Modern risk management helps brokers
A shift in risk management focus from documentation, governance and reporting to performance and outcomes has the potential to deliver a triple-win for broker, client and underwriter. This was the central message carried during a keynote address to the recent Institute of Risk Management Southern Africa (IRMSA) conference.
A favourable risk management future
In a rare appearance at a live conference, Alex Sidorenko, Group Head of Risk, Insurance and Internal Audit for Serra Verde Group, encouraged the audience to work towards a favourable future in which the risk management discipline delivered tangible cost savings alongside optimised resource utilisation. His hope is that risk managers realise their power to “fundamentally change the way businesses operate” by making a tangible, visible difference.
Sidorenko boasts impressive risk management credentials. He serves as head of risk and insurance at a large mining firm, having previously performed the same functions at one of the largest fertiliser companies in the world, and before that, in the sovereign fund realm. He is also the founder of Risk Academy, the biggest YouTube channel dedicated to risk management, including a catalogue of over 1000 blogs. The presenter has consolidated this unparalleled knowledge base into a set of artificial intelligence (AI)-backed tools that significantly outperform the main large language models in risk management tasks, and assist in his day-to-day decision making.
The presentation offered an interesting analogy to illustrate how risk management, by addressing volatility, leads to huge cost and time savings and significant improvements in profitability. “If risk managers were superheroes, then volatility would be our arch nemesis,” Sidorenko said, adding that uncertainty made it difficult for businesses to budget, forecast and plan. He illustrated how the introduction of steel shipping containers in the mid-1960s decreased the cost of global shipping 100-fold and reduced the time to delivery from eight days to 11 hours.
Innovating for cost and time savings
This single innovation introduced cost and time efficiencies across the board, from shipping, to loading, to damage or theft of goods in transit, to insurance costs; and it led to a huge surge in global trade. “Doing good risk management reduces the volatility, and reduced volatility introduces significant growth into our industries,” Sidorenko explained. He noted that lower volatility contributed to stable, predictable operational performance and a more transparent understanding of risks, both contributing to better risk pricing.
This realisation is gold for commercial risk managers and their insurance brokers because the better you understand your risks, the easier it becomes to mitigate them or transfer them via insurance. “You have to be able to explain your risks when you are trying to transfer them,” the presenter said. “If you do not do that, then the counterparty is going to charge you more … they will put more contingency into the calculation, and your cost of capital goes up.” You have to show that your risk management programme is sound to lower your cost of capital.
The presenter encouraged businesses to reduce cash flow volatility while defending against the negative impact of catastrophic events like cyberattack, fire, port congestion or other long-tail shocks with the potential to disrupt the business plan. Sidorenko shared three focuses that will inform the future of risk management. These include smarter insurance buying; reducing costs by addressing volatility; and reintroducing the concept of optionality. Excelling at these three focuses demands close collaboration across the insurance, risk management and treasury disciplines, in addition to having business continuity and recovery plans in place.
The right cover at the right price
Smarter insurance turns on achieving the right level of cover for the right perils and at a fair price while reducing the consequences of tail events. It turns out that a disciplined insurance programme coupled with sound risk management can trim millions of dollars from your insurance premium without sacrificing coverage. In Sidorenko’s experience, his firm was able to trim over USD 13 million in premium while tripling coverage, removing unwarranted exclusions and reducing deductibles.
To precis his argument, your understanding of the underlying risk, coupled with your ability to sell that risk to underwriters, will yield a much better price. From the broker’s perspective, this ‘selling’ includes explaining why your client’s risk is different from the industry average, why your client’s controls and mitigations reduce the chances of adverse events happening, and how your client’s recovery procedures are better and stronger than the industry average. At first glance, brokers and insurers might be miffed by a reduced premium outcome, but the reality is that a stronger insurance posture improves outcomes across the value chain.
As an aside, this was the first time that your writer truly appreciated the role that a commercial broker plays in the broader risk management process. Your job goes far beyond simply scrolling through a list of assets and potential risks and then matching these to the business lines your preferred underwriters offer; it involves being actively engaged in a process that gets to the heart of your clients’ risk requirements. As an added bonus, there is nothing better for risk managers than presenting tangible insurance-related cost savings to their boards.
Addressing volatility across expense lines
The second risk management focus demands looking at company cash flows and finding those risk-related consequences that can be improved.
“These could be due to fines, unplanned maintenances, excessive use of raw materials, spikes in logistical costs; whatever the cause, there is an opportunity for risk managers to get involved, investigate the issue and change the business process to make it risk-based and reduce the volatility going forward,” Sidorenko said. He warned that firms operate in a world where every assumption leads to a range of possible outcomes; the world is not deterministic, but stochastic.
Finally, reintroducing optionality requires that a risk manager be present to consider the trade-offs arising from critical business decisions. The presenter explained this concept in the context of deciding where to locate a new manufacturing plant. Engineers might want the plant to be on a site close to the existing facility because it reduces the complexity of the build and costs. But risk managers might argue for a more distant location to reduce the risk of damage consequent to explosion or fire at either facility.
According to Sidorenko, “if there is a risk manager in the room, or if there is a methodology or process that requires risk thinking to be switched on, then the choices will be significantly better.” There are countless tools available to risk managers to assist with this type of decision science. He closed this section of the presentation by summarising the three focus areas that both broker and risk manager should aspire to, and this seems as good a place as any to wrap FAnews’ coverage of proceedings.
Aggregating clients’ risks
He expanded on the risk management focuses shared earlier in the conversation, starting with the need to reduce tail exposure by buying better and more cost-effective insurance, by improving business continuity and by hedging risks wherever possible. Second, you need to introduce stochastic thinking into the way companies operate by acknowledging that most outcomes occur across ranges. And third, you need to use a sensible, scientific approach for aggregating these ranges to allow for optionality, or the comparison of one decision with another.
Writer’s thoughts:
Smarter risk management and insurance buying could see your clients paying less premium for better protection. Are brokers ready for the trade-off? And is this not a perfect illustration of the distortions that commission-based remuneration introduces? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
