Canadian Underwriter

The Art of Taking Risk

August 1, 2016   by Jessica Wasserman, Office of Compliance and Risk Management, New York University

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“I know that I have a 0.013% chance of being hit by a car on my way home, or a one in 46,000 chance of falling through a subway grate. So I try to manage that risk by avoiding danger and having a plan and knowing what my next move is.”

So said Rueben Feffer, the character portrayed by Ben Stiller in the 2004 movie, Along Came Polly.

The movie’s risk analyst protagonist is a character that many risk professionals can relate to. Risk professionals focus on finding ways to assess, analyze, mitigate and transfer risk. They are trained to solve problems and find solutions for an organization’s “what can go wrong” moments.

And there are plenty such moments just waiting to happen. On June 16, Walt Disney World experienced one of those moments when a two-year-old boy was killed by an alligator on the shore of a lagoon outside a Floridian resort.

Jessica Wasserman2 -

Jessica Wasserman, Office of Compliance and Risk Management, New York University

More recently, the Democratic National Committee faced a hack that led to the release of damaging emails meant to undermine Hillary Clinton’s presidential campaign and influence the outcome of the election in the United States.

In-house risk managers actively consider these “what can go wrong” incidents, as do risk professionals like insurers, brokers, underwriters and actuaries who work to provide risk transfer opportunities by understanding client needs and assessing what type of coverage is available.

With insurance premiums reaching into the trillions of dollars, the Insurance Information Institute in the U.S. reports that it is evident risk transfer is still the primary method of addressing both personal and organizational risk.

Despite this growth, the insurance industry is facing challenges and disruption. PwC’s 19th Annual Global CEO Survey, published this past February, points out that one of the biggest challenges is technology. Not only are insurers seeing advances in data analytics systems used in-house, but technology is changing the way customers interact with insurance providers.

Reflecting input from 1,409 chief executive officers (CEOs) interviewed in 83 countries, including Canada, the survey further suggests there is a growing cyber risk as companies are seeing computer and data hack. This is very concerning for insurance companies that collect and store significant amounts of personally identifiable information.

“There is a couple of big challenges that the insurance industry is facing, which I expect professionals are already aware of, but that doesn’t make them any less challenging,” notes Henry Essert, managing director of PwC’s Actuarial and Insurance Management Solutions Practice.

“The first is low interest rates/asset returns and that these are likely to continue for quite some time. The second is the very dramatic changes in buyer needs and buying patterns. A good example of buyer need changes in personal lines is self-driving cars, which will certainly change how insurance coverage and liability are defined.”

The survey found that 71% of polled insurance CEOs report feeling that attracting and retaining professionals with key skills is a challenge. With all this change and disruption, it has become increasingly apparent that not only do organizations have to innovate and grow, but so do the risk professionals who support these organizations.

Below are some tips for risk professionals looking to stay ahead of the game.


Strengthen circle of competence

Warren Buffett, who has been studying the insurance industry for the past 65 years, is reported to have once said, “Risk comes from not knowing what you are doing.”

Risk professionals are clearly well-informed about their particular area of the business. An underwriter knows the types of risks, identified through underwriting guidelines and experience, applicable to the insurance policies they underwrite. Since insurance companies want to create portfolios of homogenous risks, underwriters become experts in their areas of focus.

For risk professionals, however, Essert recommends they “expand beyond that specific background to embrace other ways of thinking and get comfortable with the full spectrum of their company’s and industry’s risks.”

Risk professionals with a broader view and understanding of risk not only encounter increased opportunity and flexibility in their own careers, but are also prepared to better assist their companies as new risks arise.

The insurance industry is also seeing change with regard to increased emphasis on enterprise risk management and strategic risk management. These risk management areas focus on all different types of organizational risks (that is, financial, compliance, operational and strategic). In addition, organizations are considering other risk mitigation techniques besides risk transfer.

Embrace quantitative, qualitative data

The insurance industry is well-known for its use of quantitative data. Actuaries use statistical analysis to compute everything from determining potential liability exposure to the pricing of policies, notes the International Actuarial Association. And insurance companies have now increased their use of quantitative data through “big data” platforms.

Still, Essert advises risk professionals “not to think that any single quantitative metric is the ‘answer.’ Instead, each is just one way of looking at things. It’s important to look at a problem from different perspectives,” he recommends.

For Chubb, it notes in its 2014 annual report, “the traditional art of underwriting has been augmented by market segmentation and mix management, specialization in selected niche markets, and predictive analytics to improve pricing sophistication and reduce costs.”

Essert says he believes that insurance companies will also be looking at formalized stress-testing activities. “While insurance companies have been doing this for a long time, the trend is now to do it in a more organized way, bringing the same kind of rigour and governance that is brought to other metrics like economic capital,” he points out.

Equally important in analyzing risk is qualitative data. Uncovering additional details and perspective is important in developing a holistic view of the risk.

Consider, for example, that many organizations have systems that can detect computer system and software breaches. Those systems can provide a wealth of information with regard to where the breach occurred, who hacked into the system and what information the hacker accessed.

However, quantitative analysis may miss the fact that an employee lost his thumb drive, a drive that was not secure and contained system passwords, in a taxi cab on the way to see a client.

By developing a more comprehensive view of a risk or risk event, managers are able to make more informed decisions.

Customize the conversation

Risk management is often a difficult topic to talk about since those “what can go wrong” conversations can be quite negative. When speaking to various stakeholders, it is important (and healthy) to

remember that risk is a part of operating a business.

“It is important to recognize that risk management is not just defensive,” Essert emphasizes. “Risk management is about making better risk-taking decisions, not avoiding or eliminating risk management altogether. So no approach or amount of effort will eliminate all risk and we need to be comfortable with that, too.”

Effective risk professionals focus on tailoring conversations to their various stakeholders. A conversation that an underwriter has with a sales professional may be different than the one the underwriter has with senior management. With senior management, it is important that the identified risks and metric information can be communicated clearly and succinctly.

As the risk management function and insurance industry continue to advance, so, too, must risk professionals. Doing so will help risk professionals take a step back and think about “what can go right.”

Jessica Wasserman is author of the RIMS Executive Report, Risk Taker vs. Risk Manager, that delves deeper into the dynamics between an organization’s risk management function, its organizational strategy and its pursuit of new opportunities


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