At the 2015 Philly I-Day, Phillip Ellis, Chief Executive Officer, Global Solutions Consulting at Willis Group and James Coyle from Willis Group presented on how to convince your CFO or Treasurer that your insurance program is good value. The answer? Analytics.
The session began with focusing on why analytics are important to corporate risk executives. The presenters offered three primary reasons:
- To ensure that your risk financing strategies are optimally protecting your corporate financial objectives.
- To save money by optimizing insurance purchasing and leveling the playing field with insurers.
- To provide an audit trail demonstrating objective decision making.
Risk managers use analytics to show the impact of the insurance program on things that CFOs care about, such as earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA), long-term and short-term growth goals, and providing value to shareholders. The insurance coverages provide a hedge to protect these corporate financial goals.
The decision-support process to ensure corporate resilience includes:
- Knowing the client and the industry.
- Defining risk tolerance and appetite.
- Identifying potential exposures.
- Modeling loss frequency and severity.
- Qualifying total cost of risk.
- Managing the potential volatility through a combination of loss control, self-insurance, risk avoidance, and risk transfer through insurance.
- Having a recovery plan, including claims handling and a disaster-response plan.
The optimal strategy with this analysis is to find the lowest cost for a given level of risk and the lowest risk for a given level of costs. This is very difficult to achieve and requires constant adjustment to your program based on the analytics. Also, there are often new risks that emerge that require program adjustments. It is important to continually rerun the analytic model so that these adjustments can be made.
On average, companies in the S&P 500 go through a “severe reversal in fortune” every seven years. There can be even more volatility with smaller companies. This is another example of why it is necessary to constantly monitor your analytics and make changes to your insurance program as needed.