Using first-hand insights from leading figures at Willis Re and Fusion, we chart the evolution of approaches to risk management in insurance
Although the fundamental tenets of risk management in insurance have arguably remained the same, the world in which the industry operates has tangibly changed. The nature of assessing and quantifying the likelihood and financial implications of events that may require a settlement has undergone a two-fold acceleration in recent times, namely digital transformation and the COVID-19 pandemic.
Indeed, these two factors in combination could be perceived as ultimately being beneficial, even redemptive, for insurance’s evolution into a truly 21st century sector. This is hardly surprising: as observed in our recent feature on the adoption of automation technology, the general consensus among thought leaders is that insurance has been conservative, resistant to change, and slow to appreciate technological advances. However, all that could be about to change.
“I actually think [the pandemic] has not been a bad thing at all for our industry from an operational perspective,” explains Dr. Andrew Johnston, Global Head of InsurTech at Willis Re (the reinsurance arm of Willis Towers Watson). “I don't think that any single initiative or business could have accelerated the digitisation process to the degree that COVID has been able to.” Forced to adapt to a more dynamic and digital style of operations following lockdown restrictions, which brought renewed legitimacy to remote working, the capability of tech infrastructure to maintain mission-critical processes has been vindicated. As such, insurance’s paradigm for risk management could already be midway through a significant shift, “I think that it has democratised elements of market competitive advantage; if an insurer cannot manage risks digitally, they're probably in trouble,” Johnston adds.
Technology and corporate culture
When it comes to narrowing down which specific technologies are enabling this change, Sal Petriello, Principal Consultant at software company Fusion Risk Management, identifies big data and artificial intelligence (AI) as being particularly important. “The digital transformation being driven by these new technologies benefits both the insurer and the insured. The insured can evaluate the effectiveness of controls and preventative measures, situational awareness and event management, and response and recovery to create a resilience score for their organisation. Meanwhile insurers can use the resilience score to understand how well the insured can avoid or limit losses, to predict the likelihood of event risk, and to assess insurability.”
However, although these technologies might be revelatory for incumbents, insurtechs, by dint of a tech-driven and insurance-focused mindset, have arguably held the developmental advantage. “You could argue that the first ‘insurtech’ dates back to the late 80s with Direct Line in the UK,” points out Johnston. “Affordable technology from third parties came into the industry circa 2012, with a lot of hype surrounding the disruptive capability of technology building in 2016.” For him, insurtech’s primary contribution to the discussion of enhanced risk management is its very existence: it forced the issue of digital transformation onto practically every insurer and reinsurer’s mind, but technology was itself just the catalyst for the underlying business proposition.
The corporate culture of an insurer can inflect its approach to risk management to a near-equivalent degree. Petriello clarifies that although many companies have an established “culture statement” on the subject it is, however, “only the first step in enabling employees to make the right risk management decisions.” It’s not hard to see why: an increasingly digitised industry means that insurers must operate in opaque regulatory territory, making lean and agile operating methods essential to minimising the risk of infraction or compromising cybersecurity. “Employees are expected to fully understand how regulatory changes impact their organisations, while meeting customer expectations for delivery of critical services and products. Also, although not new, cyber threats are taking on a new urgency in today’s climate of fast-paced change and, as a result, a risk aware culture is imperative to limit impact and loss,” Petriello says.
Deloitte’s article ‘’ gives an indication of the extent to which regtech-integrated partner ecosystems should be a priority for insurers. Their scope also broadens the foundational tech infrastructure suggested by Petriello, adding cloud computing, blockchain and APIs (application programme interfaces), among others to the mix.
The ‘war on talent’
Another consideration is that a tech-enabled approach to risk management will require specific expertise to execute, and therefore will likely cause a shift in hiring practices for many insurance firms. However, there is a discernible ‘war on talent’ currently underway, a consequence of digital transformation’s prevalence in practically every industry. In this competitive arena, insurance must make itself attractive to next-gen innovators and graduates. It was for this reason that insurtech launched its ‘’ campaign, citing research from the US that only 54% of Americans held a positive view of the industry, with the youngest and therefore most ‘digitally native’ responders regarding it generally unfavourably.
“Insurance risk managers have steadfastly followed legacy risk management methodologies. The pandemic has exposed how those methodologies may no longer be adequate to assess the likelihood of event risk,” states Petriello. “While there’s no lack of talent in the industry, there is a shortage of visionaries.” Johnston is less pessimistic: the talent pool and employee roles are changing, perhaps for the better, although he cautions that an ‘insurtech’ mindset will become increasingly essential. “I think industry expertise is actually going to experience a mini-revival as the role of the human in an increasingly automated industry becomes more important. Things like complex risk assessment, portfolio management or relationship development are almost impossible to do by technology alone. However it’ll be difficult to procure the right personality, because you're looking for somebody that both understands the industry and is placed at the cutting edge of technology.”
Although it may be premature to speculate on the outcome of a significant industry shift that only began in March 2020, it seems readily apparent that digitally enhanced risk management will have a transformative impact. From changing the way organisations insure, mitigate, accept, or avoid identifiable risks, insurers will need to “adjust their services to proactively work with clients, provide value and assist in the better handling of risk,” says Petriello. Finally, the realisation that corporate culture has just as large a role to play as technology must never be forgotten, as Johnston concludes: “When it comes to risk management the underlying technology is not even necessarily the most interesting part. It's the facilitator, it's the enabler, but having an understanding of the business perspective and what you're trying to achieve is just as important.”
Holding a PhD in Politics from the School of African and Oriental Studies (2007 to 2014), an institution at which he was also a researcher, Johnston joined Willis Towers Watson in 2016.
“My role is a combination of a few things, but my day-to-day duties include managing a team of 30 people across the globe who are looking for best-in-class insurtech businesses. We’re looking for businesses that we think can truly revolutionise the industry.”
Formerly the VP of TD Bank Group (TD) and a consultant at Capco, Petriello has now been part of Fusion for a year.
Describing his company in greater detail, he said, “Fusion Risk Management is a leading industry provider of cloud-based software solutions for business continuity, risk management, IT disaster recovery, and crisis and incident management.”