Hacking the Human Brain: How Cognitive Science Helps Mitigate Risk

New technologies drawing on behavioral science know when you're about to make a mistake.

By: Katie Dwyer | July 18, 2018

Human behavioral tendencies and individual decision-making factor largely into any organization’s risk profile.

The urge to look at a flashy billboard distracts a truck driver just long enough to cause an accident. Simple forgetfulness causes a retail worker to neglect to set his store’s alarm system when he closes up for the night. The desire to act quickly on an urgent request from the boss drives an office worker to wire a sum of money without verifying the request.

All of these losses are avoidable, but even the most comprehensive employee training can’t re-wire the brain to prevent mistakes 100 percent of the time.

Enter Behavioral Science

According to a recent Deloitte report, “The future of risk,” behavioral science is “the study of human behavior through systematic research and scientific methods, drawing from psychology, neuroscience, cognitive science and the social sciences.” Businesses are turning to its methods to identify the thought processes and biases that drive people to make risky decisions, and how those behaviors could be modified.

“There are two levels where behavioral and cognitive science can be applied to risk management. The first is making normal risk management processes more efficient and effective. The second is, more broadly, allowing decision-makers to better identify opportunities worth pursuing,” said Dilip Krishna, chief technology officer and a managing director with the Regulatory & Operational Risk practice at Deloitte & Touche LLP.

Krishna said natural language processing technologies can be used to apply the principles of cognitive science to employee behaviors. According to analytics software provider SAS, “natural language processing is a branch of artificial intelligence that helps computers understand, interpret and manipulate human language.”

A scan of employee emails might, for example, be able to identify when a worker is overly stressed just by the tone or language he uses.

This includes data that exists in Word documents, Excel spreadsheets, emails, texts and images — formats workers use to communicate but which computers do not easily interpret. Natural language processing can recast that data so computers can better understand it, allowing risk managers to tap into broader insights.

A scan of employee emails might, for example, be able to identify when a worker is overly stressed just by the tone or language they use.

“People under stress are more prone to making mistakes,” Krishna said. That insight offers an opportunity to intervene and head off mistakes proactively.

Predicting Employee Cyber Risk

Nowhere might this technology be more relevant than in the realm of cyber risk — specifically in the form of social engineering.

This form of theft or infiltration is built around manipulation of the mind and so offers the greatest potential for cognitive science to make improvements.

Tokyo-based technology company Fujitsu has already put this in play.

An enterprise-wide platform uses psychological profiling to identify the employees most likely to be tricked by a fraudulent email or link, based on how often they click links from emails, how quickly they respond to emails and their behavior while browsing the web. The organization can then provide additional, targeted training for those employees.

Pros and Cons of Cognitive Science Tech

But some employees might perceive those interventions as an unwarranted or unfair overstep. According to the Deloitte report, employees might “see behavioral interventions as an impingement of free will,” and organizations face the “risk of regulatory action in case of perceived misuse of behavioral intervention.”

“The world was built by humans for humans, but if we can take the way that computers think and apply that type of thought processing to the way we work, we can unlock a lot of insights.” — Dilip Krishna, chief technology officer and a managing director, Deloitte & Touche LLP

Still, Krishna said the long-term benefits of such technology from a risk management standpoint could be significant.

“The world was built by humans for humans, but if we can take the way that computers think and apply that type of thought processing to the way we work, we can unlock a lot of insights,” he said. “There’s potential for anywhere from 20 to 90 percent improvement from a risk profile perspective.”

In addition to employee and regulatory pushback, slow return on investment is also a roadblock. Despite its potential to reduce risks, Krishna acknowledged that parsing through complex human thought processes devising successful interventions takes time to get right.

But behavioral science has less-controversial applications in risk management as well.

“Design thinking” can train executives to overcome personal bias in decision-making, in pursuit of a more objective and thoughtful view of new business opportunities. This type of behavioral intervention helps business leaders take advantage of the upside of risk rather than avoid the downside, addressing the “second level” of risk management, as Krishna described.

As the amount of data grows exponentially and AI becomes even smarter, applications of cognitive science certainly have a place on risk managers’ radar. &

Katie Dwyer is a freelance editor and writer based out of Philadelphia. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

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.

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