The extent of damage caused by a variety of recent major world events has highlighted the importance of insurance while simultaneously rattling the industry, writes BAI Communications’ Chief Risk Officer Andrew Potter.
I was recently tuned in to ‘Who Wants to Be a Millionaire’ to for some background entertainment while feeding my four-month-old son when one of the questions triggered an ‘a-ha’ moment.
I was stunned to learn that not only is the answer, C, insurance companies, but that the fire brigade only came to your aid if you were insured (read the history of NSW Fire Brigade to learn more). Luckily, times have changed and that’s not the case today.
This led me to think about the practicality, as well as the value, of insurance. Aside from mitigating possible financial loss, it takes the risk of the insured event out of our hands and makes it someone else’s problem.
4Ts of risk management
One of the first things you learn when studying risk management is the concept of the 4 T’s, which are the different ways that you can control a potential risk:
- Treat (you treat or mitigate the risk to an acceptable level)
- Terminate (you choose not to pursue the risk and avoid it all together, if possible)
- Tolerate (you choose to live with the risk and accept it)
- Transfer (you choose to make it someone else’s problem)
- I also believe in a fifth ‘T’, Take advantage, but that’s another discussion.
Insurance very much falls under the concept of ‘Transfer’; however, this is only true for managing tangible losses. Insurance can’t restore a company’s reputation. Although covered, a company may be viewed as careless, or worse, if it hadn’t also taken preventive measures to ensure the damage and loss were minimised. Transfer and reputation risk are positively correlated, so you have to be careful and balance ‘Transfer’ with prevention.
BAI Communications’ recent insurance portfolio review revealed to us the extent of the almighty hit that the insurance industry suffered as a result of major world events in our recent past, including:
- multiple cyclones and hurricanes worldwide
- the Californian wildfires (in 2018, property/casualty insurers paid out US$13 billion in losses, following US$12 billion paid out in 2017)
- the Australian bushfires (the insurance industry’s loss is estimated at A$1.9 billion / US$1.3 billion)
- covid-19 (such as the impact of related issues, including devastated service industries and increased cyber-criminal events).
I think you’ll agree that insurance is an important means of financial control, especially when you consider the reality of the unimaginable actually happening, as it certainly has in very recent times. In Australia, BAI Communications operates and/or maintains $2 billion of infrastructure across 752 sites. In 30 years, BAI has had to make five claims relating to property, with the most recent being fire damage at our Mt Wandera site during the 2019/2020 summer bushfire season. Despite all the preventative measures we had in place, such as a fire protection zone and a relationship with the Rural Fire Service (RFS) to protect BAI’s critical infrastructure that provides communications technology for the emergency services and emergency communications to the public, we still had to claim damages although much less than we would have without extensive protection measures in place.
Risk management at BAI
BAI, like many larger organisations, has a range of insurances to help mitigate financial risk and manage some potentially significant losses, including:
- property: this is coverage for loss of assets and revenue, and increased cost of working (the last being expenses incurred in temporarily restoring services) that arise from external causes such as fire, theft, natural disasters, and accidents
- liability: this covers legal liability to third parties for personal injury and property damage such as claims of negligence
- travel: covering domestic and international business travel
- motor vehicle: comprehensive vehicle insurance for the current fleet of 32 company owned vehicles.
- professional indemnity: covers claims of financial loss due to negligent or incorrect advice, design, and information provision such as consultancy and professional services to third parties
- cyber: covers costs incurred by cyber-attacks on the BAI Group and financial damage to third parties affected
- marine transit: covering both domestic and international shipping, including road and air freight
- construction: cover for risks where the business undertakes construction for third parties and while it works on its own and third party sites
- crime: covering fraud and theft
- directors and officers: covers directors and officers in the event they are personally targeted for actual or alleged wrongful acts in managing a company.
These days, insurance is becoming more difficult to place.
BAI Communications’ portfolio approach allows us to place insurance coverage at an acceptable rate and level. However, if the insurance industry continues to be devastated by natural disasters and premiums continue to grow then future strategies and alternative solutions to insurance may need to be considered, which could further disrupt the insurance industry.
In any case, the best we can do is not only make those risks someone else’s problem by making sure that we have the best insurance cover we can afford; we must also maximise the preventative measures we have in place to help avoid the problem altogether.