While experts continue to present a bleak image of an imminent recession, businesses throughout the nation are faced with uncertainty and difficult decisions.
“We’ve never experienced inflation, recession, pandemic, supply chain issues, social inflation, and labor shortage — all converging at the same time,” notes Matthew Moore, executive vice president and president of underwriting for Liberty Mutual Global Risk Solutions.
How can businesses predict their futures effectively in a turbulent environment? What instruments might they employ to design resilience and reevaluate risk?
According to Moore, a path ahead is provided by proactive risk-management planning and the assistance of strategic alliances with insurance providers.
“Insurance can offer real solutions,” says Moore. “You need to work together with your carrier to develop smart solutions that strategically manage and mitigate risk.”
Three risk management trends to watch in 2023
Here are three risk management trends to watch out for now and why working together with insurance providers can help businesses create a resilience road map.
1. Companies’ risk profiles will likely shift.
An important lesson for business risk managers is that economic uncertainty has probably changed your company's risk profile, putting many organizations at risk of having inadequate insurance. Insurance companies will be closely monitoring risk profiles as firms may be tempted to cut corners on risk mitigation, loss controls, employee safety, good governance, and compliance in order to save costs.
Property values have an impact on risk profiles as well. Property replacement prices are rising faster than appraisals, according to Moore, who also cites labor shortages and supply chain problems as contributing factors. In fact, according to industry experts, a staggering 75% of commercial enterprises are undervalued. For instance, a building that was valued at $1 million five years ago could easily cost 20% more to replace today due to escalating prices. There are additional aspects that should be taken into account in addition to building costs, such as business interruption and the frequency and intensity of weather-related activity.
If you’re underinsured, Moore notes, “you may face another unpleasant surprise after you’ve already experienced a loss.”
The best way to make sure your operations have the correct coverage and can recover fast after a loss is to work cooperatively with your provider and broker in a proactive manner.
2. Insurance carriers may become more selective in response to economic disruption.
Insurance providers are also under financial strain as they navigate change, in addition to covered businesses. This past December, the Fed raised rates for the seventh time, this time by 0.5 percent, in an effort to contain inflation. Insurance carriers are revising their business plans in light of the rapid pace of change.
“Commercial insurance lines can face an amplified impact, as exposure bases like payroll or sales can decline quickly, reducing premium and increasing risk,” says Moore.
Carriers anticipate that when the economy weakens, there will be less of a need for insurance and a corresponding drop in premium prices. Carriers' revenue from investments may rise, but their risk-taking capacity may decline. On the basis of market cycle vulnerabilities, carriers might, for instance, limit their capacity in certain businesses and lines.
Given the possibility for carriers to become more picky, it is critical for businesses to disclose any changes to their operations to both internal and external insurance partners in order to minimize any unanticipated changes.
3. Value-add insurance offerings play an even more important role in managing total cost of risk.
The statement made by Federal Reserve Chairman Jerome Powell that businesses will feel "some pain" when the Fed raises interest rates to combat inflation sent the corporate sector into a tailspin. Following this statement, the economy's key driver, the tech industry, revealed dismal news: they laid off more than 150,000 workers in 2022.
As the country braces for a possible recession, insurance has a major role to play in reducing risk and allowing companies to weather the coming economic storm.
“There’s a lot that a carrier can offer to lower a company’s total cost of risk by thinking beyond the coverages,” Moore said.
“Some companies see insurance as purely transactional — which is a mistake,” says Moore. “Your insurance provider can help lower your total cost of risk by thinking holistically and helping you strategize.”
Some benefits of partnering with your insurance provider include:
- Consulting with a team of risk control experts to capture all potential loss drivers — and plot out tactics to mitigate those losses
- Leveraging risk advisory services to help make operational changes to address different risks resulting from shifting business strategies and market conditions
- Benchmarking data and tapping into an extensive network to learn what has worked for similar organizations
“When recession hits and you have even less money to spend and you know the risk environment has intensified,” Moore notes, “it’s vitally important to create a strong relationship between the carrier, broker, and risk manager to make sure your insurance program is offering you as much value as possible.”
Four ways to build a roadmap for resilience
Risk managers have the ability to create a roadmap for enduring volatility despite the unstable economic environment, and this ability is bolstered by proactive collaborations with insurance carriers and brokers.
When building your roadmap to resiliency, we recommend following these four steps:
- Leverage risk-management practices that encompass risk engineering, control, and transfer.
- Take advantage of the risk advisory and consultancy services your carrier offers to implement best practices, improve safety, and reduce risk, and therefore cost.
- Establish and maintain channels of regular communication between your team and your carrier on a year-round basis to get ahead of any surprises.
“At the end of the day, your carrier wants to help you manage risk,” Moore explains. “It’s our job to form a genuine partnership to help you improve the risk environment — and it’s what we enjoy doing. Your carrier can be a great resource to you, especially amidst uncertainty.”