The Changing Nature of Insurance and Risk Management in light of the current pandemic

Interview with John Mina, CEO of DeWitt Stern Group-Risk Strategies

Today, businesses focus their energy and resources on mitigating risk and adapting their operations. Those who can accurately assess the changing nature of the market on a day-to-day basis are the winners. In response to the increasing importance of this business need, SACCNY reached into its network and collaborated with risk strategies expert, John Mina, CEO of SACCNY member DeWitt Stern Group-Risk Strategies, who has been at the forefront of the insurance industry for more than 30 years. He shares insight into the crucial role of managing risk during the pandemic – and after.

Above describes the new normal for businesses today as governments mandate non-essential businesses to close.

How do you see insurance and risk management changing in the face of today’s COVID-19 crisis?

The changes are likely to be fairly widespread. I would put them in three categories: the overall health of the insurance market, companies’ heightened awareness and focus on business risks like pandemic and cyber, and human capital.

Prior to the emergence of COVID-19 and the resulting pandemic, the property & casualty insurance industry was already in a “hard” market.  Insurance carriers were seeking significant rate increases, moving away from unprofitable classes of business and restricting some terms and conditions. While there were many reasons that precipitated those actions, the simple reason is that insurance companies needed to improve their underwriting results. The COVID-19 crisis will undoubtedly put further strain on insurance company results leading to continued rate increases.

This pandemic has made us more focused on the risks that can dramatically impact business and our economy. Insurance and risk management will move to the forefront as methods to avoid, mitigate, and transfer the risks in an increasingly perilous world.  Pandemic, climate change, and cyber are real and continuingly imminent risks to our personal and economic ways of life. Going forward businesses will likely focus more on enterprise risk, the applicability of insurance policies, business continuity planning, risk control and other mitigation techniques. We expect that businesses will also seek out alternative risk financing plans, like captives and self-insurance, to reduce their overall cost of risk.

The cyber risk landscape was already undergoing a paradigm shift in the landscape prior to COVID-19 and has rapidly deteriorated due to unanticipated changes arising out of the response to COVID-19.   In the past the primary focus of cyber threat was on gaining access to personally identifiable information that can be monetized on the black market.  Threat actors are now striking when companies are most vulnerable, taking advantage of workers not being physically on premises and following established protocols to verify the legitimacy of correspondence with their colleagues and trading partners. 

What are some actions that companies can take to be more resilient against these types of events?

Over the past 20 years we’ve experienced three “black swan” events which, by definition, were unique in their own way and largely unpredictable – the events of 9/11, the 2008 financial crisis, and now the COVID-19 pandemic. Despite that, some companies have weathered the impact of those events much better than others.

Benjamin Franklin was famously quoted as stating that “An Ounce of Prevention Is Worth a Pound of Cure”.  I think the importance of a company taking a holistic review of risk is becoming increasingly more important, along with a review of the company’s ability to weather systemic shocks.  Business continuity and Disaster Recovery planning is one of the first areas a company should look at, though it’s important to keep in mind that a pandemic is different from other threats like natural disasters and power failures.  Most business continuity plans are developed for an event such as a hurricane and are usually specific to a narrow geography.  A pandemic is fundamentally different in that it is a truly global event.

Answering the question of how you’ll stay in business is critical.  Reviewing your “Key Man” risk is an often overlooked exposure; sometimes the most important person in the company is not an executive but the person who maintains your licenses or data.  To the extent that some businesses primary assets are human capital, facilitating and accentuating the connection between people through more flexible work arrangements and communication will allow for greater resiliency among a dispersed workforce.

Finally, when it’s time to look at insurance we frequently see insureds try to buy deductibles as low as possible rather than invest in the safety of the business.  While the investment approach is often more difficult, it generally provides for greater long term returns and a more resilient business.

How should our members be prioritizing their resources in today’s business landscape?

To start, we need to look at the current situation as a health crisis first, and an economic and business problem second. How we as leaders respond and treat our employees during this period will have a significant impact on the culture of our organizations going forward. In a service economy such as the United States the majority of expense is payroll and benefits and our first priority needs to be focused on retaining our associates and keeping them employed.  Prioritizing the retention of employees through the provision of employee benefit plans that are configured as a constituent element in an employer’s value proposition, will give employers emerging from this crisis a competitive advantage.

Most companies don’t have a significant cash reserve. The readily available access to cheap capital has made holding onto cash a poor decision so it is critical to get in front, if at all possible, of the pain that your organization may face and make proactive decisions, with the goal of having minimal impacts to the most vulnerable of your employee population.  The next step is preservation of cash and prioritization of vendors critical to your business.  Early communication with key vendors can achieve a balance of terms that will provide them with the liquidity they need so they can continue to be responsive to your business needs, and achieve the goal of cash preservation for your firm. Taking these steps will allow your firm to emerge from this crisis at or near full employment and more readily take advantage of what will hopefully be a rapid and robust recovery.

Big hurdles – businesses must navigate a market with limited capital.

Do you foresee any changes or challenges that may impact global markets?

Yes.  M&A will be impacted as buyers and sellers push those decisions further out, buyers because they will want to be careful about deploying the limited capital. Sellers will want to avoid selling in a depressed economic market.  Much of the recent M&A activity has been fueled by debt, and there may be a pullback from lenders given the precarious position many companies are in now due to the crisis.

How we look at supply chain risks will become more important and actions that were once considered to be very efficient will have a new level of risk associated with them.  For example, how we think about offshoring or on-shoring work in centralized operations will be looked at through the fresh perspective of recent events in India, China and our own work from home arrangements.

This crisis is testing the global delivery of healthcare services. All systems whether commercially or nationally based have been stretched to the breaking point in response to the pandemic. Global healthcare delivery will necessarily look at its ability to adapt and withstand this sort of threat. One small conclusion is that virtual healthcare which has taken a backseat to traditional care will emerge as a meaningful alternative for all health systems.

DeWitt Stern Group-Risk Management is a SACCNY flagship member and a top New York City insurance and risk management firm. If you would like to know more about how your company can mitigate risk during this time, please contact the SACCNY team to get connected!