Category Archives: Political Risk

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Total Cost of Risk Drops for Third Straight Year, RIMS Finds

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Despite the challenges of a slowed economy in an election year, a shifting risk landscape as a result of technological advances, and a slow to negative growth rate in some sectors, 2016 saw the total cost of risk (TCOR) decline for the third consecutive year, according to the 2017 RIMS Benchmark Survey.

Even in the face of such uncertainties, the TCOR per $1,000 of revenue continued to drop, ending at $10.07 in 2016. The main drivers were declines in all lines excluding fidelity, surety and crime costs, according to the report. TCOR is defined in the survey as the cost of insurance, plus the costs of the losses retained and the administrative costs of the risk management department.

The survey encompasses industry data from 759 organizations and contains policy-level information from 10 coverage groups, subdivided into 90 lines of business.

Uncertainty around policies in the new presidential administration will continue to dominate in 2017, as the nation’s trade policy, regulatory reform and tax system could see changes, RIMS reported. The new political regime is also expected to reduce regulatory oversight at the state, federal and international levels.

Key findings from this year’s RIMS Benchmark Survey include:

  • Technological advances have caused a seismic shift in the risk landscape, creating new types of claims and forcing insurers to consider new products and solutions for customers.
  • Insurers ended 2016 with average capital and surplus at the highest level in 10 years. However, excess capacity is undermining profitability, as seen by falling net income and return on average equity.
  • The personal insurance space is in the midst of a consumer-centric revolution, offering customers new transaction platforms, better metrics and more flexible pricing and coverage options. Commercial insurance is expected to adopt a similar focus, transforming the way business is transacted.
  • Predicted rate increases for cyber, E&O and workers compensation failed to materialize across the board. Projections for 2017 are more moderate, with property and most liability lines flat to down 10%.
  • Emerging trends in the 2017 risk landscape include the tech revolution, security issues, natural catastrophes and political upheaval.

“The RIMS Benchmark Survey chronicles the evolution of corporate risk management costs over time. This year’s edition highlights how risk managers have effectively managed costs in a time of evolving risks and demands, enabling them to do more with less,” said Jim Blinn, executive vice president of client solutions at Advisen.

It’s a Great Time to Be a Risk Manager

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2017 has so far been a wild ride of change. Companies are navigating through a new U.S. administration, Brexit and cyber risks that are more daunting each day. We are bombarded with uncertainty and unchartered waters. Nevertheless, it’s a great time to be a risk manager.

This kind of disruption is the reason many of us got into the risk and insurance industry.  Addressing disruption is what we do best. According to a recent CNN report, in fact, Risk Management Director is the number-two Best Job in America for 2017. Recognizing the meaningful contributions and rewarding work of a risk manager, the report highlighted the role in “identifying, preventing, and planning for all the risks a company might face, from cybersecurity breaches to a stock market collapse.”

In the midst of a riskier environment, the insurance industry that serves risk managers faces highly competitive market conditions. The result is more choices and better services for the risk management community. Now is the time for the risk manager to take the lead.

As thousands of risk professionals soon head to the RIMS Annual Conference in Philadelphia, it’s a good time to consider the opportunities in this growing profession.

Why the time is right for risk managers:

  1. 2017 brings a new risk profile. Every company, regardless of industry or size, needs to evaluate the new risks from the shift to nationalist policies in the U.S. and abroad. Our new administration’s efforts to increase America’s manufacturing raises a host of new insurance needs—more U.S. production means more U.S. liability. We are also seeing a shift in global supply chain and an increase in the political risks of operating outside our borders. These changes require board-level and C-suite attention. We expect to see risk managers play a more significant role with management in building risk mitigation into their company’s strategic direction.
  2. Rise in specialists. This is your time to be selective about specialists that understand your business and the specific challenges you face. Insurers are differentiating through specialization. Work with an underwriter that knows the risks, regulations, complexities and nuances of your industry. Many industries, such as construction and health care, will experience rapid change this year. Find partners that have been in the same trenches and can help you navigate changes.
  3. Tailored products and solutions. The highly competitive insurance market is also driving product innovation for clients with more tailored solutions. Take the time to learn about less-understood products, such as accounts receivable insurance, which protects companies from non-payment risks and gives them the ability to borrow, receive loans, and as a result, improve their credit quality. In Europe, 70% of companies purchase this coverage, compared to only 8% of U.S. companies. Understand the risks across your supply chain and work with your broker to customize insurance programs and bring innovative solutions.
  4. At the center of technology and innovation. The insurance industry is on the front lines of the cutting-edge technologies: internet of things (IoT), robots and drones. These advances will only grow and thrive with the right risk and insurance programs. For example, the technology surrounding drones or unmanned aerial systems is rapidly evolving. The ability to collect and analyze aerial data has improved efficiencies, enhanced safety and lowered costs within the construction, agriculture, telecommunications, oil & gas and real estate industries. As usage  grows, risk managers will be central to the successful operation of drones by understanding and managing the risks and compliance needs.
  5. Ability to leverage the best in data analytics. Risk managers have the data, tools and skills to anticipate the risks from this tumultuous environment. The insurance industry views these challenges with a different lens, drawing on past catastrophes and predictive analytics to plan for the challenges ahead. Risk professionals who know how to leverage this information can bring a sense of preparedness and control at a time of heightened uncertainty. There is also a role for risk managers to advise senior management on the use of data. But because models are continually amended and updated after losses occur, it is important to avoid an over-dependence on data and false sense of security.
  6. Opportunity to participate in growing your business. Risk managers do not just protect a business, they grow a business. Companies are reevaluating strategies based on new policies. Will they build manufacturing plants? Will they buy a strategic target? Risk professionals have an important role in mergers and acquisitions deals as insurance can be used to help quantify contingent liabilities and allow for accurate pricing models. The most common is representation and warranties insurance, which can help strengthen and facilitate a transaction.
  7. Better risk management services. Insurers realize it is not enough to write a check for a claim. Take advantage of risk mitigation services that are built into your insurance policies. They include education, training, tabletop exercises and risk assessments.
  8. A thriving profession. With more and more universities offering undergraduate risk management majors, we will see a dedicated, high-caliber talent pool focused on careers in risk and insurance. The Spencer Foundation, for example, has completed an eight-month competition between students of 29 universities from around the country, analyzing, developing and presenting the most comprehensive risk management solutions for a case study. The top eight teams will be in Philadelphia to present at RIMS.

The risk and insurance industry is made up of some of the most agile and level-headed professionals. Risk managers have always moved with the changing environment and crisis situations, developing programs to address their entity’s risk profile. Hopefully, we will see more companies include risk management in their strategic planning and leverage the experience and skills of their risk managers.

Protecting Employees in the Face of International Risks

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Increasing globalization and the growing world market presents employees with opportunities to travel and experience new countries and cultures. With travel comes risk, however. In the event of an unforeseen incident, it is an organization’s top priority to ensure its employees are safe and out of harm’s way.

By following proactive travel risk management strategies, employers can help ensure not only the safety of their employees abroad, but also the success of their businesses while avoiding major financial, legal and reputation costs. When developing travel policies, companies must consider the health, safety and security risks that their employees could encounter.

Security Risks
The frightening unknowns of crises such as sudden earthquakes or airport terror attacks can cause distress and chaos. It is the duty of a company’s human resources department to ensure employees are safe and secure, as being unprepared for such events could have dire consequences. For the best outcome, companies should proactively develop travel risk management plans before disaster strikes. Consider these guidelines for your company’s travel emergency plans:

  • Share information. Ensure employees are educated on how to avoid security risks in their destinations and share corresponding safety advice.
  • Develop a communication plan. Decide how employees should contact HR and/or other crisis response team members and vice versa in the event of an emergency.
  • Give employees information about who to contact if they’re in an emergency scenario. Create staffing patterns or third party resources that can accommodate after-hours calls.
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  • Consider rearranging travel plans if there’s a high security risk. Use technologies, such as video conferencing, to keep business rolling as usual if employees need to conduct in-person meetings in destinations where it may be temporarily unsafe to travel.
  • Encourage employees to enroll in the Smart Traveler Enrollment Program (STEP). The app provides updated travel warnings and alerts via email. It can also help the nearest U.S. embassy or consulate locate individuals in the event of a disaster.

Health Risks
Recent disease outbreaks in several countries have caused concern among business and leisure travelers alike. If organizations have plans for employees to travel to areas experiencing widespread illness, consider exercising flexibility. If a disease epidemic is dominating news headlines, there is a good chance employees will be concerned about going to a destination that’s affected. In these cases, advise alternative options such as video calls or contacting local partners to help out. On the other hand, if employees elect to travel to the location, it is the employer’s job to ensure they have the knowledge and resources they need to have a safe and successful trip.

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 To help protect the health of a traveling employee, HR professionals should:

  • Research and understand destination-specific health risks and share this information with employees. Education is essential to preventing life-threatening situations.
  • Ask employees to fill out personal medical information Forms. An employee should bring a copy on the trip and also leave copies with trusted friends or family. In the event of a medical emergency, the trustees will be able to obtain important personal medical details from the document, such as insurance coverage, current or past medical conditions and emergency contact information.
  • Remind employees to carry prescription paperwork. This can prevent issues at airport security and can be useful should a new or similar prescription be necessary locally.
  • Confirm that employees are covered by health insurance that is accepted overseas. This will help avoid monstrous fees later on.

Potential Costs for the Business
The costs of not following these strategies can be far-reaching. Your employees’ health and safety is always of utmost importance. However, there are also some continuity issues to consider.

At the most basic level, a health or safety issue that affects a traveling employee will likely cause a loss in productivity and, therefore, an impact to your organization’s bottom line. Companies could furthermore face cancellation fees, lost deposits, unused inventory or lost sales. Additionally, medical bills, medical evacuations and security evacuations can pose huge financial burdens on both employees and the company.

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Furthermore, an organization that doesn’t adequately prepare for potential risks and therefore compromises an employee’s safety can lose loyalty quickly. If employees know their colleagues were put in risky situations, they will likely lose trust in their companies—which could cause engagement (and business results) to decline.

Adding to the strain of a disillusioned workforce, legal disputes could arise. An injured worker seeking remedies could bring an injury claim against their employer. The cost a company could face when it comes to duty of care disputes depends on the complexity of the case, the length of time and whether it reaches a full trial. Businesses should be prepared for the possibility of facing court cases by following key risk management strategies before being pulled through lengthy and costly litigation processes.

There are also reputation costs to consider. One of the most damaging scenarios may be that the company’s failure to fulfill their duty of care obligation leads to media headlines resulting in serious brand damage. In this case, the news can mar the company’s reputation, causing stakeholders to pull away and resulting in devastating loss in revenue.

Above all, employees are the backbone of an organization, and their safety and security should be the top priority for every business. Devising a sound risk management plan for travelling employees is crucial for ensuring the safety of employees as well as the longevity of your business.

Accounts Receivables Coverage Helps Fill Supply Chain Gaps

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It is standard for companies to insure and protect cash, inventory, property, plants and equipment, and more recently, data. Companies are insuring every step in the supply chain and sales process from concept to delivery. What is often not insured, however, is the last but most important part of a sales transaction—getting paid. You can safely bring your product to market, but if a partner or customer defaults on payment and you have no recourse, you’ve lost your total investment. Your balance sheet takes the hit.

As with most risks, there is insurance for that, too. Accounts receivable insurance protects what is often a company’s most critical asset on the balance sheet. More than just protection from non-payment, accounts receivable insurance puts companies in a stronger position to secure loans with improved credit quality. With accounts receivable Insurance acting as a second source of repayment, a company can assure a lender it will not have covenant issues if there is default by a customer.

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Consider these hypothetical scenarios: Bob’s company is based in Canada and he sells components to computer chip manufacturers throughout North America. He buys parts from foreign markets to make his product. The company that supplies Bob with parts has been working with Bob for 30 years. Bob has always paid them for their deliveries. Recently, Bob has struggled to receive payment from his customers in North America due to their decline in computer chip sales.

As a result, Bob is now finding it difficult to pay his supplier on time. The supplier believed Bob had risk management protections in place and would always pay them for their delivery. They never thought Bob would go bankrupt. Fortunately for both Bob and his supplier, he has accounts receivable Insurance. Even though he was exposed to the risk of his customers not paying, his accounts receivable Insurance kicked in as a second source of repayment.

Here is another example regarding the uncertainty of political events in a global economy and how they can impact a company’s balance sheet. A U.S. exporter is selling to Latin America and there are a few countries within the region that are approaching elections. A regime change could mean changes in policies, resulting in the possible cancellation of an import or export license, a moratorium on the payment of any external debts outside the country, or the inability to convert local currency to hard exchangeable currency to make payment. With an accounts receivable program protecting assets, the exporter is able to securely transact with their customers in a foreign market, knowing they’ve mitigated the risk of non-payment due to any potential policy changes or actions.

These examples are not hard to imagine. What is startling to see are estimates that only 8% of U.S. companies have accounts receivable insurance compared with 70% of European companies. In Europe, boards mandate this coverage.

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This underscores the differences between regional risk perceptions. Perhaps there is a greater recognition of the account receivable risks for companies operating in multiple countries, including developing nations with a high degree of political instability.

With the new U.S. administration, Brexit and other unpredictable market forces in play, it is certain that we will be seeing shifts in the global economy. Undoubtedly, there will be bumps along the supply chain as well, and companies will face challenges, including non-payment.

These bumps are not only for the largest global organizations, however. Middle-market companies will face a new competitive landscape, with a push to focus manufacturing in the U.S., and changes to the flow of their supply chain. This will impact costs and the need for extra working capital. Accounts receivable insurance should be viewed as a tool to bolster the balance sheet to provide the liquidity needed to advance business goals.

Accounts receivable coverage provides a competitive edge by giving suppliers the ability to extend credit to their customers as opposed to requiring payment in advance or on delivery. It can be helpful in lengthening payment terms with customers to match or exceed the competition and allows for these aggressive growth strategies without taking additional balance sheet risk. Accounts receivable insurance also can help a company obtain a higher advance rate with lenders that use accounts receivables as collateral. This will provide increased liquidity without having to increase the asset base and can help in negotiating lower borrowing rates.

Supply chain risks are currently taking center stage as one of our greatest concerns. Don’t forget to protect the ultimate objective in the sales process—collecting payment.