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Brokers

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.

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“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.”

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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.”

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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.”

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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.

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“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

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]