COUNTERPOINT: Risk Transfer Can Never Be a Commodity
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.
February 19, 2013
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