Risk Engineering

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This time we turn our attention to the critical topic of risk engineering. Once the corporation has a relationship with the markets behind the major policies, it can be very useful for the CEO and team to have an ongoing dialogue about the details of the assets being protected.

Critical questions, particularly in an asset rich organisation, will come from the underwriting team about the ability of individual locations to prepare for, respond and handle a major claim situation. The priority is usually the readiness to deal with fire, flood and windstorms, amongst other risks.

Most, if not all, insurance companies will price in an allowance for risk engineering and safety management, often referred to as a bursary, whether requested by the insured or not. This allowance in the policy is often set on an annual ‘use it or lose it’ basis.? It can be a very useful way for the corporation to get a contribution to internal funding for key risk management initiatives that are then approved and supported by the insurers.

Another way to use the allowance depending on the risk, and the market, is for the provision of risk engineering surveys. These are particularly helpful for a number of reasons, not least of which is they will tell the corporation how likely it is to lose its major assets and go bust.?

There are numerous structured? benefits of risk engineering. The provision of one or more highly experienced risk engineers who can look around the physical facility and provide a very detailed, expert report, ideally with risk prioritized findings is beneficial to all parties if managed in an appropriate way.

The CEO and his team should play an active role in selecting and approving the risk engineer. Ideally, the risk engineer should be practical and realistic. Some risk engineers are academic and end up suggesting unrealistic and financially unviable solutions. The almost ideal risk engineer is a retired fireman with decades of practical incident response experience as well as a strong engineering background. A good risk engineer will also usually ask to test onsite fire fighting capabilities including hydrant and hose management.??

The resulting risk engineering report provides an excellent health check for the operations team and is complementary to their own activities. A good report can help demonstrate to management independent verification they are doing the right things. A poor report can often be used as internal support to applications for capex or additional maintenance funding.

By completing the exercise the insurer gets more first-hand knowledge of the quality of the risk, which will help refine premium pricing. Even a poor report is useful as the insured can then demonstrate problems are getting fixed and systematic improvement over time. The corporation might never know exactly what the internal insurers report said about them but usually more information is a good thing rather than otherwise.?

In an advanced risk management program the CEO and his team of risk managers will be closely engaged with ratings given for each location, the potential for improvements, and the impact of those improvements on capacity, coverage and price across the program.?

A shrewd risk manager will insist on collecting all the detailed risk engineering reports from the lead underwriter. Over time this will build into a repository or library of independent health checks on the company. In the event of the need for a leader change – particularly if this happens unexpectedly –this repository is a vital source of information for the incoming team. It will enable the new underwriters to get up to speed really quickly and, in theory at least, get a premium reflective of reality (that means cheaper) much more quickly than would of otherwise been the case.

Of course risk engineering surveys are helpful outside the property space too. There are many examples different policies where the underwriter can benefit from better visibility and those benefits will roll through to the insured if the risk manager is managing the process effectively.

Next time we start to turn our attention towards claims. That’s when the rubber hits the road in the CEOs insurance program.?

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