Managing Your Costs by Differentiating Your Risks

The state of the insurance market is a constant topic of speculation, largely because the words insurance and volatility are often uttered in the same breath. The factors that make the market so intriguing also make long-term strategic planning a frustrating experience for buyers who are intent on getting the most value from their risk management investment. It has been proven, however, that one key to successful risk management is to differentiate the quality of your risk from that of your peers.

The current insurance climate presents opportunities to achieve more favourable insurance terms and conditions when purchasing or renewing property insurance coverage. Available limits are gradually increasing, for example, and terms and conditions have become more flexible for insureds that can demonstrate an attractive risk profile. Risk differentiation can be a very effective strategy in such an environment. Whether or not your risk is associated with building construction, protection of hazards, exposure to natural catastrophe events such as flood, wind or earthquake, equipment maintenance and supply chain management might affect how an underwriter views the quality of your risk. Provide as much information as you can to outline your risk characteristics and how your company manages them.

Just looking at price alone can be shortsighted. Risk differentiation helps you receive other benefits, regardless of market forces including:

* reliable access to capacity;

* an increase in stability, flexibility and predictability;

* better terms and conditions; and

* access to better services from your insurance provider.

Below are some suggested ways to help differentiate the risk at your organization.

MEANS TO DIFFERENTIATE RISK

Reduce losses

Granted, this may be the most obvious suggestion, but it deserves to be mentioned up-front because loss frequency and severity are the primary drivers of policy terms and conditions. While you can’t change the past, you can certainly learn from prior loss experiences. Many insurance buyers recognize the power of linking insurance with effective loss control.

Change your company’s risk profile

This is simply the most effective way to prevent or reduce losses. Your risk quality can be improved if you buy into the philosophy that the majority of all loss is preventable, and then make sound investments in loss prevention and control.

The savviest organizations maintain a healthy dose of humility when it comes to risk. They understand some risks may be outside their management team’s knowledge or experience and therefore they seek the counsel of experts who can help them understand scenarios beyond their familiarity. These organizations can then map their experts’ findings against their operations, locations, revenue streams and value drivers to determine their level of vulnerability and help them make educated risk management decisions.

For example, experience and research have proven that when it comes to dealing with windstorm threats, additional roof fasteners – a low-cost solution – can have a huge impact on preventing or reducing loss potential. On the other hand, it is also possible to invest a much larger sum on loss prevention safeguards and achieve very little impact on expected losses.

So, another important element of differentiating your risk is to work with someone who has the knowledge to help you understand which loss prevention and control solutions will be most effective. Overall, the more information you have in your command, the better.

Companies with the most successful property protection programs base their decisions on an objective and consistent benchmark of risk quality that correlates with actual loss experience. They demonstrate steady progress toward their risk improvement goals and have ways to prove their risk profile is superior to other companies competing for capacity or preferred terms and conditions. These companies also quantify the amount of potential loss averted through risk control measures. They have studied their options and are implementing proven loss control solutions that provide the best return on investment in terms of reducing exposure to loss. We are fortunate that technology and years of loss analysis experience provide us with better, more reliable tools than ever to deliver this type of information.

Increase risk transparency

Assuming your organization has a positive risk profile, anything you can do to make the risk more transparent to your insurance underwriter will be beneficial to differentiating your risk. With a firm grasp of your exposure, your underwriter usually can find ways to be more flexible. Risk transparency also helps ensure you’ll get the best price. Also, to the extent you work with a carrier that takes the time to understand the exposure, it works in your favour: you and your insurer can develop the best approach to minimize the most serious threats to your business.

Improve policy terms and conditions

You may be in a position to receive better terms and conditions from your insurer through higher self-insured retentions or appropriate limits of liability. This, too, will be a decision based on what you’ve learned about your exposures and vulnerabilities.

RISK: WIDE LENS

Overall, the benefits of risk differentiation are multifold and have an impact on much more than just the price of insurance. Taking more control of your insurance program and an active role in managing exposures to reduce losses represents good management practice that sends a positive message to your customers, suppliers, investors and employees. It cuts down on any “uninsured” elements related to the loss (for example, loss of investor confidence, loss of contract, loss of shelf space, lost earnings per share). It helps protect your organization’s reputation and brand image. It can increase predictability at policy renewal time and help insulate your organization from the cyclicality of the insurance market. And, you increase your insurance options and make your portfolio more marketable if and when the time comes.

By viewing risk through a wide lens, as opposed to fixing your sights on the most attractive insurance price available at the moment, you will be in a better position to make decisions that provide the best long-term strategic value to your organization regardless of the insurance industry profit and loss climate.