Rapid changes in the global economy and technology are causing risk managers to demand increasingly complex insurance products.
As companies expand into the global marketplace and change the way they do business, the role of the risk manager continues to widen, reflecting the evolution of risk management from an investment in avoidance through insurance to a much broader discipline.
Business risks and exposures are skyrocketing as companies change their modus operandi in the highly charged competitive environment. In particular, we are fast becoming a more intellectually based e-business world, and in order to stay ahead of the pack, many companies are demanding much more from their risk managers. Now, the corporate risk manager needs to be more attentive and knowledgeable about emerging risks, how those risks are managed, and how they could ultimately affect a company's financial situation and therefore its position in the marketplace.
In essence, how such risks are managed can give a company a competitive advantage. These quickly changing times are marked by the adoption of e-commerce into business models, the integration of web-based communications and data transfer capabilities into businesses operations, and leveraging of advanced network and technology architecture for maximum benefit.
For the risk manager, these new exposures – cyber-risks – can lead to cyber losses, widening the interpretation of what constitutes insured property damage, particularly as it relates to information technology and data.
To keep pace with such dynamics, forward-thinking companies know they must bring their business and risk objectives into alignment by incorporating enterprise risk management into strategic business planning. They must look for ways to improve the way their businesses operate by reducing their risks. This means investing a large amount of time and money, and ensuring a good return on this risk management investment. In the end, such an investment should create positive returns for their business as well as increased reliability and decreased volatility of earnings and cashflows.
All the while, their organisations are under tremendous pressure to reduce expenses and grow profit margins, and cannot afford to suffer a property loss or business interruption. How a company identifies, quantifies, qualifies and manages these new risk exposures, in addition to the well-known traditional risks, is becoming an important factor in creating shareholder value. This often means changing the way everyone in the organisation thinks about risk.
And as risk managers are seeing price levels continue to rise – albeit modestly – in today's primary commercial property and reinsurance markets, they are demanding that insurers improve their risk assessment and quantification offerings. The good news for risk managers is that as the economy evolves, insurers are increasingly matching that evolution with new products, services and capabilities.
Insurers who are truly listening to their customers and striving to be more in tune with their needs are responding to the fast- changing risk management landscape. They're hearing their customers say they need fresh approaches to address the new challenges facing their organisations; clients need their insurers to help protect the value created by their business.
As a result, insurers are finding they are increasingly required to develop and expand their information technology platforms to ensure that the vast amount of data they collect about their customers can easily and seamlessly be transformed into valuable risk management information. To help their customers make better-informed decisions, insurers must be able to swiftly deliver this data to their customers anywhere in the world.
Insurers are also discovering that risk analysis and risk assessment have to be customised to meet policyholders' new exposures and needs. The insurance industry is stepping up and addressing these challenges in several different ways.
E-business is expected to grow 33% per year and become a trillion dollar business by 2003, according to some reports. Companies have become data and technology dependent in an environment where such tremendous technological growth and e-business pursuits are spreading some organisations thin and opening them up to vulnerabilities that can affect their business operations, profitability and shareholder value.
This tremendous surge in e-business is changing basic business operations and creating new risk exposures. Many companies face the threat of business interruption and shutdowns because of data corruption, data loss, software and operating system damage, service interruption in their electronic commerce networks, attacks by hackers, widespread viruses and a growing number of computer-related security incidents.
Since property damage is necessary to achieve risk transfer in traditional property insurance policies, many policyholders have no effective mechanism to manage and reduce these new and evolving exposures.
To combat this problem, an organisation's insurer should be a partner which is rising to this challenge. The insurer should be helping the risk manager assess the organisation's current business model and addressing its exposure to electronic commerce and the impact information technology (including the integration of the internet into business processes), service providers and third party operations can have on business continuity, supply chains and revenue streams.
The good news is that some insurers are beginning to address these concerns. A number are using outside consultants to perform risk assessments that cover both first and third party exposures. They are also responding with new products that provide coverage for both first and third party network computing liability exposures.
At FM Global, our e-conomy risk assessment approach builds on the foundation of our company's loss prevention engineering expertise and our understanding of our customers' business and knowledge of their facilities.
The same way we assess first party exposures like fire or natural catastrophes, from a first party liability point of view, holds true with e-business-related exposures.
Many e-business exposure areas are no different from those we traditionally assess. In addition, because we are familiar with a customer's business processes we can help them identify specific risks that an outside consultant might not find. Many of the improvements we recommend, while not the primary intention, may also help mitigate third party exposures.
Our underwriters are also working to broaden our current all risk policy to cover these emerging e-business exposures.
Business impact analysis
In addition to managing these new types of risks, achieving profit and protecting cash flow in today's fast-paced economy is imperative. As more and more companies outsource work, use single source suppliers and implement shorter supply chains, the business risk exposure grows exponentially.
Savvy risk managers and financial executives in today's environment realise the risk assessment process needs to be taken another step further by working with their insurers to study the potential impact of a loss on their company from a financial as well as an operational standpoint. This allows the risk manager to quantify and manage risk in the modern economic environment.
Business impact analysis, for example, gives risk managers access to assessments that combine the financial and physical property exposures across their organisation. It takes the standard property loss prevention analysis and moves it to the modern era of strategic value management. It provides customers with an infinitely deeper understanding of their risks and how it can affect their ability to operate profitably.
By analysing business operations, risk exposures and financial data, insurers can present customers with a comprehensive review that is broad in scope and deep in information, and solutions that relate directly to a company's budget plan and earnings. It can quantify exposures like fire, mechanical or electrical breakdowns, and natural hazards in lost dollars and time. The customer gains a thorough knowledge about their property exposures, recommendations to minimise or control the risk to loss, and learns about their current preparedness to deal with loss situations.
Additionally, a fiscal analysis helps them understand their financial exposures such as direct labour risks and interdependencies with suppliers and other third parties. Such an analysis can even show an exposure's potential impact on a company's margins and earnings per share.
In the end, financial officers find such an analysis a valuable component for strategic business development, business continuity planning and determining the most effective areas to spend limited risk management dollars.
We've found at FM Global that business impact analysis services are a logical evolution of the detailed, location-specific risk assessments we currently offer our clients. This effectively uses our skills to expand our services to meet our policyholders' needs.
Even in today's challenging and fast-paced economy of hyper competition, e-commerce, just-in-time materials management, value chain dynamics, customer consolidation and tight material allocation, some things remain unchanged.
Merely insuring for a loss is not enough. Nor is risk assessment simple or a one-time task, but rather an iterative process focused on continually understanding one's exposures.
To help their businesses thrive, risk managers cannot be complacent. They need to form strategic partnerships with their insurers in order to better quantify, qualify and manage the growing number of emerging risks as well as to maximise shareholder value.
In the end, the best measure of your insurer's success will be if you have a high degree of satisfaction and reduced loss costs.