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5 Ways to Make Risk Management Data Work for You

risk data management graphic

With more sophisticated data capture and data mining systems, companies can now measure their key performance metrics in an unprecedented manner. But how can the risk management community gain competitive advantage from this wealth of data? This article explores how to use your data to not only protect but also enhance your return on investment (ROI).

Over recent years many businesses have faced a relentless push to capture ever-increasing amounts of risk and exposure data. This has been driven by a number of pressures that include:

  • a broader understanding of risk by organizations

  • greater business and financial regulation

  • external corporate governance

  • internal management and performance measurement

  • the impact of a struggling global economy

  • the evolution of knowledge management into areas such as Big Data

  • a broadening focus on insurance and risk management

Companies devote extraordinary amounts of capital to grow their businesses. By utilizing the insurance markets, they seek to protect their balance sheets (and hence their vast investments) against adverse events. To ensure the most effective use of insurance markets, organizations must create and maintain data management tools. Five risk management best practices can deliver enhanced value from the wealth of data now being collected and ensure a positive return on investment associated with the technology and insurance program structure used to make the most effective use of total cost of risk investment.

1.) Risk analysis and modeling

While certainly not new, the combination of all available modeling techniques using quantitative and qualitative data is a significant step forward. Used together, capital-based risk modeling, loss forecasting and analysis, and technical pricing models help drive optimal program structures that blend the best priced external capital (insurance) with the most efficient internal capital (retention).

2.) Performance benchmarking

This allows buyers to measure their existing insurance and risk management plans against others of a similar size, industry sector, and/or geographic profile. Buyers can also assess prevailing positive or negative trends in areas such as rates, deductibles, capacity and coverage, and prepare strategies and arguments to counter or benefit from them. Also, benchmarking market appetite across particular industries (in terms of capacity and preferred attachment points) enables buyers to find the best return for their premium spend and achieve the most effective total cost of risk. These concepts are best demonstrated by client benchmarking in risk management software.

3.) Best-in-class data for underwriters

By imposing higher premiums, underwriters punish clients who leave them with uncertainty when reviewing their programs. Put yourself in the underwriters shoes, with a pile of specifications on their desk, would they favor a program that is well presented, addresses their questions and clearly displays an organization's control over risk or a program that is not presented in this manner? Organizations that consolidate, analyze and present their programs in a clear and concise manner reduce or eliminate underwriter uncertainty and thus have more accurate results at renewal.

4.) Driving the optimum structure

Creating the optimum structure requires robust, accurate data outputs from risk exposure analyses, risk modeling and benchmarking. These outputs help determine the efficiency boundary between risk transfer and retention: all companies take risks – it is the nature of being in business – but the most successful companies take risk where they get the best return. An optimal efficiency boundary combines best risk management control with the most beneficial price and cover from the market.

5.) Total cost of risk allocation

As a scientific and behavioral exercise, managers require quality data to manage and influence results and behavior across the company in a fair, flexible and transparent manner. For many organizations, the allocation of risk costs to the managers at these locations serves to reduce total cost of risk by creating responsibility. For example, if a location manager knows that if two more incidents occur to employees at their location in the current quarter, they will lose their bonus for the year. This incentive to ensure a safe workplace is much higher than when there was no financial incentive directly affecting this manager. This process is tried and true and ensures that the organization benefits because a safer workplace means less incidents, less claims and less costs, therefore, the total cost of risk is reduced.

 

Mar 8, 2013

 | Originally posted on 

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