meet the particular needs and the individual risks that organizations confront.

For example, the question of the size of risk retention may be more a question about the cost and value of capital. In the midst of the economic downtown, the financial strength of the carrier was a critical factor, not just price. There are certain kinds of risk -- contingent business interruption, for example -- that will probably never be treated as a commodity, because the risk is so complex and individual.

Risk engineering, globalization and claims management are issues that don't easily lend themselves to a simple price comparison.

Managing risk means managing cost and creating value for the investment. Price is only one factor in that equation.