What will risk control look like in the future?
How a company is positioned, its appetite for risk and an effective response to market conditions affects profitability.
For many clients, a primary concern is how to transform risk control to ensure that their program won’t fall behind the times over the next five years. Key industry players all share the same significant concern that they are not changing fast enough to meet current or future needs.
Complicating these matters is the fact that our industry is losing talented people at a shocking rate, the bench is weak, and money is in short supply for risk management. Very few companies are getting ahead of this.
What I find fascinating is why this is happening. Companies must find a way to redefine and align risk control resources with underwriting risk while overcoming the following factors:
One million dollars isn’t one million dollars anymore
I know how we all hate to sound like our parents, but the fact is a dollar just isn’t worth a dollar anymore. When I started my risk management career in 1989, a dollar was worth a dollar. A typical insurance carrier offered typical insurance packages with $1,000,000 limits. In 2018, we still offer the same $1,000,000 package, but that same dollar is only worth $0.50 compared to what it was nearly 20 years ago. However, many carriers have simply not adjusted risk control to these economic changes.
Small business competition
To complicate matters even more, the competition in the small-to-middle commercial space is growing. Larger carriers are entering the fray with simple and quick solutions, making prices continue to soften and creating slimmer underwriting margins. This market will need to find alternative risk management approaches that control costs and provide appropriate risk assessment.
How your company is positioned, your appetite for risk, and an impactful risk management response to these market conditions will impact your profitability now and into the future. As risk managers, it is our responsibility to influence the way carriers manage costs and balance risk. So what are your options?
- The tried and true: Current risk management programs are not going to go away, but they must adapt – it’s survival of the fittest. There will always be a need to personally and professionally interact with risk in the middle market. This is particularly true in specialty areas. For example, a recent study from the Center for Construction Research and Training at the University of Minnesota concluded that there is a “significant reduction in risk of lost-time injury after a single contact from a loss prevention representative.”
So how does your company choose to apply their precious resources in a meaningful and impactful way? The full-time risk control from top to bottom model just doesn’t work anymore. It’s simply too cost prohibitive. Carriers are shifting away from servicing small accounts, but exposing themselves to risks they need to manage and contain. They are leaving the underwriting door open.
- Low-touch or no-touch: Some carriers have lived with a low or no-touch option for years. It’s built into their model. They simply desk-underwrite smaller risks, using their low expense ratio from risk control for future losses. However, few carriers stay in their low exposure boxes.
As profits rise, the underwriting box predictably expands, and these carriers begin low-touching the loss-leading classes of business with expensive risk control services in hopes of staving off future losses. However, these companies often find themselves unprepared and without the capabilities to effectively provide low-touch services.
The result is just as predictable as the long tail for workers’ compensation. These carriers enter, exit, and then re-enter the lower-priced markets as the old losses gain momentum, hoping their newest venture raises the revenue bar long enough to stay in business. The lower touch model relies on analytics, but analytics haven’t delivered the results that have been projected.
- New talent pools: For larger risks, many companies use this low-touch method for large properties, specialty risks, or initial assessments. For smaller risks, it’s been utilized more for verification purposes or inspection. Great potential exists in the small-middle space where carriers can use current demographics as an advantage, rather than as part of a looming crisis.
Now is a unique time when great risk management talent is retiring, living longer healthier lives, and looking to be productive on a part-time basis. This talent can be repurposed to work in the small-middle space where there is less paperwork and more free time.
The key will be finding a vendor that can attract this talent capable of providing a quality product at a reasonable cost. The need for quality risk assessment, and the retirement crisis, could be an advantage to survey companies and their clients willing to pursue this opportunity.
- New methods and technologies: The capabilities of the modern consultant were inconceivable even a few short years ago. Mobile GPS consultants can remotely look up claims history, loss runs, and applications, all the while communicating with the underwriter in real time.
Going forward, technology will continue to be a game changer in the commercial space. To really take advantage of this opportunity, companies have to let go of some traditional practices. For example, I used to believe that the on-site risk management consultant could not be replaced. However, this will soon be an option for some small commercial carriers.
Putting it all together
The evolution of risk management will continue. Less than five years from now, automated data-driven AI solutions will be a component in every company’s arsenal. Thriving carriers will be managing costs and balancing risk by integrating a variable cost model into their small- and small-middle commercial business.
This will free up risk management capacity for full-time consultants, enabling them to provide impactful service and risk assessment in the true middle market that still requires boots on the ground. The number of options for the middle will be at an all-time high.
Now, and further into the future, carriers will be looking for a practical low-touch option for their less complex business. Some companies are just beginning to utilize such programs for their smaller business, and outsourcing the small-middle work to survey companies. They will be ready – will you?
Joseph Palermo, ARM, CRIS, is the assistant vice president of business development – risk control at EXL. Contact him at Joe.Palermo@exlservice.com.
For more information: