Canadian Underwriter
Feature

Mitigating Risk In Changing Times


July 31, 2009   by Royston Colbourne


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Risk mitigation represents the core of insurance: The entire industry is based on making informed judgments about probabilities of things going wrong. The industry has, in general, made a very effective process of calculating premiums in the context of risk. There are, historically, unforeseen events and incidents that remind us all the process needs to evolve and continue to be improved. The mathematical calculations that compare risk with probability in respect of premiums is and has been an excellent guide to calculation of premium and risk mitigation. It continues to play an important part in the process. The nature of the current system is that it is prediction-based on history.

It is not suggested that the historic perspective is not relevant or does not form an important part of premium assessment — the fact is it is reactive prediction. But what is new and different and in what ways can the industry continue to be in front of the curve?

The role of insurance brokers is to assess the risk and to guide, by various means, clients to take certain measures to make the likelihood or impact of a claim to zero. The reality is factors come into play that are unforeseen or outside the reality of predicted probabilities. Insurance brokers examine a range of factors

when considering rates: the industry, nature of business, history of relevant factors, the clients history and the measures taken by the client to mitigate risks and reduce the probability of circumstances leading to a claim.

The combination of reduced premiums and reduced risk makes the venture more attractive for all involved: brokers, insurance companies and, of course, the end users of products or services as the cost of insurance is inevitably passed on to consumers.

What is new

On the one hand it could be said nothing is new: business is interrupted and incidents of damage and injury occur and claims are made. On the other hand, what is new are the type of incidents and events that result in claims.

The systems and judgments made for assessing premiums is driven by the insurance industry. This is based on a historical perspective and based on data and information. The reality is industries and society evolve so rapidly in our current age that by the time sufficient data and information is collated it is often old news and does not form a holistic view in respect of anticipation and prediction of the forthcoming year.

The old adage — the only thing that changes is change itself — is very true. Sudden events that are unpredictable in their detail can be the subject of planning, preparation and mitigation. What must be remembered is that hindsight generally reveals indicators were there for the discovery.

Over the last six months alone, terrorism continues to evolve and probe to find new soft underbellies of western infrastructure and society, there has been a rapid and unprecedented economic downturns and now a pandemic. We can look back and generally say we were not surprised that x or y happened. While these issues are not new in theory, they are becoming an issue for an organization, company or industry for the first time.

It has been suggested that where minimum standards or regulations are not dictated, there is a reluctance to explore deeply, leaving some organizations ill prepared for potential eventualities. It is not advocated that more regulation and standards be introduced, but that organizations take a hard look at standards and regulations and ask if the aim is to meet or exceed them.

What is different

Acceptance and accountability from shareholders and the public is rapidly changing. The tolerance level for getting it wrong in the past was much more liberal than it is now. In the past, the public and shareholders did not feel as empowered as they do in the rapid information age of the 21st-century. After an event, people know exactly what should have been done, how it could have been avoided or mitigated and how a manager’s focus, policy or attention to detail could have averted or minimized whatever the event was. Could a pandemic, terrorist attack or serious industrial accident, sabotage or environmental spill have been averted or mitigated by policy, practice, planning? The answer to all those is probably yes if we are bold enough to admit it.

Staying ahead of the curve

The insurance industry is in a privileged position in terms of mitigation. The reality is the most attractive aspect of risk mitigation is the bottom line: Reduction in insurance premiums, civil claims and all the other financial penalties associated with getting it wrong. The pivotal role insurance plays in guiding others to get it right is by prompting and promoting risk mitigation to play a broader and deeper role in client’s activities. Simply focusing on the historic perspective and encouraging compliance is only part of the process.

The process of risk mitigation should be viewed from a more proactive stance; a more lateral examination of threat risk and vulnerability is required.

The process of conducting threat, risk and vulnerabilities surveys is an important part of getting it right. Where those surveys are carried out as checklists or simply ensuring compliance with standards and regulation, important as that is, it does not reveal emerging and changing environments, and negative activity. The art of a survey is to find threats, risks and vulnerabilities previously unidentified, which will inevitably bite the client. There is significant advantage to both insured and insurers in taking a more proactive approach to risk mitigation. Insureds should be encouraged to look beyond the typical, conventional and historic areas of risk providing insurers tangible evidence of proactive risk identification and reduction. Explore beyond the obvious and you will find those opportunities which positively impact the bottom line. Proactive risk mitigation is the crucial step to getting it right.

Royston Colbourne, BSC, is the senior risk consultant with Canpro Global Services Inc. He provides comprehensive security and threat risk mitigation services to overseas missions organized by the United Nations, primarily in the Middle East and Eastern Europe. Mr. Colbourne is a former member of the London Metropolitan Police.


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