We have been telling everyone who would listen for a long time that the future of the insurance industry will be dictated, not by the insurers, but by the clients. We have also been telling you that this reorientation will manifest itself first on the commercial side of things, if for no other reason than the greater bargaining power of the customer. Sure enough, Willis Towers Watson announced last week an innovative risk advisory service that very much looks at the world through corporate clients' eyes.
Of course, Willis is not the only organization moving in this strategic direction. We know of at least one large broker that is actually ahead in its thinking. But it's still worth looking at the implications of the Willis program, which helps risk decision-makers (usually risk managers or CFOs) manage risk more effectively, balancing retained and transferred risks to reduce companies' total cost of risk.
I have heard from a lot of risk managers that they would like their role within their organizations to be elevated. They would like to be part of strategic decision-making, forging the organization's risk profile. Well, as the Willis program shows, here's your chance.
The key to the future of risk management is that risk has always been viewed as an expense or a liability but, because of technology, will start to feed into opportunities on the top line of a company's financial statement. Basically: Yes, there will be a risk if we attempt X, but we can be smart and mitigate risk by doing Y. The numbers for X now look a lot better, so let's go ahead with it—and watch sales climb.
Risk management can become strategic if managers find ways to enable projects that can drive revenue. We have seen more than a few examples of this. The benefits are not fractional; they are measured in multiples, as in P/E multiples that make the stock market amplify the gains.
From the standpoint of brokers like Willis, the needs are pretty straightforward: They need to become better at identifying technology advances that are important for clients, to stay ahead of their broker competitors, and will need to consult more with clients while selling products less. There will, of course, be some transition required in the business models, because consultants don't get paid a commission on premium. New pay arrangements will need to be figured out.
From the internal risk manager standpoint, the situation will be more complicated. Even though many risk managers say they want to take a more strategic role in their organization, they may be reluctant to stick their necks out. (No jokes needed about being risk-averse.) Just look at all the RMs that have sprung up over the years—ERM (enterprise risk management), SRM (strategic risk management), IRM (integrated risk management) and maybe more—without causing the sort of major shift in role that many have predicted.
There isn't always an appetite among senior management for more input by risk managers, either. Our friend Chris Mandel, an SVP at Sedgwick who is one of the world's ranking authorities on risk management, says input is requested on the most destructive exposures, so requests for strategic advice are scattershot. But the needs are there among senior management, and aggressive risk managers can spot and fill those needs. (Chris offers more thoughts on risk management opportunities in a podcast I did with him earlier this year.)
Clients will, of course, continue to work on reducing their traditional, internal risks, and technology will help there, too. For instance, many companies have learned the hard way that they had more cyber exposures than they realized—the sort of thing that technology can track. Reducing the number and severity of claims will, at least eventually, lead to lower premiums. But the days where the risk management game was based on ratings and recovery are numbered, and the days of prediction and prevention are fast coming. The new game will be won by those in the industry that can help clients switch from a focus on reducing losses to enabling growth.
Those companies that embrace the notion of risk as a value driver will see exponential gains in enterprise value, and those of us in the insurance industry need to enable those gains. It's all about the clients, not the insurance.