Are you going to swim against the current?

Stepping into the office and expecting one day to be like the next is a luxury that many CEOs in South Africa are seeing fade off into the sunset; particularly when it comes to the financial services sector. Business unusual is a catchphrase that has become common within our industry and highlights the need for risk management. This is a topic that was discussed at an Insurance Institute of Gauteng (IIG) Insights Seminar which focused on risk management.

Structural changes

Clyde Troup, Head of Market Underwriting at Discovery Business Insurance, pointed out that most of the changes that companies are currently facing are being driven by structural changes to the business environment. This includes aspects such as technology, social media, the economic and political climates. 

“In addition, what we have seen over the years is that the source of value for firms has shifted drastically from creating value using tangible assets to now creating value with intangible assets. In 1975, less than 50 years ago, 83% of firms were creating value through tangible assets. Looking at 2015, we have seen a massive shift where only 13% of firms still get value from tangible assets with the other 87% from intangible assets. This is risk management on a large scale,” said Troup. 

From these changes of new macro trends affecting businesses as well more companies’ source of value from intangible assets, we have seen that the major risks affecting companies over time have changed over the past few years. 

“We can see that risks like fire and explosion, used to be very high risks are not the biggest risks for companies anymore. Risks like cyber, damage to reputation and new technologies, which were small (or some non-existent) a few years ago are now some of the main risks affecting companies,” said Troup. 

Exposure to evolving risks

The risks that companies face are changing. This is having a major impact on the insurance industry from an insurer, broker and policyholder point of view. 

“Looking at risks companies were exposed to in the 1960s, which were covered by commercial insurance policies included fire, business interruption, theft and accidental damage to building and equipment. However now companies are exposed to so many more risks which include cyber risks, social media, and reputational damage,” said Troup. 

Risk engineering

With this new evolving environment of new risks faced by companies, the need for risk management and therefore risk mitigation has never been more important and essential for companies. 

“Therefore, more and more companies are insuring themselves now. We also see that the need for risk management from an insurers point of view has never been higher. This is necessary to ensure that they are sufficiently covered to provide the policyholder with appropriate cover,” said Terashni Pillay, Head of Risk Engineering Discovery Business Insurance. 

She added that risk engineering is a crucial step for underwriters to use to better understand a risk and therefore put the correct protections in place. “The process is that the risk engineer will visit the client and collect as much data. They then need to analyse the data and create a risk engineering report.  This report is then used by underwriters to become risk aware and understand the risks the client faces. Armed with this knowledge, the underwriter will then come up with risk mitigation solutions to protect the company,” said Pillay.   

If the underwriter feels they have enough information and can put enough protection in place, they can then decide to accept the risk and write the business. 

Driven by technology

It is ironic that technology will be the main lever that insurers will use when addressing the new risks that clients face. It is ironic because technology is itself one of the biggest risks that insurers currently face. 

Technology is only a risk if insurers make decisions based on unrefined Big Data. To enhance this data, Pillay pointed out that insurers will have to rely on artificial intelligence and machine learning. 

“Machine learning is used to enhance traditional modelling methods. For example, machine learning algorithms can capture trends within the errors of traditional generalized linear models (GLMs). This is possible as machine learning algorithms search a far wider and deeper space than traditional models. As a result, this reduces human bias, increases accuracy and extends the possible tasks that companies can complete as they can build more complex models. In addition, machine learning tools enable companies to find better correlation between factors affecting risks at a deeper level,” said Pillay. 

She added that with all the extra information gathered, insurers have a far more holistic view of the client and can charge the client accurate premiums commensurate of their risk. 

Editor’s Thoughts:
Technology is only a risk if insurers do not embrace it and fail to see the value that it can provide. The question then becomes: are you going to swim against the current or with it? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.