Russell Group puts forward new solution as risk quantification and regs hold back transfer options

As risk interconnectivity mounts and demands more relevant transfer solutions, an inability to quantify exposure, coupled with regulations that restrict insurers’ ability to collaborate and deliver cross-class solutions, are holding back the market from being able to deliver for clients, according to experts gathered in London. But Russell Group, which organised the briefing, believes its new data solution for quantifying corporate risk, called Russell Score, can help companies and the insurance industry measure previously unknown risk and work towards better solutions. The briefing, titled ‘The Russell Score: Quantifying Your Connected Business Exposure’, brought together senior underwriters, analysts and risk managers to better understand how risk can be measured and ultimately transferred. Suki Basi, CEO and founder of data and analytics company Russell Group, said all organisations now operate within a network where risks are shared and more distributed. As the world digitalises, it will accelerate along the “path towards risk contagion”, he said. “We all operate in a network and everyone is tied to the same connections,” said Mr Basi, who noted that every FTSE 100 company is interconnected by six steps. The connectivity is growing, and risk managers and insurers need to understand those relationships, he continued. David Broughton, head of insurable risk for Centrica, said the biggest challenge facing companies today is the speed with which the risk landscape changes. Interconnectivity is increasing, he said, with the main risks now often coming from outside organisations rather than from within. Roman Beilhack, head of new technology and the internet of things at Munich Re, said most large corporations are now really network managers. He noted that a tier one German automotive supplier Munich Re is working with has 20,000 suppliers alone. The growing risk interconnectivity is making it harder for risk managers and their transfer partners to find solutions. Mr Basi pointed out that on average, only 20% of all corporate risk is insurable in today’s market. The insurers in the room conceded they are struggling to keep up with the pace of change. “I think from an insurance perspective we are not keeping up and still think predominantly in lines of business. There are many interconnected risks out there that are effectively being ignored and they shouldn’t be,” said Mr Beilhack. “As insurers, we are struggling to keep up with the changes as much as the potential buyers of insurance. We have to make our products as relevant to the needs of customer as we can. But anticipating what will be needed five or 25 years down the line is extremely difficult to do,” agreed Andy Caldwell, active underwriter at Lloyd’s Barbican Syndicate 1995. Part of the solution requires better quantification of the underlying risk, which is proving increasingly difficult. “It is not like these new risks cannot be insured and solved… but we need more data,” said Mr Beilhack. “Data and risk quantification is hugely important to help solve these issues... If we understand the need to quantify and that everything is more connected, beyond supply chains, we have no choice but to try and understand that,” said Mr Basi. “Insurers need to understand who and what they are actually insuring. Risk managers need to understand the connectivity of risks beyond their own supply chain,” he added. Mr Basi believes the newly launched Russell Score can help. "Insurers and reinsurers siloed by class of business, and corporates siloed by business function, are struggling to harmonise information that allows them to efficiently deal with these events… There is consequently a massive opportunity for corporates and (re)insurers to collectively quantify the unknown risk and so create new vehicles for risk mitigation. Russell Group believes that a solution exists through the Russell Score,” he said. Built on commercially viable data, the Russell Score gives every organisation a score based on a variety of metrics such as financial, personnel, product, reputation and location, as well as the external links that impact the organisation. Russell Group said the score reflects the resilience and sustainability of an organisation’s business model at a given time, and provides much-needed insight and foresight. Mr Basi went on to stress that measuring the underlying data and then coming up with solutions requires collaboration between companies and insurers. The insurers agreed that more collaboration is needed between themselves to deliver for clients, but said antitrust regulation is prohibiting this from happening on the scale needed. “One of the weaknesses that we have as an industry is we tend to go off on our own and develop products. Actually, it needs cooperation across the industry,” said Mr Caldwell. “But there are lots of rules and regulations about what we can or cannot do, and how we talk to our competitors. But I think in some cases to come up with solutions for customers, it requires huge capacity and product innovation that can’t necessarily be developed by one company in isolation,” he added. “There are circumstances where cooperation across the market is beneficial to the customer. This is where there is definitely a failure of antitrust rules. It is very frustrating,” he continued. Mr Caldwell also said regulations demand that insurers report along very rigid lines of business, which restricts them from offering cross-class, or multi-risk solutions, which would be a big help for clients. He said insurers need to deliver wraparound solutions that cover traditional P&C risks, plus add-on protection for other exposures. “Because we now understand how our products are connected, I think the way we should be going is packaged solutions. To sell individual products to the same insured always risks gaps in cover. From the buyers’ perspective, they need to know there are no gaps. We need to say ‘here is the aggregate limit of the cover we provide’. If there is a one-stop solution for a company across the traditional product lines, I think it will add confidence that the product will deliver what is needed,” he continued. “I think this is where regulators have to understand the requirements of the customer and allow insurers to design products that operate in this way,” said Mr Caldwell. Mr Basi said corporates don’t think along lines of insurance, so this type of cover that focuses on insuring outcomes would be a big help. Mr Caldwell went on to suggest that another problem facing the insurance industry is an underlying lack of capital for increasingly large companies with huge risk connectivity. He questioned whether there is sufficient capital in the industry to meet such demands. But Mr Beilhack said the insurance industry can certainly do more with the capacity it currently has. “I think there is enough capital to do substantially more than we currently are. Is there is enough capital to go from 20% of corporate risk covered to 80%? Probably not. But I think that is not really the issue. There are so many risks out there that we could insure and at the moment, for whatever reason, we currently don’t,” he said.

Russell Group puts forward new solution as risk quantification and regs hold back transfer options

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