New techniques boost underwriting accuracy
Assessing risk isn’t easy. It’s a complex, intricate framework that could be compared to a Rubik’s Cube: lots of layers and lots of ways to interpret.
But insurance companies have a new way to analyze and simplify the risks faced by their clients. It’s called “risk mapping,” and it works, essentially, by breaking potential risks faced by companies into simple, manageable bites.
“It’s creating a common language, a common risk language,” said Thomas Quigley, Northeast tech and telecommunications practice leader for Marsh, the world’s largest insurance broker, with an office in Providence. “And there really are no drawbacks.”
Risk mapping is part of the broader practice of risk management – assessing the risks a company faces with regard to its facilities, supply chain, products or employees and trying to minimize exposures through preventive measures and insurance.
Mapping is a relatively new tool, Quigley said, used by “a very small percentage of companies” in the industry. But more are showing an interest, he pointed out, because risk mapping makes risks easier to understand.
Visually, risk maps allow people to see how their company’s risks break down and what they physically look like. It also enables them to prioritize risks, Quigley said, because assessments include both the intricate (property, transit or environment) and the simple (business interruptions, errors or omissions).
In Marsh’s risk mapping, certain risks are given designated colors – green for insured, yellow for partially insured and red for uninsured – and are charted on a table based on their severity. Projections of the highest possible and lowest possible premiums are also plotted out on data tables.
In the end, that information allows companies to better dissect the issues of risk and more easily reach an agreement about how they should be managed, Quigley said. The cost, severity and likelihood of each risk are mapped out, so it’s easier to assess what risks should be underscored. When it comes to accountability, mapping also creates a solid template to work from.
Another benefit, according to Quigley, is that mapping starts a dialogue between suppliers and business partners. In turn, that can create a more streamlined network, he said.
“Case by case, once you put it up in front of investors, they see it, they understand it, they’re getting into the bigger issues,” he said.
Companies can make judgment calls about what areas of the business will or won’t be insured, he said. Or they can create a rationalized approach to risk management dollars and how to better spend them.
Some businesses might also decide to absorb costs rather than insuring a certain risk; that can free up resources to deal with other issues or to further blanket more significant risks.
Simply put, “it allows for better allocations of risk prevention capital,” Quigley said.
But it doesn’t always have to be used on such a grand scale, according to Joe Fitzpatrick, senior vice president of Aon eSolutions. Risk management technology can also be utilized to hone in on certain areas of the business, he said. For instance, companies can assess risk when it comes to building construction, value or contents. Environmental issues, such as earthquake or flood risks, can also be looked at.
“We can slice and dice it whatever way they’d like,” Fitzpatrick said.
He explained that Aon uses a “risk console” that dumps information into a consolidated database. When that information is processed, it can help companies to understand what’s occurring and why, he said. In the end, it allows them to adopt preventive training and work to decrease losses.
“Most of our customers tell us they have so much data, and without a tool like this, they’d be swamped,” he said. “This allows them to create information they can act on and prevent incidents from occurring.”
Risk management technology, when coupled with high-resolution mapping systems, can also be used to predict which companies are likely to face environmental disasters.
Dennis Charland, executive director of the Independent Insurance Agents of Rhode Island, said insurance companies nationwide are mapping storm damage risk with the aid of an intricate mapping process that integrates laser scanning and global positioning. The information derived from satellite systems is then used to calculate risk.
Any piece of property can be dissected that way, Charland said. Mapping systems can determine how far the property is positioned above sea level and what the potential is for flood, hurricane or windstorm damage. Certain topographical features that might make one area more vulnerable than another can also be pinpointed, he said.
“It allows them to identify this stuff in advance,” Charland said – “to anticipate it.”
Essentially, he explained, the information allows insurance companies to be much more exact in their underwriting.
“When they use technology for mapping, they can be very precise and know what you’re going to face literally on two different sides of the street,” he said. “It’s a way of being very precise in setting the rate for a particular exposure.”
