Shift in risk programs presents challenges & opportunities

Preliminary findings from the upcoming 2023 State of Risk report — which includes a survey conducted by Origami Risk during the fourth quarter of 2022 of roughly 300 C-level executives across insurance, risk, safety and compliance markets — indicates a shift in risk programs that may represent a major opportunity as well as a considerable challenge for commercial insurers. Those insurers able to leverage these trends, and the likely deluge of data accompanying them, are poised to succeed. Failing to adapt to new technology and gain insight from new data sources could be a significant missed opportunity.

New challenges, same pressure

The 2022 State of Risk report highlighted how organizations were, at the time, dealing with supply chain issues, expanding natural disaster and climate-related perils, the Great Resignation and increasing cyber threats. The looming threat of a war in Ukraine provided an additional layer to evolving risk management practices.

Survey data from the upcoming report shows that while those challenges remain, respondents have shifted focus.

This trend echoes themes from the annual Conference Board CEO Survey, which found the ranking of concern over a recession jumped from sixth to first with concerns over inflation making a similarly scaled leap to second place. The heightened focus on inflation and the potential for a global economic downturn has clear implications for commercial insurers — including claims fraud, which increases during economic downturns.

During inflationary periods, timely updates of property values and repair costs are critically important. Deloitte reported in its 2023 Insurance Outlook that, “As of May 12, [2022,] average replacement costs were up 16.3% — nearly twice the Consumer Price Index rise.” Commercial insureds struggling with values collection may make this situation worse with stale, incorrect data. Insurers that fail to manage this data effectively may undervalue policies and insufficiently fund reserves.

Several executives interviewed for the upcoming State of Risk report expressed a related concern, questioning if an economic downturn could magnify current challenges related to employee recruiting and retention. An economic downturn often precedes resource cuts that could negatively impact production and revenue. That, in turn, would make it more difficult to spend on recruiting and retention, leading to chronic understaffing.

Given studies showing that downturns have historically led to increases in fraud risk and that understaffing leads to burnout and increased safety issues, this feedback loop may directly impact insurers’ bottom lines. Insured organizations dealing with retention issues may increase the percentage of new hires in the enterprise, pushing up the likelihood of filing claims.

Thankfully, the State of Risk survey data also indicates that insureds acutely feel and are responding to the pressure of today’s risk environment and are pushing their organizations to “level up” risk programs in response. This trend is also likely to benefit insurers.

Forced evolution

The percentage of respondents who indicated that risk programs had the highest priority (a rating of “10” on a 1–10 scale) in their organization doubled from last year. The percentage of self-identified “leaders,” those with risk programs described as enterprise-wide and well-managed or optimized, also nearly doubled. Most importantly, even amidst global reductions in IT budgets documented by Gartner, a majority of respondents have maintained or increased IT spends for risk-related IT systems.

This forced evolution of risk programs — a response to years of increasing complexity and velocity of risk combined with current inflationary pressures and concerns about a possible economic downturn — matters to commercial insurers. Insureds with strong, well-documented risk programs are more likely to have the means to identify trends as they emerge and focus their mitigation efforts in the most critical areas. Stronger programs also help risk managers shift away from time-consuming administrative tasks such as chasing data. Instead, they are likely to spend time on more beneficial and rewarding activities such as root cause exploration, potentially reducing burnout in risk programs already stretched thin.

That commercial insureds are prioritizing leveling up their programs is good news for insurers. Exactly how they are choosing to reach that goal, however, could be pivotal.

Clarity through connections

Last year, a majority of State of Risk survey respondents indicated that they had no pending plans to connect their risk data to other systems in use across their organizations. This year, there has been a reversal. The average response across all risk technology (RMIS, ERM, EHS and Compliance systems) has flipped. Nearly two-thirds of respondents in the current report indicated they are planning for additional connections.

This turnaround highlights the desire to break down silos and gain greater context by connecting data points from multiple departments. At a minimum, this means volumes of granular data will be available to aid organizations in decision-making and real-time analysis, while offering insurers new opportunities to better evaluate and properly price risk.

Commercial insurers have a vested interest in customers willing and able to use their data to lower their risk profile. In certain scenarios, however, there could be too much of a good thing. For example, when insureds attempt to connect data using a patchwork assortment of apps in an increasingly interconnected risk environment, the competing applications erode data confidence by effectively eliminating a single source of truth. This could spell trouble for insurers hoping to get better clarity on insured data used to underwrite the very risk it’s meant to illuminate.

According to the 2021 State of SaaSOps Report, the average number of SaaS applications a typical organization uses ballooned from 8 in 2015 to 110 in 2021. Each additional application used by a commercial insured means more data sources, more effort to reconcile that data and less confidence that any individual app can serve as a single source of truth. It also buries insights that could prove valuable when underwriting new policy risk. As app data proliferates, commercial insureds risk becoming data-rich and insight-poor.

Data overload

The upcoming State of Risk survey reveals that commercial insureds are seeking new ways to combine data across the enterprise. A majority of respondents were interested in solutions, in the process of purchasing them or already had solutions in place for tapping artificial intelligence/machine learning (AI/ML) risk-assisted management solutions. While insureds leveraging this technology could fundamentally change the scope of data available for the underwriting process, this would require investment in technology for underwriters to process and analyze new, complex data sets — and the agreement and buy-in of insureds to supply such data.

Even without AI/ML risk solutions, there are indications that commercial insureds are already starting down the path of more data. A 2020 Verdantix study sponsored by the National Safety Council examined the use of health and safety technology through a survey of EHS professionals. Nearly half reported using sensors and detectors, more than a third were using dedicated software and more than one in four had deployed wearables. Each of these solutions brings more data, often unstructured, to the table.

Collectively, these potential sources of data could prove enormously helpful in better understanding the risk of each insured. Utilizing that data will require insurers to be up to the challenge of processing and analyzing those new data sets. Other sources cast doubt on that scenario.

Are carriers ready?

Despite indications that the insurance industry continues to invest in modern technology stacks, there are signs that many insurers have not fully unlocked the promise of internal data, let alone new types of insured data sets:

“… even though data has been the industry’s lifeblood since the first actuary was hired, the ability of many insurers to refine their most basic raw material and produce more impactful insights has likely been hindered by a lack of long-term strategic frameworks and the integration of systems to support them. One insurer interviewed said, ‘We still treat data more like the plumbing,” while another described data as “more of a commodity.’” [Deloitte Insights]

Yet the pressure is on for the insurance industry to work more cooperatively with their customers for better quality and quantity of data. The “talent drain” that has plagued the industry is projected to only worsen. BLS data shows a net contraction through 2031 of projected employment figures for underwriters, adjusters, claim processors and every other insurance-related role except for agents and sales. As considerable institutional knowledge exits the profession and the pipeline to replace it shrinks, it may become increasingly necessary to “connect the dots” of the new data insureds are generating and strategically leverage it moving forward.

Seeing the end state

In her State of Risk interview, Kathy Freyman, chief innovation officer for Inspirien, provided an idea of what a reimagined relationship between commercial carriers and those insured organizations who have built stronger risk programs could look like:

“Insurers talk all the time about remaining relevant. Potential clients can get their medical malpractice coverage, their workers comp coverage, etc., from anybody — they can just go to the next person on the list. So we have to ask, ‘What problems are they actually trying to solve?’ And even if we aren’t the solution, ‘How do we help them invest in what that future looks like?’ When they see us as that type of resource, they’ll buy their coverage from us because they see a partner that they want to have and someone that is really looking out for their best interest.”

Becoming that resource for insureds will require technology that not only delivers a more consumer-like digital experience, but also provides a way to intake new types of risk data that can aid in underwriting and claims while also returning data and information that helps commercial insureds drive down their risk.

One way to approach this could be with a single platform solution that not only integrates insured and insurer cross-functional data, but also allows greater data exchange between the two sides. What’s clear is that how far each group gets on that journey may largely be driven by how well the other deals with their tech challenge.

Origami Risk provides industry insights into the State of Risk on an annual basis as a free resource to both insurers and their insured customers. A copy of the 2022 State of Risk report and a waiting list sign up for the upcoming early release of the 2023 State of Risk report is available now.

Christopher Bennett is core solutions president of Origami Risk. He has over 14 years of direct RMIS experience in client service, sales and product management.

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