Information & insurance: the power of transparency; Now, even relatively small companies can access the data and analytical tools necessary to make better risk-retention, risk-transfer and risk-financing decisions.

• Author: Bradford, David K.
• Position: Insurance risk

Insurance is fundamentally a simple product with a clear purpose--to make individuals and businesses whole following certain types of economic loss. However, for today's financial executives, the processes of pricing risk and of buying property and casualty insurance can be, as Winston Churchill once said of Russia, "a riddle wrapped in a mystery inside an enigma."

For larger firms, insurance can be a multi-million-dollar expenditure. Mistakes in the type and amount of insurance purchased, or in the choice of an insurance company, have potentially devastating consequences. Yet, commercial insurance buyers frequently do not have access to the information necessary to make informed buying decisions.

A recent survey of buyers of commercial insurance by Advisen Ltd. found that 74 percent of the nearly 700 respondents want a standardized and transparent insurance transaction process, and 67 percent want better information on the prices and terms being transacted in the insurance marketplace. The survey profiled insurance buyers' opinions on the impact of New York Attorney General Eliot Spitzer's recent suit against alleged bid-rigging and other anti-competitive practices. Written comments from respondents made it clear that many buyers intend to increase direct communication with underwriters and be more involved in evaluating quotes.

But much of the information needed to fully assess and price risk is locked away in the policy and claims statistics amassed by insurers, who have little incentive to share this information with their customers. Brokers can supply market knowledge and risk expertise, but they also may suffer from information gaps. And, as has recently come to light in Spitzer's probe of the insurance industry, the incentives of some brokers have not always been aligned with the best interests of their clients.

Fortunately for commercial insurance buyers, digitized data and the technologies to rapidly transmit, compile and analyze those data have simplified the processes of assessing, managing and financing risk. Buyers can tap into databases of risk-related information to help quantify and price exposures.

A new generation of online tools can assist in analyzing risk-financing alternatives, and can benchmark insurance program structures and pricing against a company's peer group based on near-real-time market information. For the first time, even comparatively small companies have access to the data and the analytical tools...