The New Natural Catastrophe Risk Management Framework

 In Blog

Historically, catastrophe risk management has been a static, reactive function, and goes something like this: Once per year during renewals, risk managers pass property portfolio data to their insurance brokers during renewal time. 

Underwriters use this data to run models in a “black box” environment. Your data goes in, their pricing comes out. There’s little transparency into the factors influencing the pricing outcome.

When catastrophe hits, lack of meaningful, real-time data leaves many risk managers feeling helpless, as they follow news reports and weather apps without actionable and specific information that relates to their assets. 

Today, the risk management function is changing at a rapid pace. Accenture points out: 

It is increasingly understood that the world and business will never move as slow as it does today. Things are only going to get faster, more connected, and in some ways more complex. For the risk function, this is the primary challenge.

Alongside the changes that risk managers are experiencing is the frequency and severity of changes that impact risk transfer. 

Large-scale catastrophes have transformed the way insurers view natural catastrophe risk, starting with Hurricane Andrew in the 90s and more recently, the 2017 Atlantic Hurricane season that resulted in more than $200 billion in damages, with combined insured losses of $92 billion, equivalent to 0.5 percent of U.S. GDP. 

Then in 2018, the California wildfire season was the most destructive on record with insurance claims exceeding $12 billion. Therefore, insurance underwriters are tightening their belts. And risk managers need to be more prepared than ever during the insurance buying process by getting a clear picture of risk.

But it’s not just during risk transfer that risk managers need a better approach to cat risk management. To keep pace with the growing demands, risk managers need a new framework for catastrophe risk management. One that creates a proactive and continuous approach to catastrophe risk.

The Nat Cat Risk Management Framework

The new catastrophe risk management framework takes into account the ever-changing role of the risk manager, and the increasing demands put upon this function. 


In this new framework, cat risk management is grouped into three functions: plan, monitor and respond. This cycle creates a continuous, year-round approach to cat risk management in the context of business and professional objectives, including the ability to:

  • Take control of the insurance renewal process and transfer the right amount of risk. 
  • Proactively monitor and respond to catastrophic events with confidence.
  • Make better decisions about portfolio risk in real time throughout the year.

Planning for catastrophe: Risk managers have more control in the risk transfer processes, including insurance renewals, retention analysis and more.

Monitoring catastrophe: Risk managers have more transparency at the point of decision making for forecasting risk, budgeting for risk management and a better understanding of how cat events impact assets.

Responding to catastrophe: Risk managers access better insights into catastrophic impact, which helps ensure the next steps are clear in both loss assessment and corporate communications. 

This new framework is only possible with emerging technologies on the market today, which we’ll take a look at next.

The Technology Enabling Continuous Catastrophe Risk Management

Our lives have been transformed many times over when elite technology was made available to the masses. Take, for instance, computers, the internet and digital cameras. 

For decades, insurers have had access to technology that has put the power into their own hands during the insurance placement process, as they modeled risk in a “black box” environment. 

Risk managers’ portfolio data goes in, but the “why” behind the output–the underwriter’s decisions, has largely been a mystery. This is all changing with emerging technologies on the market. 

Given the availability of open risk analytics and modeling platforms, risk managers now have access to the same technology and tools used by underwriters to evaluate and price risks.

RiskTech–the intersection of technology and management–is enabling risk managers to not only be empowered with the same type of technology insurers use to model risk during insurance buying but beyond to span multiple functions of cat risk management year-round.

Risk Analytics: A Game Changer

Talent and technology are at the forefront of the risk manager role today. Data show that these two functions are becoming more essential each year.

Better insights are the foundation of the new catastrophe risk management framework. And this can only be enabled through emerging technologies like risk analytics. 

Here are just some of the functions that risk managers can perform today with risk analytics:

Planning

  • Insurance renewals: Present data in new ways to brokers and insurers that improve the marketing outcome, essentially “pre-underwriting” the risk. 
  • RIsk planning: Conduct hazard assessments of locations that quantify the severity and frequency of nat cat events including business continuity and disaster recovery planning.
  • Risk retention: Stress-test your own insurance program by running retrospective loss scenarios and historical events that estimate retention. 

Monitoring

  • Human resources: Ensure the safety of people while keeping operations going as needed.
  • Business continuity: Reduce business interruption protection gaps such as closing unaffected locations prematurely. 

Responding

  • Claims management: Be first in line with loss adjustors when you know there’s a claim.
  • Crisis management: Proactively respond to real-time cat events
  • Communication: Articulate transparency losses with more certainty to key stakeholders.

Are You Ready for the Next Level of Catastrophe Risk Management?

By adopting technology, risk managers are better equipped to support the new natural catastrophe risk management framework for proactive, continuous risk management year round. A more accurate view of risk will trickle into every function, from insurance buying to decisions about portfolio assets to corporate communications and beyond. 

To learn more about this new approach to nat cat risk, and how emerging technologies are helping risk managers create more value, download the ebook: “3 Factors That Are Constraining Your Catastrophe Risk Management and How RiskTech Is Setting Them Free”