Back to Basics (December 01, 2008)

The cascading financial services crisis in the United States has risk managers on both sides of the border bracing for a bumpy renewal season in the coming year. The crisis has forced many risk managers to re-consider how they approach evaluating the financial stability of insurers, their insurance portfolios and whether or not they will move policies from carriers that have been red-flagged by rating agencies and the media.

To aid risk managers in navigating through the turbulent times, the Risk and Insurance Management Society (RIMS) hosted a Webinar featuring a panel of risk managers representing the corporate, public and educational institution sectors.

“These are extraordinary times and I think it’s really critical for a risk manager to go back to the basics,” said Webinar panellist Janice Ochenkowski, RIMS president and managing director at Jones Lang LaSalle Inc.

What does this entail?

The first step is to identify the issue and look at the liabilities the organization faces, Ochen-kowski said. “Quite honestly, over the next few weeks, these [liabilities] will be changing almost daily.”

The next step is to assess the potential liabilities and develop an action plan. “Work with your internal management and operations, implement the action plan and, on an ongoing fashion, assess it.”

Ochenkowski also stressed the importance of continuously monitoring the financial strength of insurers, as well as the lenders, vendors, clients, contractors and tenants upon which an organization relies.

“You notice that I am not saying that I am doing all of this [on my own], because risk managers themselves cannot fully control all of these aspects,” she added. “We need to work with other management. We need to show we are part of our senior management teams, and that together we add value in helping them create good, effective strategies for the business.”

STAY OR MOVE ON?

Monitoring the viability of carriers on an ongoing basis is good risk management practice, but what should risk managers do when it becomes apparent that a carrier with which they deal is operating on shaky ground? Should a risk manager seek coverage with a different insurer that appears to be withstanding the economic crunch, or should they stick it out?

“This thing is happening and cascading so quickly that you can get blindsided,” warned William Strachan, director of risk management for the City of Enfield, Connecticut.

Leslie Seabrook, director of risk management for Dartmouth College in Hanover, New Hampshire, agreed with Strachan. She admitted she is concerned not only about AIG, but other insurers as well. “I believe that we haven’t heard it all yet, and things will continue to unfold,” she said.

Seabrook said that in addition to monitoring the financial stability of carriers, her department has also been checking the cancellation wording on the college’s policies “to ensure that if we made the decision to get out from under an insurer, we would have the ability to do that.”

The school’s insurance renewal is in July. She voiced her concern — echoed by risk managers across all sectors — that the market will have hardened considerably by that point.

Ochenkowski suggested there are two schools of thought on whether or not the market will begin to harden.

On the one hand, she noted, the need for cash flow in the wake of diminishing investment returns might lead to a hardening market if “market [participants] stand firm on pricing [they need] to maintain in order to manage their business.”

On the other hand, Ochenkowski continued, “the same need for investment income is going to continue the soft market because there will be competition for those [premium] dollars and the need to have that cash flow [to offset investment losses] is going to continue, and that will continue to drive prices down.”

Ochenkowski admitted she was uncertain which of the two scenarios would occur.

Strachan said he had a gut feeling that as insurers’ investment income dries up, it will lead to adjustments that result in a hard market.

“Insurers are experiencing underwriting losses,” Strachan observed. “As of [year-end 2008], the industry’s combined ratio is estimated [by A. M. Best] to reach 103%, the surplus is dropping like a stone and loss ratios are climbing.” In addition, he added, the number of people able to make infusions of capital into the market is diminishing.

“It’s going to be surprising, it’s going to happen quickly and it’s going to be very volatile over the next six months,” he concluded.

Seabrook said risk managers must take this opportunity to step back and evaluate an organization’s insurance portfolio, including limits, retention levels and policy enhancements. “When the market is soft, you tend to buy more limits because it makes good economic sense to do so,” she said. “Certainly in the next six months, we’re going to be looking at the whole insurance portfolio; not only the carriers and watching the viability of those, but also the retention levels. Are they appropriate? Can we move it up a little bit? What kind of coverage are we willing to give and take on? Just be prepared for those kinds of discussions and analysis with your senior management.”