The economic uncertainty caused by the COVID-19 pandemic has roiled the insurance market as many companies seek ways to improve cash flow, increase liquidity and drive growth.
Large and midsize companies now face an insurance market where pricing is up, capacity is down and finding competitive terms and conditions is challenging. Risk managers and other corporate executives encountering these headwinds may not know their next best move.
Fortunately, now is precisely the right time to rethink traditional risk financing strategies and ask, "Why am I buying insurance?" An innovative framework, known as NextGen Risk Finance, can help organizations across sizes optimize their risk management strategies.
Use Data to Establish a Framework for Risk Management
The disruption in the marketplace makes it difficult to apply conventional risk management frameworks. It's time to think differently about risk finance. NextGen Risk Finance is built on four core principles:
- Organizations now can analyze and explore their risk opportunities and advantages in the traditionally collected risk finance and risk management data that we could not discover even five years ago.
- Connecting the risk data with company performance information can help organizations inform strategy and financial performance decisions.
- While insurance coverages are generally organized and placed individually, organizations can reorganize and analyze coverages using data insights into a more robust risk portfolio. This portfolio approach allows organizations to leverage their understanding of risk volatility and price risk assumption versus transfer more effectively.
- Well-managed risk portfolios enable organizations to leverage and aggregate lines of coverages across hazard, financial and operational categories.
When organizations master these principles, they can become an "underwriter of choice." This means that organizations can underwrite their risk and price risk transfers organically irrespective of market perception or historical risk pricing. For example, a global retailer used NextGen Risk Finance to evaluate its property coverage. The analysis revealed the key drivers of cost and the retailer was able to identify where the program could retain risk better and substantially negotiate down the price of its risk transfer.
Find Your Risk "Strike Price"
Organizations with a portfolio view of risk can “do the math” to figure out their risk appetite. From there, they can model their program volatility and determine the "strike price" for each line of coverage. The strike price is simply the price at which it makes sense to retain the risk or transfer it through insurance coverage.
The strike price simplifies the risk-retention decision. Does the strike price indicate that the organization can underwrite risk itself or is it more effectively and economically transferred to the market through insurance?
A strike price helps organizations initiate a new dialogue with carriers. Organizations can use the strike price to signal their price expectations across their risk portfolios. Where the market meets or beats the strike price, the organization can transfer the risk. Where the market does not meet the strike price, the organization retains the risk on its balance sheet or through a captive insurance company, wholly-owned and controlled by the insured.
Become the "Underwriter of Choice"
NextGen Risk Finance leverages an organization's knowledge and operational experience to create a new risk management narrative. The approach changes the way carriers and organizations behave together.
When an organization becomes an "underwriter of choice,” the discussion becomes less about renewals and rate increases and more about effectively enhancing the organization's financial performance. As a result, the risk portfolio becomes the economic underpinning for enterprise-wide risk finance. The organization transforms from being an insurance buyer to being the underwriter.
NextGen Risk Finance encourages a shift in mindset across the organization. For most organizations, becoming the underwriter of choice means they can more effectively utilize their knowledge, data, and ability to communicate risk into the marketplace as a driver of financial performance. The disruption caused by COVID-19 and other economic circumstances presents an opportunity for organizations to embrace a refreshed and redirected framework that can optimize their risk management strategies, control costs and drive growth.