Can Brokers Keep Pace?

The rapid rate of change in our ever-more-connected world challenges brokers to anticipate new risks.
By: | October 15, 2016 • 6 min read

Technology and globalization offer opportunities for innovation, expansion, increased efficiency and improved customer service. But they also involve a rapid pace of change — and evolving risks — that keep every company on its toes.

“Changing global landscape, economy, regulatory environments, technology … this is changing the way companies manage both their financial and human resources,” said Tim DeSett, executive vice president of risk practices, Lockton.


“For brokers, this is really a transformational opportunity.”

The traditional role of the broker is transactional. A company hires a broker to buy insurance. But that model has been changing for years, with brokers becoming consultants and risk advisers in addition to procurers of policies.

“The traditional ways are shattered,” said Mary Ann Cook, senior vice president, risk and insurance knowledge group at The Institutes, a leading education provider for the industry.

“Those brokers that come to terms with that more quickly will be the ones out in front.”

But if brokers are to be effective risk consultants, they have to be a half-step ahead of the pace of change, anticipating the challenges their clients will face and understanding what mitigation strategies best fit their long-term goals and capabilities.

That takes a mix of forming key relationships and expertise within a client’s industry, and gaining a deep understanding of data.

Broker as Expert Consultant

“The best brokers are businesspeople,” said Brian Elowe, managing director, global risk management, Marsh.

“In a fast-paced world, I don’t see how you can be an effective adviser to a client without specializing in their industry. Client organizations have higher expectations that they won’t have to train their broker, but that the broker will bring insights to the table.”

To best understand a client’s risk, it is incumbent upon brokers to familiarize themselves with every aspect of the client’s business, from macro industry trends, to the regulatory environment, to the strength of its competitors in the market, and down to the nuts and bolts of their operations and financial standing.

Mary Ann Cook, senior vice president, Risk and Insurance Knowledge Center, The Institutes

Mary Ann Cook, senior vice president, Risk and Insurance Knowledge Center, The Institutes

Today, brokers also have to take into consideration a broad range of issues like the impact of increasingly unpredictable weather, migration patterns and political climate, impending local regulatory changes, and the now eternal question of data security. Conversations with experts are often the easiest and most reliable way to stay updated on broad trends.

The Institutes, in the course of assembling its seminars and educational materials, seeks input from policymakers and legislators, regulatory bodies, the NAIC, various conference attendees, social media platforms and multiple advisory groups.

Additionally, “belonging to industry associations is a great way to ensure you’re around the conversation of what those businesses are facing, and what strategies they’re developing in response,” Elowe said. “Our account executives are really experts in health care, technology, real estate or whatever sector they’re serving.”

Marsh works with several organizations to put together its annual global risk report, which is presented at the World Economic Forum each year.
Elowe described the process of consulting with leading economists, often working with the world’s top universities, as “an opportunity to challenge our thinking and get a better idea of the conversations we should be having with our clients.”


That in-depth understanding is critical if brokers want to get the attention of the C-suite.

“To have a conversation at that level, we need to translate our risk management initiatives into language that relates to the company’s goals and objectives, and what global resources are available,” DeSett said.

“To do that, we have to know what they’re saying to Wall Street and to their shareholders.”


The broker’s role as a consultant also involves adjusting to greater demand for alternative risk transfer strategies that don’t involve insurance. Emerging exposures like cyber, climate, political and reputational risks are often difficult to insure in the traditional market, pushing more risk managers to look for creative ways to retain it themselves.

“As a broker, it’s about ensuring capital efficiency and helping clients set up internal finance mechanisms to prepare for risks that may not be insurable,” Elowe said.

“Pooled risks and captives are situations where a broker wouldn’t be involved in a transaction, but would fill a role providing guidance to clients on how to utilize those models,” said Cook of The Institutes.

Leveraging Analytics

Big Data and predictive analytics also are useful tools in identifying emerging risks and vulnerabilities, but could also be a stumbling point for brokers as technology continues to evolve.

“Big Data is an incredible asset and opportunity to leverage, but takes a lot of energy to manage and can also be a distractor,” DeSett of Lockton said.

“Predictive analytics is a tool that should be a part of a broader strategy of measuring potential outcomes of potential risks.”

Tim DeSett, EVP, Risk Practices, Lockton

Tim DeSett, EVP, Risk Practices, Lockton

To paint a picture of just how rapidly data has grown as an asset for businesses, the McKinsey Global Institute (MGI) estimated that U.S. retailer Wal-Mart’s data warehouse in 1999 held about 100 terabytes of stored data; by 2009, nearly every sector in the U.S. economy was gathering and storing at least twice that amount.
Fifteen of 17 U.S. sectors have more data stored per company than the U.S. Library of Congress, it said.

McKinsey also projected 40 percent growth in global data per year, although with only 5 percent global growth in IT spending, according to its 2011 report, “Big Data: The Next Frontier for Innovation, Competition and Productivity.”
The insurance industry in particular not only has access to large amounts of data gathered from policyholders, but also the analytical talent to process it in its field of actuaries.

The study by MGI analyzed nine occupations that require the skills needed to execute big data analytics and in what industries they could be found, based on reporting by the U.S. Bureau of Labor Statistics.

Insurance carriers employed more of these individuals than any other segment included in the study, which also included telecommunications and internet service providers. In 2009, insurance carriers employed about 18,400 people considered to have “deep analytical talent;” the runner-up, scientific research and development, employed 13,000.

The report concluded that the financial services and insurance industry is “positioned to benefit very strongly from big data as long as barriers to its use can be overcome.”


Brokers have the opportunity — the obligation, even — to tap into carriers’ wealth of data and analytical talent.

“It will be critical to partner with a carrier willing to work with brokers on the analytics side,” Cook said.


“The data wars are coming. Brokers have to be able to capture it and work with it better; don’t defer an obligation to help clients build out an insurance program today that is comprehensive, flexible and integrated with data analytics.”
DeSett said, however, that barriers to effective use of data analytics are significant. The ability to store large amounts of data and run analytical software requires heavy investment in technology updates and training.

Aggregating large amounts of data is a useful tool for spotting trends, Elowe said, but it remains difficult to “get out in front” of emerging issues. Even those organizations with access to data and the talent to utilize it will struggle to keep up with new analytical tools and techniques.

For now, brokers’ predictive capabilities may be behind the pace. But this may be an even stronger reason for brokers to, as Elowe advocated, “Get a higher level of understanding of the business first, risks second.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of He can be reached at