Building a Bigger Picture: Effective Risk Management Programs

Rebecca Fuller


June 1, 2022

Sponsored content by Kroll

Need for Effective Risk Management Programs

Historically, insurance policyholders have engaged a valuation company either at a point of pain, where they have suffered a recent loss and discovered that their assets are underinsured, or because the duration of time elapsed between valuations has become too great to be acceptable by the market. Due to the hard market and increasing ambition to have better data, the insurance industry is now more focused on accurately declared replacement cost values. 

Since the beginning of the pandemic, both pressure and process around valuations have changed. Insurers will no longer turn a blind eye or accept a 10-year-old valuation, risk managers want consistency and accuracy of data throughout their portfolio, and board members expect that global environmental, social and governance (ESG) objectives be taken seriously. This has increased the need for accurate valuations and efficient processes. 

It is crucial for policyholders to know the full replacement cost value of assets for insurance purposes—whether they own a large, complex multi-jurisdictional portfolio or only a single property. In the absence of accurate replacement cost values, policyholders cannot be sure if they will be adequately compensated by insurance in the event of a partial or total loss.

Effective risk management programs help businesses to be prepared for contingent liabilities, provide insights and support to their board of directors, and improve resource deployment.

Why Underinsurance Is a Risk

A recent analysis of 1,455 real property assets showed that 68% of buildings valued from 2020 to 2021 were underinsured by 25% or more and 19% were underinsured by 100%.

Businesses can face dire consequences if their properties are underinsured. In the event of a loss, they may come across some of the following challenges:

  • Adverse impacts on existing resources and business operations
  • Less negotiating power during policy renewals 
  • Unrecoverable financial liabilities 

Having an effective risk management program can help businesses overcome such challenges and mitigate loss.

Risk Management Programs

Multinational firms across various industries have understood the need for effective risk management programs and have engaged valuation providers to determine accurate property values and replacement costs. 

Allocation of Accurate Premiums. A large multinational energy corporation has a global portfolio of electricity generating assets ranging from conventional thermal power to advanced energy storage installations. It operates a total of 29,688 gross megawatts across four business units. The corporation also operates an insurance captive. A coordinated approach to asset valuation is essential to give the insurance captive certainty that all the assets are being valued consistently by a globally recognized independent valuation provider. This allows the captive to accurately allocate premiums and gives confidence to the panel of reinsurers that the declared values are correct.

Periodic Reviews. The multinational energy corporation also partnered with a valuation provider for a comprehensive rolling valuation program, which typically consists of an initial, site-based valuation followed by annual desktop reviews for a period of around seven years, when another site visit will be scheduled. The annual reviews will consider all relevant movements in commodity and engineering, procurement, and construction pricing and any major changes of individual assets. This will enable the corporation to be accurately insured and prepared for risks.

Virtual Inspections. One of the world’s largest bottling companies has a valuation cycle of five years. The business consistently provides its valuation provider structured data, which allows for the use of an expanded range of methodologies that create efficiencies throughout the valuation process. The company engages its valuation provider to carry out site visits, desk-based and virtual inspections on a rolling basis.

Global On-Site Visits. One of the world’s largest pharmaceutical companies has an exemplary attitude to risk management. Due to the complex and sensitive nature of assets across its global portfolio, it prefers its valuation provider to conduct a site visit every five years at each location and updates the values from the desk each year in the interim.

Time and Budget Expenditure. A globally renowned franchisee of a retail chain has established 45 experience-oriented shopping centers throughout the world and over 500 retail outlets or distribution centers. The firm wanted to improve its valuation program by centralizing and using its valuations to produce more consistent data to benefit its insurance placement. To execute its objectives, the firm partnered with a valuation provider to manage its valuation program and liaise with an extended team of local in-house valuers to reduce travel time, risk management time and associated budget expenditure.

Digital Applications. One of the world’s largest insurance firms partnered with its valuation provider for a digital application to manage its own portfolio and associated risks. The firm, with the help of its valuation provider, brings great value to its clients through independent advice around valuation accuracy.  

What Makes a Risk Management Program Effective?

The key to developing an effective risk management program is a framework that allows risk managers to assess the key factors relating to valuation in their business and properly prepare to structure the framework elements to benefit the wider business. This framework is used to guide risk managers in properly assessing factors such as asset data structure, reporting requirements, internal resourcing and timing, which are all crucial to the efficacy of reporting values for insurance. Organizations and risk managers should consult their valuation partners for a framework that is best suited to their needs.

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Rebecca Fuller is Managing Director and Global Fixed Asset Advisory Services Leader at Kroll.