Building Risk Engineering from the Ground Up: How BHSI Is Giving Underwriters the Confidence They Need to Tackle Risk

A lot goes in to creating a successful risk engineering practice. Experts from Berkshire Hathaway Specialty Insurance delve into how they’ve done just that.

By: Autumn Demberger | February 8, 2021

Topics: Risk Management | Underwriting

Risk engineering requires a dedicated team of professionals who not only understand the risks clients face but can also address those risks and communicate them to underwriters.

At Berkshire Hathaway Specialty Insurance, building its risk engineering practice started with a desire to make this communication between engineer and underwriter as consistent and clear as possible.

“As we set out to build the practice, we were guided by a foundational tenet of simplicity over complexity in order to drive consistency across North America and globally,” said Doug Johnson, vice president of risk control, energy and construction at BHSI.

That meant creating a system where the tools used, the grading system for risk factors, and the application of loss estimates all aligned across the organization.

“At the start, we had few systems and no tools,” Mike Rendich, vice president of risk control – general property, North America, BHSI, said. “A challenge, for sure, but also a wonderful thing, because we had nothing constricting us on what we wanted to do.”

Now, six years after the BHSI team began its risk engineering practice, the team is sharing what they’ve found to be the key steps to success.

BHSI’s Risk Engineering Beginnings

Crucial from the start, Johnson, Rendich and the BHSI team knew its risk control practice had to be in line with BHSI’s underwriting philosophy.

“We don’t buy reinsurance,” Johnson explained. “So, all the dollars that we place on a risk are net to BHSI. Therefore, we need to be extra diligent in our risk review process.”

Mike Rendich, vice president of risk control – general property, North America, BHSI

Added to that, the group started with just a few risk engineers.

That led to setting a main goal: Their job was to create a risk engineering review process that supported the BHSI underwriters and helped the underwriting team make informed decisions. At the same time, they needed to make the most efficient use of limited risk engineering resources.

“Risk control couldn’t be just a checkbox; we had to home in on the areas where we could add the most value,” said Rendich. “This required collaboration with underwriting to focus our resources where greater understanding was required to underwrite the risk.”

That started with drilling down on confidence.

Why Instilling Confidence Is Crucial to Risk Engineering

In the world of risk and insurance, certainty is all but certain. Things change and grow and shift every day, so staying on top of how the industry is evolving has become a key component of strong underwriting.

That is also why confidence has become a key metric for the risk engineering team at BHSI.

“Understanding a customer’s risk management culture can instill confidence in the underwriting team,” said Johnson. This requires BHSI to be comfortable with the third-party information on which the team bases its analysis. In addition to assessing the information, BHSI’s engineers are also evaluating information quality.

From there, the risk engineering team can provide underwriters with both the information and conversation starters they need to underwrite risk.

“It’s important that we’re transparent about what we know and don’t know when communicating our risk assessment,” added Rendich.

“Because we use third party sources,” Rendich continued, “we need to scrutinize the data in order to identify gaps in understanding.”

The Long Term Proposition

BHSI is committed to the long term and the team is building its risk engineering practice to support that commitment. It does this by ensuring a disciplined and consistent engineering approach across all regions and by continually improving the depth of the team’s understanding of customers’ risks.

“It is key that we are consistent in our engineering standards and processes,” Johnson said, which is why the team felt it important it have common applications, tools and deliverables across the globe.

“Being long term focused allows us the time to grow our understanding of the risks year over year and become more confident in the assessments we provide to underwriters,” Rendich said.

4 Key Elements to Building a Successful Risk Engineering Practice

According to Rendich and Johnson, four key elements are foundational in building a risk engineering practice and vital to its long-term success:

1) Support from Senior Leadership

“Having the support of senior leaders,” Rendich explained, “enabled us to have the latitude to do the things we needed to do to build the practice.”

This is something that came in on day one and has continued through today.

2) Collaboration

Working together didn’t stop with support of senior leadership. Collaboration between several departments was key.

Doug Johnson, vice president of risk control, energy and construction, BHSI

“This is an organization that has a non-siloed approach,” Rendich said. “Collaboration,” Johnson added, “goes beyond underwriting. We’re talking claims, actuarial, and our catastrophe engineering and analytics teams — everyone has to be a part of finding strategies and solutions.”

3) Bringing the Right People to the Table

“It is critical that early teammates bring a strong knowledge base and buy in to the company’s proposition,” Rendich said. At BHSI, risk engineers brought to the platform have all had extensive experience and a desire to be part of a team that could build a world-class practice.

“At BHSI, we seek teammates with both capabilities and character,” Rendich continued. “We are proud of the team we have assembled.”

4) Be Open to Ideas

With the team in place, senior leadership’s support and collaboration across multiple specialties, it is important that everyone is open to ideas.

“Again, it goes back to the non-siloed approach,” said Johnson. “As we’ve grown and developed, risk engineering has found success by being open to feedback from all stakeholders who share the vision of a forever company.”

Working to Continue the Wins

Looking ahead, Johnson and Rendich agreed that the next steps for BHSI’s risk engineering practice is continued development and improvement.

“We host an annual risk control meeting, in which we have the opportunity to bring together risk engineers from across the globe,” Johnson said. “That helps drive the consistency and collaboration piece.”

Even this year, with so many travel plans uprooted by the global pandemic, the BHSI risk engineers are planning global virtual meetings to keep the conversation going, with hopes of having in-person meetings again soon.

In addition, BHSI is constantly looking at ways to improve upon the processes it already has in place.

“We are comfortable scrutinizing our process, especially when losses occur,” said Johnson. “We work to make sure we’re making the best decisions, while recognizing that building a successful practice is an ongoing endeavor.” &

Autumn Demberger is a freelance writer and can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.