Rewriting the Insurance Playbook: ERM’s Strategic View of Risk

Using an ERM framework for insurance transformed one company’s decision-making and coverage strategies.

Faced with rising premiums and pressure to optimize costs, one NeuGroup member refocused his team’s insurance strategy around the company’s framework for enterprise risk management (ERM). That enabled more thoughtful, data-driven decisions about spending and coverage. The key objective, the member said, shifted from “Do we need this policy?” to “Is it worth the cost?”

• “ERM helped us understand where to allocate resources,” the member said in a recent meeting of NeuGroup for Insurance and Risk. “Now we can calculate the return on investment for decisions like buying property insurance or installing sprinklers, run a sensitivity analysis, and figure out where these actions should rank compared to other investments in the company.”

Data-driven reprioritization. The ERM framework brought insurance decisions and discussions into focus at the highest levels, including the board and senior management. This data-driven reprioritization had quick impacts on coverage strategies.

• The team discovered they were overinsured on property and product risks and adjusted deductibles and limits. This enabled them to pull back and “retain” (i.e., self-insure) the risk of some property damage.
• Meanwhile, the board’s growing concern over cyber threats led to an increase in cyber insurance. The member said this wouldn’t have been possible without “trimming back” coverage for property and product risks, “allowing us to focus our premium spend on the program with the highest return.”
• He said one of the most significant benefits of an approach rooted in ERM principles is the development of a consistent methodology for evaluating insurance programs, making it easy to replicate for future risks and ensuring more efficient resource allocation. “The conversation is now more about how much risk we’re willing to retain—should we buy insurance if the impact is insignificant or minor?”

Benefits: The member said the major benefits of the strategy shift so far include an ability to:

1. “Rank, in order, the insurance programs that have the highest ROI, allowing us to focus our premium spend on the programs with the highest return.
2. “Determine which mix of deductibles/limits are most cost-effective.
3. “Deliver on my commitment to tie our insurance strategy into our ERM framework and create a consistent methodology for evaluating insurance programs.”

A strategic rethink. This process began with an expansion and reorganization of the company’s risk department, bringing a number of controls functions—including insurance—under the broader ERM banner.

• Other insurance leaders in the NeuGroup session said they have been seeking a more systematic assessment of the risks they face. The member said his team started by leveraging the ERM team’s risk register—a tool that lists, updates and organizes potential threats.
• The company hired consultants and actuarial experts to quantify potential exposures and make informed decisions on risk retention versus risk transfer. A financial services firm ran actuarial modeling on property insurance, and the team worked with consultants from the Decision Empowerment Institute (DEI) to assess risks where they lacked large datasets.
• “We’re using our ERM risk register to effectively create a discounted cash flow analysis out of the risks we’re reporting,” the member said. This means the team assigns a financial value to risk exposures and evaluates whether to transfer risks through insurance or manage them internally.
• DEI’s models were especially useful for risks like product liability, where industry-specific data was sparse. This helped the company gain a deeper understanding of the financial exposure to rare but significant risks, shaping smarter insurance purchases.
• “They can apply some modeling that’s way over my head to help us understand what we think the cost of risk will be,” he said. “A lot of that just comes through from time spent interviewing panels of experts, people who really sit close to the risk and understand the risk: How likely do we think this event is going to occur, and if it occurs, what type of cost will it be?”