Risk managers embrace risk information systems but insurers need to up game

However, while software capabilities are constantly developed by the vendors, there are still several challenges that face risk managers as they seek to extract the maximum value from the technology. Some of these challenges are technical, not least the task of integrating the systems within the company’s overall IT infrastructure.

Other challenges that face risk managers are based on the alleged reluctance of the insurance industry to give due recognition to the generation of enhanced risk data provided by risk managers in terms of improved rates and premiums or to match the use of technology among insureds with the development of their own systems.

Carlo Giannini is the risk and insurance manager for Sony Supply Chain Solutions, Europe (SSCE). While the company relies heavily on its ERP system from SAP for the bulk of its information, for risk management, Carlo Giannini’s team uses Aon’s RiskConsole to interface with the SAP system for any appropriate data needed to manage risk.

hide

The task of extracting the data from the legacy data into the RMIS tool is one of Mr Giannini’s biggest challenges because of the complexity of the company.

“If procedures are kept streamlined, uniform and efficient, it can be easy. But if there are more than 1,500 exceptions and different ways of doing things everything becomes more difficult and mapping becomes a nightmare. Every time there is a new logic introduced we have to include it on the system or else we risk losing data,” he explained.

Consequently Mr Giannini has tried to ensure that everyone uses the same logic and the same rules. “We will never get everyone but we are aiming at that 80% to follow the same logic and then we can deal with the exceptions. It is an educational process. In a business like ours, with lots of different channels and businesses—consumer, gaming, software, electronics—it is essentially an educational process,” he said.

The system is also a useful tool for the difficult task of communicating about risk with senior management, said Mr Giannini. “Management always has the attitude that it will never happen to them. When I go to the board to ask for more money to manage a new risk, I have 10 minutes to make my case so I need an efficient system that can give me tangible and concrete examples of possible incidents and how they would affect the company and what we would pay,” explained the risk manager.

In terms of risk data distribution, Mr Giannini uses some manual intervention in order to put some intelligence behind the automatically generated data. “It is dangerous to just automatically send out reports highlighting potential risks without adding some perspective or context behind the numbers. There are probably other managers making better use of automation but I don’t think it is the most efficient way to manage risk,” he said.

Mr Giannini is also in charge of distributing risk data to the company’s supply chain. “The supply chain is where we have one of our biggest exposures. We sell electronic products so a breakdown in our supply chain or our production can costs us billions. For example, the flood in Thailand was a much greater risk to us than the earthquake in Japan because it also affected our production,” he said.

Sony’s extensive use of its RMIS tool has not, however, directly resulted in lower rates from its Japanese insurer, said Mr Giannini. “Insurance is a Jurassic industry and not very prone to change, especially in Japan. They do not consider that risk is better managed by using an RMIS, it is all about the loss ratio. If we give them a lower loss ratio, they will give us a higher rebate and vice versa.

“But for me, using the RMIS has enabled me to take the corrective actions to reduce my loss ratio, so I have lowered my premiums across Europe by over 60% since 2006. But this is a direct consequence of better risk management and not because the insurer believes my risk is better managed,” said the risk manager.

Germany-based chemical company BASF is also a user of Aon’s RiskConsole. For corporate insurance manager, Eberhard Faller, the big benefits of using the system are data autonomy and a more efficient IT infrastructure. “When I arrived at the company in 2010, there was a lot of fragmentation in terms of systems. Now we have a common landscape of IT systems where everybody is looking at the same data from the same database.”

Dr Faller’s use of his RMIS is more geared towards the company’s insurers than for distributing risk information internally. “Our function as the beneficiary of risk data is to provide the insurance market with a fair and transparent picture of our insurable risk. So in any renewal we can press a button to generate an instant, updated and accurate report of our risk profile.”

The company is currently in the first year of the global installation of the software and the primary task was to include a complete insurance inventory for 800 legal entities and 200 outside warehouses.

Dr Faller’s team has also added employee benefits and amalgamated five legacy systems into RiskConsole and is currently adding energy insurance policies for oil and gas exploration. The next stage is to include more data on non-physical business interruption and the interaction with the supply chain and then develop a process for generating management reports via an aggregated view of the company’s risk information.

Although the use of RMIS has not had any direct impact in terms of reduced rates, it has been helpful in terms of convincing underwriters that BASF is a well run company and able to properly manage its risk, said Dr Faller. He also believes that it will become a more important feature of the relationship between corporates and their insurers in the future.

“I am firmly convinced that the investment in RMIS is desired by the insurance industry and the more that the risk ratio increases in certain regions or certain areas, such as natural catastrophe, the more the insurer will press for a greater extent of information,” he added.

Dr Faller also has his own demands of the insurance sector about its use of technology. “As a global enterprise, our main demand from the insurance industry is for them to provide information that we can upload instantly into the system or, vice versa, for the insurers to accept information from their major clients that is more accurate than the information they have. We believe we know our business better than an outsider and we have accurately allocated the premiums internally and that the insurers should follow our numbers,” he explained.

The other demand is for a more efficient and automated process for insurance transactions. For example, a data interface between insurers and insureds that could generate new policies on a real-time and automated basis and not after 90 days. “If the primary role of insurers is risk transfer, then the associated administrative work would be minimised if our systems and the systems of the insurers could communicate in an automated manner,” said Dr Faller.