InsurTech’s impact on the future of enterprise risk management

When something goes wrong, there is one thing we know for certain: the situation will be different from what we anticipated. That is the whole point of planning: to prepare an enterprise to respond and adapt to the unexpected.

One key challenge in enterprise disaster planning is accounting for individual behavior. The post-disaster choices made by individuals (employees and customers) are largely outside of enterprise control, yet those decisions are critical to continued operations. Workforce and customer availability become a key issue. A chain is only as strong is its weakest link, and in disaster planning that weak link is the unpredictability of human behavior.

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From snowball to avalanche

In a major natural disaster, like Superstorm Sandy, the 2011 tsunami in Japan, or the next big one in California, the worst losses are those least expected: short-term aggravations that snowball into long-term losses, and defy quantification.

Even worse are unexpected “avalanche” losses, from sources outside the enterprise’s control.  At the macro level, this could take the form of supply chain upheaval; long-term disruption to power or communications; or permanent regulatory changes. At a micro level, it could be individual decisions of employees and customers who must first ensure the safety and well-being of their families before focusing on their jobs or business commitments.

For example, contingency planning for widespread outbreak of a severe flu pandemic considers possible hospital employee absenteeism.  Under what conditions will employees continue to come to work? If they start showing symptoms, they are likely to stay home. This also applies to workers’ immediate families. As such, response plans emphasize contagion avoidance resources and plan for distribution of medicines to medical workers and their families. The point is to prevent the spread from snowballing due to a weakened healthcare response caused by absenteeism.

What if the “avalanche” is a crisis of personal finance? Here is a sobering reality: a majority of Americans report that a surprise expense as little as $500 would be difficult to handle. The next disaster will create a financial shock much larger than $500. Immediate payment to cover unexpected expenses could make the difference between an employee returning to work or moving away to start anew.

Outside our control?

Mass employee turnover or widespread erosion of customers represent hard-to-measure risks that can result in long-term impairment to both operations and brand. Fortunately, for risk managers, there is a supplemental form of insurance that allows an enterprise to mitigate these “external” or “unmitigatable” risks.

This type of flexibility is possible through ‘parametric’ coverage, which makes payments right away upon occurrence of a pre-defined event; that is, a parameter. Parametric coverage is ideal for external risks because payments are tied to the occurrence of a specific (usually low-probability) circumstance. Parametric coverage is relatively new, and until now, enterprises have typically used it to cover macro-level risks.

For example, an enterprise might work with its insurer to create a custom parametric policy that provides ‘X’ payment if there is a widespread power shutdown for more than ‘Y’ number days. In this way, parametric policies are a mechanism to internalize and manage risk that was previously external.

Likewise, parametric policies can be used to cover previously uninsured exposure at the micro-level: decisions of individuals on whom the enterprise depends. Consider that an enterprise could buy a group of parametric policies for each employee. After the event, impacted employees receive a pre-specified payment that they use at their discretion to meet their immediate needs.

Event types that provide the best balance of cost and payment for parametric coverage are those that are scientifically credible, plausible to most people, but nevertheless low-probability.  In addition, parametric coverage is best suited for the first layer of losses and immediate impacts, in amounts that everyone will need for something related to the event. It is not designed or intended to provide a windfall.

InsurTech: A risk manager’s new best friend

The availability of parametric coverage is one manifestation of how the InsurTech revolution is broadening the tools, resources and policy options available. InsurTech allows an enterprise risk manager to not only mitigate more risk types, but also to more efficiently compare and procure mitigation solutions, and to process claims faster and more accurately.

Through custom datasets, artificial intelligence and machine learning, InsurTech is igniting a virtual circle of broader coverage and lower premiums.

Another area of risk managed with new technology is the active construction site. IoT solutions (for example GuardHat, Pillar, Modjoul) are providing data streams that contribute to the new generation of machine learning and AI algorithms. One solution (Safesite) is driven by the belief that managing individual, specific worksite hazards can be crowd-sourced in real-time with a simple, user-friendly interface that takes inspiration from the most popular social and gaming applications. In this case, considering human behavior leads to the conclusion that risk reporting will be much more frequent via a slick smart phone application than via a physical bulletin board next to the coffee.

In the future, we will see insurance for enterprises evolve to become hyper-customized, with a menu of options to cover many more categories of risk. Continued product innovation will allow for customization based on cost, speed of payment and data availability, enabling an enterprise to mix-and-match to achieve their optimal coverage combination or cover new and emerging risks.

When an enterprise risk manager begins to incorporate innovative policies into their risk avoidance/mitigation strategies and insurance coverage, they will not only be able to manage formerly external risks, they will also demonstrate leading-edge commitment to employees and customers when they need it the most.

Kate Stillwell is co-founder and CEO of Jumpstart. Contact her at kstillwell@jumpstartrecovery.com. Chris Gallo is managing director and co-lead of the InsurTech Practice Group at Aon. Contact him at chris.gallo@aon.com.