Spotlight: Why we need risk management for everyone, not just the 2%

For over 200 years, the insurance industry has understood the benefits of risk management in reducing and controlling exposure. But in a world of emerging and evolving risks, the traditional way of making improvements through site surveys creates a fundamental problem, as RiskSTOP’s Nigel Raywood explains.

The concept of risk management in general insurance started to take shape with the advent of fire insurance. The Great Fire of London back in 1666 had a lasting impact, leading to the formation of early insurance companies such as the Sun Fire Office. Industrialisation brought new risks, and insurers started carrying out basic surveys to assess risks associated with factories, railways and shipping.

Come the early 20^th century, the insurance industry began to standardise risk assessments. Insurers employed engineers and surveyors to inspect properties and industrial sites.

By the 1950s, the Great Depression and World War II had led to advancements in risk management practices, and the concept of comprehensive risk surveys became more prevalent.

Only around 2% of any insured risks ever receive guidance and improvements following a risk survey.

Nigel Raywood, RiskSTOP

Later, standardised survey forms and procedures were introduced and the traditional site surveys we still use today began to take shape. Site surveys continue to dominate the landscape well into the 21^st century.

Today, the ability to deploy site surveys across the industry is severely curtailed by the availability of human resource and its associated costs. So, while risk management interventions driven by site surveyors can have a significant impact on insurers’ combined operating ratios (COR) by mitigating claims, the benefits are limited.

In fact, it’s tip-of-the-iceberg stuff. Only around 2% of any insured risks ever receive guidance and improvements following a risk survey.

Finding answers

So, what is the solution? What about the 98%? In September 2019, PwC published its report The Future of Risk – The Insurance Risk Function of the Future, which highlighted the need for general insurance risk management to incorporate assisted, augmented and autonomous intelligence.

Put simply, PwC said that when it came to risk management, the insurance industry needed to supplement human expertise with data, machine learning and AI resources to be fit for the 21^st century.

At RiskSTOP, we became obsessed with this idea, not least because we could see the possibility to extend the availability of risk management beyond a tiny 2% of policyholders – to everyone.

Not only could this help insurers dramatically improve COR, but it would enable insurers and brokers to enhance reputation, customer relations and ensure positive customer outcomes by adding value through widespread risk management support.

We also spotted a connection between PwC’s vision for general insurance risk management and how the insurance industry segments its customers.

Exposure-appropriate risk management

Insurers and brokers tend to place customers within three distinct categories – complex, mid-market and digital. These segments are generally linked to levels of exposure.

Complex risks tend to be high-severity and/or high-frequency in nature, but don’t exist in large volumes. Mid-market risks tend to offer lower severity of exposure, but there are more of them. Those within the digital segment feature lower individual exposure, being made up mainly of SME or more straightforward risks, but they’re high in volume.

Could we do more risk management if we found a different approach?

As you would expect, it is the more complex risks where risk management resource is most often deployed, but not exclusively. Some mid-market risks also benefit from occasional site surveys. Digital risks, not so much, but site surveys do happen every now and then.

However, site surveys seem most ‘appropriate’ for complex risks. In order to hazard-spot and paint a reliable picture of a risk for underwriters and brokers, it remains clear that expert-led human assessment, which takes place face-to-face and on-site, is still required.

But do we need to send a surveyor to mid-market and digital risks? Could we do more risk management if we found a different approach?

What’s appropriate for the rest?

The key to delivering ‘Risk management for everyone’ is working with data and digital resources and where appropriate, offering either automated risk guidance or hybrid (human and data combined) risk assessment and reporting.

The hybrid model works well with mid-market risks. Rather than sending a surveyor to the risk, a team of risk management advisers can pull together a range of digital sources, including unique risk data gathered from tens of thousands of risk management site surveys and across all kinds of classes of business.

Rapid assessments can be carried out in a fraction of the time and cost of a site survey.

This can be followed up with a ‘desktop’ assessment of the risk, discussing aspects remotely with the policyholder and producing a risk report, with risk requirements.

We are already building a range of these desktop-based ‘Rapid risk management’ (RRM) services, focusing initially on emerging and evolving risk issues, such as vacant properties, thatched buildings and risks featuring solar panels, as well as different classes of business including retail stores, offices, hotels and residential flats.

Rapid assessments can be carried out in a fraction of the time and cost of a site survey.

Automated reports

Of course, the biggest challenge facing the insurance industry is how to deliver risk management that is appropriate across the high-volume digital segment.

Here, the key is to provide automated, personalised risk reports, delivered mainly through brokers to their clients, and in a way that not only supports risk improvement, but also enhances broker customer relations. 

This could involve providing a simple tool to brokers, which allows them to guide clients on a journey of risk improvement. 

Ideally, this would be delivered without waiting times and at a cost that makes it accessible to all: to identify the risks different classes are most likely to face and to offer guidance related to these risks; or spot key emerging and challenging risks and bundle this information into a report that requires minimal online input, and which brokers can access instantly and share with their clients.

In our commitment to enhancing the safety and security of individuals and businesses in the UK, this online tool is freely available to brokers and insurers. We believe that ‘Instant risk guidance’ (IRG) is a revolutionary tool that will evolve and grow through industry co-operation. Unlimited and instant risk reports are now accessible to the insurance sector and its clients.

Data-driven, hybrid and human expert-led solutions can change the risk management landscape, bringing its benefits to all in a way that is fit for the 21^st century.

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