From loss coverage to prevention - the ‘Great Recalculation’

Zurich sheds light on the role of insurance in a world fraught with more risk and how mitigation can help rebalance the scales

From loss coverage to prevention - the ‘Great Recalculation’

Professionals Risks

By Bennett Richardson

This article was produced in partnership with Zurich

Insurance has always been a social good.

Without insurance, businesses great and small would have to set aside large quantities of capital, or find other investment mechanisms, to smooth out the financial shock following unwanted incidents.

But the 2020s is shaping up to be the decade when the narrow role of insurance to cover an unexpected loss shifts to a broader focus where insurers actively reduce and prevent risks from arising in the first place.

It might seem like a subtle change – but this is perhaps because its causes have crept up on the world and eroded insurance capacity gradually. 

“We are seeing this more often, with greater variety of uncertainties and emerging risks for which there is no conventional insurance protection,” says Mervyn Rea, head of Zurich Resilience Solutions (ZRS) for Australia and New Zealand.

As a result of the effects of emerging risks cropping up more frequently on balance sheets, businesses and insurers everywhere are reassessing what can realistically be insured and how mitigation might factor into the equation to help bring some of the risks that have been pushed outside the envelope of what is insurable back into the fold.

Call it the Great Recalculation.

Why this time is different

There are several candidates for the catalyst behind the shift in how insurers ought to approach risk. One obvious one is the pandemic, something that seemed straight out of Hollywood in the initial shocking phases – but upon reflection, so too did 9/11 and its aftermath.

The real poster child in the Great Recalculation is climate change.

“Our changing climate is fast becoming the number one discussion topic that sees me and my team engage with more than just traditional insurance and risk managers,” says Rea.

Rea now talks with increasing frequency to CFOs, CEOs, Boards of Directors and other key stakeholders in the wider business environment about using Zurich’s services to boost resilience to climate change as more ferocious weather events impact their businesses as a regular occurrence.

In some regards, the idea of weather events as emerging risks impacting a business’s future earnings is much more predictable than a global pandemic would have been five years ago. The need to mitigate against weather risk in the 2020s is a no-brainer because no one realistically expects there to be fewer such events in the future.

“Understanding the many risks that can occur is key for a business of any size to become more flexible and adaptable to risk management,” says Rea.

What’s more, risks do not always materialise in isolation.

“Once a business understands this complexity, and their exposures, and then evaluates the magnitude of that exposure potential, they can make clear and tactical decisions on how to prevent and prepare for events that can lead to injury to employees or members of the public, financial loss, interruption to activity at their own premises, or severe interruption and disruption upstream to suppliers, or downstream to customers,” says Rea.

Flattening the risk curve

Zurich is one of a handful of companies to have realised the sea change taking place in both the business environment and customer attitudes toward risk and the need to actively tamp down risk impacts. It is also one of earliest to retool its offerings for this brave new world.

Its ZRS unit was set up just over two years ago as part of a revamp of existing risk engineering infrastructure to create a wider range of insurance related and non-insurance related risk management solutions, such as cyber, supply chain and climate change.

“We work with businesses to remove uncertainty and be more resilient to unwanted incidents and events,” says Rea.

“Zurich wants to be able to offer our customers prevention AND protection.”

Remarkably, ZRS services and solutions are available to all businesses regardless of whether they are a Zurich customer or not.

As more companies realise the necessity of hedging against a riskier world, business has grown rapidly at the unit.

“We are seeing an increase in demand for services, for instance, in improving motor fleet operational risk, reducing crashes, keeping vehicles on the road, and at the same time, improving fuel efficiency and reducing carbon emissions.”

The customer benefits of this change in thinking are clear in real world examples.

ZRS had a freight rail operator customer with a critical piece of maintenance machinery located in a significant flood exposure zone.

“It quickly became apparent just how costly the loss of this equipment would be, and the reduced effective maintenance could lead to other losses, inefficiencies and potential interruption to normal business activity,” says Rea.

Rather than lift the premium and gamble against a flood not occurring, ZRS worked with the customer to construct a modern, duplicate facility elsewhere.

Another customer introduced a waste chute in their warehouse which ZRS found to be inadequately protected by sprinklers. Not long after fixing the issue, a small fire broke out that was easily contained.

Running a counterfactual reveals the outsize financial impact that was circumvented.

“A large fire could have resulted in a temporary closure of the retail store, loss of earnings/sales, delay in replacing damaged stock due to international supply chain issues, disappointed customers, and probably made the news, resulting in deteriorating reputation,” says Rea.

There is no shortage of risks to mitigate when this thinking is applied – others that have been flagged by insurers looking at emerging risks include supply chain vulnerabilities, a changing social and geopolitical landscape, changing demographics, and advances in technology.

A solution for the post-pandemic, climate compromised world

Many of the problems thrown up by the new, magnified risk environment can be addressed through technology.

The Zurich Risk Advisor app provides a secure, easy-to-use application with many different types of risk assessments that follows the doctrine and methodology that Zurich risk engineers use.

“This allows business owners, risk specialists and insurance brokers to conduct their own self-assessments for risk evaluation, mirroring our own semi-quantitative risk grading methods, and also generates suggestions for risk improvement,” says Rea.

Zurich is also looking at using emerging innovations and technology to create new ways to evaluate risk, including via AI and data analytics.

“Right now, we are partnered with a specialised data management and analytics company to help identify uninsurable financial risks and business operational efficiencies,” says Rea. Eventually, these risks may become insurable if the right mitigation tools can be found and implemented.

Research shows that consumers want insurers to approach risk in the business world by moving from compensating for a loss that occurred in the past to predicting the impact of a risk and providing solutions to protect against it before it eventuates – either circumventing it altogether or bringing its impact down to an insurable level.

Talking about preventing disasters before they happen sounds like science fiction – but it is essentially risk engineering taken to its logical acme point.

While we may not have the ability to predict the weather, the property market or the fates of societies, Zurich already has the knowledge and means to map out the consequences of businesses not mitigating against any number of risks and the tools to prevent unnecessary damage.

“Marrying risk management and insurance together is a perfect remedy that helps avoid losses from occurring,” says Rea.

Zurich Financial Services Australia is the local arm of Zurich Insurance Group – a leading multi-line insurer that serves global and local markets. For 100 years, Zurich has combined global expertise with local care to provide leading wealth and insurance solutions. Zurich’s general insurance business is dedicated to a fully intermediated broker advice model. This approach is paired with a state and regional presence, empowering local teams to make local decisions on the ground. We are passionate about our purpose to ‘create a brighter future together’ and use our resources to contribute to communities through disaster resilience, community partnerships and sustainability.

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