By Peter Crowe |

Originally published on CLM Magazine February 12, 2025

Discovering a planned risk remains uncovered due to outdated or false information can be embarrassing and costly. In the popular children’s story, The Emperor’s New Clothes, a con man convinces the emperor he is dressed in garments of unparalleled beauty. Ultimately, the emperor parades through the streets in only his underwear, blissfully unaware of the deception (we’ve all had this dream, haven’t we?).

In insurance, exposure management helps insurers assess and mitigate risks, but what happens when exposure management solutions fail to capture real-time data related to specific perils or properties? Typically, exposure management focuses on a limited scope—the perils and coverages explicitly included in policy agreements. This means, unintentionally, the process often overlooks the importance of understanding risks insurers deliberately exclude from coverage. This oversight can lead to significant financial and operational challenges, particularly during catastrophic events when policyholders are more likely to file claims regardless of coverage specifics.

Claims in Excluded Coverages

Insurance professionals frequently encounter claims submitted despite exclusion from policy coverage. For example, during Hurricane Florence in 2018, policyholders in North Carolina filed numerous claims for flood damage, even though standard homeowners’ policies explicitly excluded floods. Similarly, claims for fallen trees that do not cause property damage—another common exclusion—continue to appear in insurers’ claim queues. The same situation is likely to happen in the aftermath of 2024’s devastating Hurricane Helene. 

Although these claims are typically denied due to lack of coverage, there are still processing expenses incurred. Right or wrong, the administrative burden of reviewing and denying non-indemnifiable claims strains resources, particularly during catastrophic events. High claim volumes can overwhelm insurers, reducing operational efficiency and increasing costs. Therefore, effective exposure management must consider not only covered risks, but the financial and logistical impacts of excluded perils as well.

The Cost of Denials

Denying a claim may seem straightforward, but it involves significant costs. Every claim undergoes thorough review by claims professionals to ensure the denial complies with policy terms and regulations. This process incurs administrative expenses, labor hours, and, in some cases, legal consultations.

During catastrophic events, claim volumes often spike—including claims for excluded risks. Policyholders under stress and without access to policy documents tend to act on impulse and emotion. Typical thought processes lean into the idea that it is better to file the claim and be denied than to wait for weeks to determine if specific damages are covered and delay claims payments further. Insurers must, therefore, scale up operations, adding temporary staff or authorizing overtime to meet demand.

Strategic Exposure Management

To address these challenges, insurers must invest the time, energy, and budget dollars in building a comprehensive exposure management strategy. This requires assessing the risks associated with covered perils and the potential exposure from excluded risks. Since the definition of “excluded risk” can evolve, real-time data integration is essential. By incorporating proactive exposure management into core administration systems, insurers can correlate claim denials with up-to-date information that accurately reflects intended exclusions.

Proactive exposure management includes:

• Risk concentration analysis—understanding risk concentration beyond static, point-in-time reports.
• Claims team training—educating claims professionals about the implications of non-indemnifiable risks.
• Real-time data access—leveraging technology to identify patterns and anticipate claim surges.

Implementing Effective Exposure Management Practices

When implementing an exposure management strategy, insurers need advanced data analytics and modeling tools to help anticipate claim volumes (for included and excluded perils) during catastrophic events. After the Camp Fire in 2018 in California, insurance companies, like State Farm and Allstate, for example, utilized predictive models to allocate resources more effectively in anticipation of a surge in claims related to smoke damage.

Additionally, robust training programs enhance claims professionals’ understanding of risk concentration and non-indemnifiable perils, improving claim-handling efficiency. Adequate staffing and resource planning can also help insurers manage increased claim volumes. Meanwhile, clear communication with policyholders, such as the educational campaigns by the Consumer Federation of America (CFA) after 2021’s Hurricane Ida, reduces confusion about coverage limitations and clarifies exclusions while helping to reduce the number of non-covered claims.

Technology that automates first notice of loss (FNOL), streamlines initial claim reviews, reduces administrative costs, and frees up human resources for complex cases can’t be overlooked in an exposure management strategy. Insurtech solutions, like triage systems powered by artificial intelligence (AI), can be invaluable during catastrophic events.

Avoiding the Emperor’s Misstep

Exposure management is not just about managing covered risks. It’s about preparing for the financial and operational implications of excluded perils as well. By adopting a more comprehensive, proactive approach, insurers can enhance operational efficiency, reduce unnecessary expenses, and maintain financial stability even in the eye of the storm, so to speak.

As the insurance industry faces evolving risks and new challenges, the importance of effective exposure management cannot be overstated. It is a critical component of safeguarding insurers’ financial health and maintaining policyholder trust. With the right strategies in place, insurers can avoid finding themselves, like the emperor, walking around in their proverbial underwear.