By Atul Sharma, Head of NIIT Insurance Technologies Ltd

When it comes to the commercial insurance industry, one routine decision made incorrectly can have a significant impact.

To make matters more complicated, the industry has to deal with an ever-changing set of risks that it has to underwrite to stay current. These risks can range from those emanating from the desk of a cyber-criminal a few thousand miles away to the threat posed by new terrorist groups, or even the ongoing concerns that emanate from global warming and associated catastrophes.

Perhaps it’s stating the obvious, but if insurers can choose their risks carefully, balancing and neutralising their exposures through diversification and ceding, they have a much better chance of managing the complexity of risks that are happening around us. Indeed, risk management practices are key in building the resilience needed to allow insurers to survive large losses.

Historically, some insurers have survived monumental disasters through a resilient exposure management capability, whereas some have met their comeuppance for not keeping an eye on the risks that they underwrite.

As purveyors of risks, one thing that insurers can’t avoid is risk taking. The key is in taking balanced risks – and that is where exposure managements systems come in. When insurers can visualise what an exposure heat map would be with the addition of a new risk – and also understand how likely the new risks are to be affected by any hazard – there is a much better chance of underwriters being able to balance their risk profile.

Underwriters, who are under pressure to make quick decisions and win business, often lack the tools that would give them the real-time insight as to whether their organisation insures too much risk in too narrow a geographic area. As a result, companies often struggle to understand the impact on their exposure before they choose to provide cover, finding it especially difficult to assess situations where there are clashes of exposure from multiple lines of business.

In addition to this, estimating the financial impact after an incident has occurred also poses challenges. After a big insurance event – whether it’s a hurricane leaving a hundred mile wide trail of devastation, or a bomb blast in a mixed residential and industrial area – insurers can really benefit from an immediate look at their exposures gross and net of reinsurance cover across all lines of business.

A lot of insurers simply outsource their risk modelling to third parties, but with this comes a worrying loss of their biggest differential advantages. What really makes companies stand out within the insurance industry is strength of technical underwriting, and what sits at the core of technical underwriting is risk assessment. Underwriters need to be able to access the right tools to evaluate proposed new insurance risk as quickly and easily as checking out maps or restaurant reviews online.

Additionally, there is a systemic risk associated with many insurers relying on the same models to assess risk, as any assumptions or gaps in the model are amplified across the industry. This presents an existential threat to the whole industry, in a similar way to the banking industry’s reliance on the same few credit rating agencies before the global financial crisis. As such, there is an urgent need to ensure that insurers are able to generate more diversified views of risk and have the freedom to make their own assumptions about the underlying risk factors.

No insurer should wait for a large loss to happen before they seriously look at their risk exposure management tools. In a climate  where attacks are becoming the new normal and disasters of one kind or another will happen, the answer has to lie in insurance companies coming together to build a resilient exposure management capability. We need to find ways to generate the best possible understanding of risk and provide the tools the industry and underwriters need to drive forward improved risk management practices.