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Column: Roger's Soapbox

Could Have Been Worse

By: | December 14, 2017 • 3 min read
Roger Crombie is a United Kingdom-based columnist for Risk & Insurance®. He can be reached at [email protected]

Only claims made affect premium rates, right? Wrong.

British insurers use a central database, the Claims and Underwriting Exchange, to share data.

The Exchange records any inquiry about a loss as a loss. The moment you ask if you’re insured, the conversation becomes a “notification” and goes on your record as a loss report, even if you make no related claim.

Say you have pet insurance and accidentally set fire to your cat. You call to ask if the event is covered on your policy, but it is not, so you don’t claim and the insurer suffers no loss. As a result of the call, however, your premium rises, like the smoke pouring off your cat.

The Lloyd’s/RMS report said insurers should maintain an “alternative-claims book,” tracking hypothetical losses from near-misses and “could-have-been-worses,” multiplied by their probability. They might want to keep a “poor use of English” book, too.

Companies won’t discuss this matter publicly. That’s just how it is, so don’t call your insurance company if you suffer a loss and don’t know if it might be covered. Ask a friend or a palm reader — anyone other than your insurer.

In its defense, the practice of logging uninsured losses as losses is, at least, based on real events. But Lloyd’s and modelling firm RMS now suggest that insurers not limit themselves to basing premiums on actual losses, covered or otherwise. They should also price in fictional losses.

The Economist, which broke the story, reported on a near-miss between two planes taxiing at San Francisco airport. Had one pilot not pulled up sharply, the planes might have crashed into each other. As it was, he did and they didn’t.

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Underwriters, until now, based premiums on events that happened. Claims in the airplane insurance market have lately been low, and premiums are therefore falling. Can’t have that, said the report, advising underwriters to factor into their pricing “what if” scenarios. Insurance companies that fail to track and record such non-events are missing an opportunity, Lloyd’s and RMS stated.

For emerging risks, a lack of precedent makes pricing tricky. Many insurers would not write terrorism risk in the months following 9/11, for example, because of a shortage of historical terrorism data.

Sane underwriters took a similar line on cyber risk for a while, until just about every company in the world was hit, providing a basis on which to price the risk of it happening again, which is about 100 percent.

The Lloyd’s/RMS report said insurers should maintain an “alternative-claims book,” tracking hypothetical losses from near-misses and “could-have-been-worses,” multiplied by their probability. They might want to keep a “poor use of English” book, too.

Suppose Hurricane Irma had hit Miami. The chance of that happening at one point was about 20 percent. The hit would have increased estimated maximum losses by $100 billion (The Economist said).

In the alternative register, this would be recorded as an additional potential loss of $20 billion. Besides deepening the data pool on which underwriters base risk assessments, Lloyd’s and RMS argue, such calculations could help regulators submit catastrophe models to stress tests.

How sensible is all this? Not very.

Telling insureds who have never claimed on a policy that their premiums have tripled because of losses they did not suffer seems unlikely to help anyone, especially the industry, in the long run. (Slaps forehead, stops writing.) &

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]