Introduction:

The foundational principles of insurance generally revolve around what is called “risk-based” pricing. According to the definition of risk-based pricing from PricewaterhouseCoopers:

Risk-based pricing, also known as risk-based insurance, is a pricing framework that combines market data to deliver relevant pricing signals to those providing coverage. Based on models that seek to predict premium payment for different risks or outcomes, pricing guidelines provide a foundation for insurance providers to construct innovative, customized products.

Risk-based pricing does more than create a foundation for a more flexible form of insurance. It also serves as the catalyst for the creation of insurers who are able to serve markets that have not existed before. Risk-based pricing becomes a reality when market participants are given the freedom to offer more flexible and innovative insurance products. One of the primary goals of insurance policies is to provide protection for commercial risk, specifically from an insurance company’s perspective. Traditional insurance products are restricted by their actuarial and pricing models and subject to the laws of economics. For example, traditional insurance is subject to the basic laws of supply and demand. This fact coupled with the fixed cost and performance goals of insurance agents have limited how insurance products are customized to consumers.

This fact has led the insurance industry to seek new methods of premium billing, as they seek to use information from more sources to create an entirely new type of commercial risk product that can more accurately price risk and expand their capabilities to serve businesses.

Also Related: Tom Von Reckers Article

According to a 2008 report from Munich Re Group (Aon Insurance Company) titled “Risk for Profit,” here is a summary of the findings:

Reckers, Peter (2006) – Risk for Profit, Munich Re

A Risk Study for Commercial Insurance

Ancel, E. (2003) – A Breakthrough Approach for Commercial Insurance, Frost/Sullivan

Tom, E. (2001) – Filling the Gap in Commercial Insurance, Risk Management Magazine

Von, D. (2006) – Business Risk Insurance, Risk Management & Insurance Review

Von, J. (2009) – Reinsurance and Regulator Compliance in Commercial Insurance, Risk Management Journal

Tom Von, Frank Reckers, and Zachary Reckers (2013) – Commercial Insurance for the Bottom Line, Research & Analysis, Non-Retirement Benefits Administration

Valuable Insights:

Here are some of the valuable insights that were drawn from these studies:

Insurance is the most efficient risk management tool.

Insurance protects against both losses and risk of loss.

Insurance increases the bottom line of companies.

Satisfaction of the clients and insurance agents of commercial risk insurance is directly proportional to the overall quality of insurance.

Insurance can change from a risk-based pricing model to a risk-based delivery system.

The profitability of insurance companies depends on the results of the risk-based pricing model.

Insurance providers need to be able to provide insurance products that are robust and customized for their clients.

Risk Insurance for the Bottom Line

To illustrate the benefits of risk insurance, the authors recommend the following to an insurance company’s pricing strategy:

Define a risk profile for the client, so insurance can create a plan to use the most profitable risk products and services within their specific business.

Use the most efficient risk-based pricing models that will not only allow the insurance company to create the best commercial insurance plans, but also improve the overall profitability of the insurance company.

Make use of risk-based insurance delivery systems to reduce costs and improve overall service quality.

Von, J. (2009) – Non-Retirement Benefits Administration: The Critical Lever to Preserve Financial Value, Risk Management Magazine

Tom Von, Frank Reckers, and Zachary Reckers (2013) – Commercial Insurance for the Bottom Line

Therefore, the authors recommend creating risk insurance programs that can deliver value to both the insurance company and their clients. These programs include improving overall customer satisfaction through personalized insurance programs, expanding services and allowing insurance products to better serve their clients.

Risk Management Requires These Three Components

Commercial insurance agencies are seeking the expertise of a risk management consultant in order to develop a comprehensive program to best serve their clients. According to this report, the three components of risk management are:

A Risk Management System

A Risk and Insurance Management Program

An Insurance Master Plan

The insurance industry can provide their clients with these services using risk management software that can offer their clients proactive risk management programs. The software will enable insurance agents to better deliver insurance products that benefit both the clients and the insurance companies.

Hiring a Consulting Firm

A major benefit of hiring an insurance consultant is that they have extensive experience. Many insurance companies have relied on the recommendations of a consulting firm to create and maintain their insurance policies. Many consulting firms are also known to not charge large amounts of money for a new insurance policy.

Insurance companies that hire consulting firms have had several insurance experts that have had worked with the insurance industry for many years. With the help of consulting firms, insurance companies are more likely to create the most profitable insurance policies possible.

Von, J. (2009) – Non-Retirement Benefits Administration: The Critical Lever to Preserve Financial Value, Risk Management Magazine

Tom Von Reckers, E. Fleck, & Tom Von (2012) – Use Risk Management to Improve Company Profitability, Insurance Education

Conclusion:

The industry is changing and so are the insurance companies. Many insurance providers have struggled with low profits and shrinking profits over the past few years. Insurance companies need to make changes to allow them to sustain profits that will sustain their businesses for many years to come.

Insurance companies that are struggling to stay financially stable need to take risks to bring in new business. The insurance companies that will bring in the most business are the ones that will have the most competitive insurance policies.

Over the years, insurance companies have been changing and adapting their policies to appeal to a broader clientele. Many insurance providers are adjusting their policies to be more appealing to clients. A common theme in many insurance policies is risk management. Insurance providers need to implement risk insurance programs to ensure that they can stay financially strong while offering better services to their clients.