More than 20 risk managers representing trillions of dollars of balance sheet capital are already part of Russell’s Corporate Working Group, looking for new practical outcome-based solutions.
Increasing collaboration and transparency will be part of the connected risk response. In July 2022, Russell hosted an event entitled “How the insurance industry can assist corporate connected risk needs?” The discussion identified 10 key themes that we believe will help shape the industry going forward:
- (Re)insurers and corporates are siloed. (Re)insurers are siloed by product class and corporates are siloed by function. Both need to understand how end-to-end processes across the business are affected by events to ensure current and future resilience. We need to break down barriers to find ways of working that enable more collaborative approaches to risk sharing.
- The talent gap. A key requirement for brokers in the market is to get the best industry talent on board. Unless we get really talented, bright people who can provide solutions, we are going to fail because it starts with the talent.
- Finding capital. A key role for brokers is also to find capital, whether that’s traditional capital, alternative capital, third-party capital or insurance-linked securities. The equity and debt capital cost for corporates in some instances is almost twice as high as it is in insurance, so the insurance sector is well-placed to be involved in conversations that revolve around major capital-raising exercises.
- Delivering innovation to address capital risk. Where are we actually addressing the capital risk and thinking about this? If we can get the best people, really talk to our clients, innovate and bring capital, we will be relevant.
- Creating connected outcomes. We are still working on backing out specific risks, rather than the actual outcome. Because loss of network, for example, could come from loss of infrastructure, or a cyber attack threat, maybe non-malicious, there is a requirement to buy insurance for that outcome to protect my business.
- Aligning insurer solutions to business growth. The insurance industry is there to help you grow as a business, not to be there when things go wrong. Back to the whole concept of pre-event resiliency, utilising the insurance market’s capabilities, capacity and, in this world of data-driven information, harnessing that power to create new products as well as to use that capital to support growth. Promoting the concept of comprehensive insurance.
- One of the biggest challenges we face is climate change. Why? Because insurance is not long-term. Big corporates come to us for big long-term projects, but the industry works on an annual basis, which isn’t really supporting companies in their development. We have to be more long-term. Not what’s going on in the next 12 months, what are we doing over the next five years? What is the direction of travel, and how can we try and smooth out these peaks and troughs?
- Need to rethink insurance. Think like a software company, which deals with intangible products and services. From a technology and data point of view, we are creating new jobs: the data stewards, data curators, data owners. There is a new job and responsibility here. Now flip it over to the corporates, which often remain wedded to often outdated ‘bricks and mortar’ solutions. They are experiencing exactly the same problem in understanding the new intangible economy and opportunity.
- How do we recognise the correct data? How do we correctly analyse that data? We need to help individual risk managers one at a time versus a blanket approach. It is about having meaningful data but also there needs to be collaboration within the insurance industry to accept and agree what data we provide. Collaboration is the way forward and then asking for the relevant information as well.
- An approach that is shock-resilient. Many corporates are asset rich but cash poor. Do indemnity-based approaches sufficiently factor in the actual cost of both recovery, potential liquidity problems, being better prepared for the next shock and being more resilient to the turbulence that results from multiple shockwaves? The answer is, no. Build back better, build back quicker in your thinking. Be better prepared to absorb the shock and move on to the next opportunity.
As the global economy has become more interconnected, the risk landscape has become more complex. As a result, the frequency and severity of events that have an interconnected nature (i.e., ripple effects on other areas of the economy) are rising. Consequently, companies are facing direct and indirect consequences of trading in the interconnected economy. This has led to rising balance sheet exposure, as insurance isn’t covering most of the loss, which hampers risk taking as risk appetites are being squeezed, thus stifling opportunity.
We need a way of freeing up balance sheets to enable risk and encourage opportunities that improve return on equity. To conclude, in such an era of complexity and unknown risks, we need calculated simplicity. Hence, we predict the rise of outcome-based insurance.
Suki Basi is managing director at Russell Group