Original version of the article by Stephan Dorner can be found in the magazine: Die Versicherungspraxis (GVNW), issue 12-2022/01-2023
Can you also find the right insurance solution? Depends on how you communicate your risk!
Yes, you have read it correctly! It's actually about the right insurance solution, and about the main component of an insurance solution - risk! How does this actually relate to communication? What is required for a good insurance solution? And why do unexpected results often occur? Many questions that arise when you set out on the road to alternative risk transfer. Questions that ultimately determine how good an alternative risk transfer solution is and how great the chance is that price/performance in the deal will correspond and all parties will feel properly understood and taken care of.
"Just a normal Day...!"
A normal day in our lives might look like this: Getting up, washing, breakfast, work, sports, family time, dinner, ... similarly, the day of an industrial company also looks like this. This also adheres to usual daily routines such as: Raw material delivery, storage, quality control, production supply, various processing activities, assembly, packaging and finished goods storage. One would not necessarily immediately think of risk potential in any of these enumerations. More likely, one would think of success, earnings, health and enjoyment of life. Nevertheless, there is a certain risk potential in these daily routines, whereby this is quite normal and natural for most of us. You don't think about it; it's just part of it.
However, a doctor or an insurer sees it differently. These professions have a daily routine filled with stumbling blocks, accidents, fires, broken machinery, interruptions to operations, etc. And this is where it comes to bridging the gap with communication. Technical terms and complex explanations of his condition are unlikely to provide the patient with sufficient information to enable him to take the right actions. The insurer also has its own language for communicating various risk circumstances and sees risk potential from a different perspective than an industrial company. Technical terms such as single pair Ethernet, cross-functional, FLEXA fall from the sky in conversations with professionals without further explanation or more precise definition. This is the cornerstone of initial communication difficulties, and creates a great deal of tension between industry and insurance, which is filled with misunderstandings, and can produce unsatisfactory risk management results for complex operations.
Squaring the circle
Communicating risk potential is as complex a subject as a doctor's diagnosis. This diagnosis must be formulated in a language that other processors of the information can also understand. In the case of the physician, that would be surgeons, radiographers, or pharmacists. Things would probably turn out badly if these professional groups did not communicate with each other in an understandable way. In the case of an industrial company, it's very similar. Many responsible people communicate complex risk potential across departments, often without these stakeholders being aware of it. This internal communication works very well because there is a common understanding about the issue or activity. Risk assessments are coordinated internally and the risk management of day-to-day activities is part of the normal course of activities and therefore does not stand out.
In addition to the communication stumbling blocks, there is of course the risk potential for us to consider.
But be careful, this is not about risk potential that is intended for a risk transfer! There are other risks to be considered which have a high potential effect. In other words, risks that have a low probability of occurrence, but whose occurrence can be really painful and endanger the continued existence of the industrial operation! These risks include fire, natural hazards, liability risks, machinery breakdown damage, cyber attacks and more. Not only can these catastrophic events cause high costs, but - as risk on mind® knows best - they can also make wide waves. All risks related to business interruption pose special threats - and these risks involve another stakeholder group - the insurance company.
"The risk bearer is the policyholder..."
...and the latter knows best about his risk potential, even if his view is different from that of the insurer. This is also what is "supposedly intangible" about risk potential - the viewpoint and the experiences that have been made with risk. Risks that are seen as uncritical by the industrial company may be seen very critically by the transfer risk carrier, the insurer. This may be for a variety of reasons: Experience with comparable risk potential, uncertainty about the activity, uncertainty about a possible loss outcome, and similar factors. In addition, there are differences in understanding of expressions, wordings and terms, and there are differences in understanding with regard to the probabilities of occurrence and the possible extent of damage.
Insurance companies have a large number of operations in their portfolio. The quality of their portfolios depends heavily on the individual risk circumstances of each business. Inadequate or unclear risk communication therefore often leads to coverage deficiencies, underwriting bottlenecks and demands for risk improvement that do not necessarily fit the risk object. This in turn jeopardizes the underwriting market position of industrial companies and also significantly limits the range of insurance available on the market, which in turn leads to unfavorable conditions.
It must become clear to all players - communication deficiencies are homemade - and therefore also very dangerous for the underwriting continuity of any company. Once the risk-related reputation on the insurance market has been damaged, it becomes very difficult to find insurance partners on a trusting level who perceive the original communication deficiencies as such and trust new representations.
Chicken or Egg?
And in fact, that's what it's all about: identifying risks properly and objectively, analyzing them, evaluating them, and ultimately managing them in one's own interest. As soon as one's own understanding of risk has been sharpened, it is also possible, detached from subjective impressions, to establish a uniform understanding of risk with other interest groups - policyholders and insurers. Because first in this context, always the risk is to be considered - how it is to be transferred, is a subsequent history! And here, the right preparation and communication is the cornerstone for optimal cooperation in alternative risk transfer; that is, the presentation of a risk fact translated into a language that the risk taker can understand, analyze, evaluate and assess.
For a successful alternative risk transfer, it is of great importance to establish a sustainably optimized risk situation in one's own business. Losses are disruptive in every respect, especially when they are associated with business interruptions. In addition, self-oriented risk management has a very positive effect on the insurance market value and one creates independence and market attractiveness, which in turn lead to a more extensive offer on the insurance market.
"The Courage to take Risks"
However, it is also clear that with an alternative risk transfer, quite a high volume of risk remains on the company's own books, which makes a uniform understanding of risk all the more important. In addition, self-interest risk management becomes much more important if it can be used to contain loss frequencies and prevent high loss severity and business interruption, thus ensuring that retention and risk transfer capital are not overstretched. This also brings great added value for the insurance companies, which in turn leads to a very high market attractiveness for the business!
In essence, alternative risk transfer means expanding the identification of one's own risk potential and managing and optimizing risk on one's own responsibility. Therefore, it is not suitable for accepting a suboptimal risk situation or for avoiding classic insurance solutions. Rather, it will be necessary to initiate a comprehensive feasibility study before embarking on alternative risk transfer, which will show the necessary investments and implementation requirements in all respects.
And how do I say it now?
It should be noted that the underwriting specifications of the individual insurance companies can differ, and thus the same risk factors can have different effects on different risk carriers. This complicates communication and requires comprehensive knowledge of the insurance industry as well as effective and economical control measures. Measures in one's own company should not be taken primarily to please the insurance companies; they must fit in with the risk philosophy of the industrial company.
It should be noted that the underwriting specifications of the individual insurance companies can differ, and thus the same risk factors can have different effects on different risk carriers. This complicates communication and requires comprehensive knowledge of the insurance industry as well as effective and economical control measures. Measures in one's own company should not be taken primarily to please the insurance companies; they must fit in with the risk philosophy of the industrial company.
risk on mind® - That's what we stand for
And how could disasters in one's own business be prevented in advance? The team of risk on mind® deals with exactly that! As an internationally positioned company, we support companies on their way to alternative risk transfer.
We offer independent, digitally supported solution consulting for all insurable and non-insurable risks. We remove communicative stumbling blocks for precisely controlled and comprehensible communication with all partners.
