How can brokers deal with unseen risks?

"You need to tell the story in their language"

How can brokers deal with unseen risks?

Catastrophe & Flood

By Daniel Wood

Brokers can face a range of challenges finding insurance covers for clients. Beyond dealing with the usual insurance issues, including a soft market or hard-to-place risks, there are also “unseen” challenges.

“First, there's an underestimation of the risk,” said Andrew Stafford (pictured), operations manager for FM Australia, the global specialist property insurer.

A recent report by Stafford’s firm, in partnership with The Economist, exposed a range of what it called “unseen risks” facing commercial businesses. The report, “Sight Unseen: Navigating Out-Of-Sight Risks”, exposed vulnerabilities, including cyberattacks, climate events, geopolitical shifts and supply chain disruptions.

Is Aussie optimism a disadvantage for managing risks?

In an interview with Insurance Business, Stafford went beyond these risks to expose the challenges brokers can face from cultural norms and human nature.

For example, he suggested the natural optimism embedded in Australian culture could be a disadvantage in a world facing increasing risks.

“That means many businesses believe that disasters are unlikely to affect them,” said Stafford.

There is also the short-termism of many SMEs and other middle market firms.

“It's more about immediate survival and it's harder to look at investment over the longer term in terms of resilience,” said Stafford. “Then I think you overlay that with a lack of information and expertise.”

Telling a story is very important

However, as the intermediary between a business and the insurer, he said brokers are in a good position to overcome these often entrenched client attitudes.

“They are the best position to connect the story of the client from the C-suite down to the insurance and risk management level about what they're trying to achieve, what they've done and also present that in a way that connects with what insurers are trying to achieve as well,” said Stafford.

He said it was important for insurers to feel like a broker’s client is “like minded and focused on resilience.” Brokers, he said, can educate the client around the risks they face and present that story to the insurer.

Nat cat risk management for properties is tough

One particularly challenging area is the risk management implications of natural catastrophes. Appreciating this risk to a business property, said Stafford, requires an understanding of climate science and how that relates to current risks and those coming decades into the future.

“We work with clients and when they build a new building they’re looking at the life of the building over 50 years,” he said. “They should be thinking about what the climate perils are in 50 years – but getting access to that data and climate science is very difficult.”

Some stakeholders want a national flood database

However, Stafford said the data that would inform those decisions isn’t readily available in Australia.

Beyond the data challenges, there are also the financial constraints facing all businesses – particularly in the current uncertain economic climate.

“Improving a building’s resilience entails an upfront cost that can be too much for the budget,” said Stafford. “I think businesses struggle sometimes to prioritize investment and resilience.”

Commercial properties, he said, often have a better chance of being educated around the risks their property faces because they are usually served by specialist insurers and brokers.

 A “boots on the ground” approach by firms like his, said Stafford, means commercial businesses can get data and expertise to help mitigate risks to their property.

He suggested that it is important for brokers to take that information and data that comes from a “boots on the ground” approach and convert it into a story that makes sense to the business.

“Telling that story about what that [nat cat] impact is going to look like to a business and looking at the total cost of risk – as opposed to just simply saying your building is going to flood,” said Stafford.

“You need to tell the story in their language.”

This means trying to make the possible impacts of a nat cat as clear as possible. For example, he said, 10 cms of water in a facility could lead to two months of outage, supply chain impacts, reputational damage and ultimately a hit to market share.

What “unseen” risks are your insurance clients facing? Please tell us below.

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