Beacons

BROKER CEO PANEL

The jury is still out on whether disclosure is a sufficient measure for handling contingency fees — or even on whether contingency fees still exist, according to a CEO panel at this year’s Risk and Insurance Management Society (RIMS) Canada Conference in Halifax.

But the panel of CEOs could all agree on one thing: governments need to become involved in backstopping the underwriting of terrorism risk.

The 2007 RIMS Canada Conference kicked off with a broker panel consisting of Stephen P. McGill, Aon CEO, risk services, Americas; Roger E. Egan, CEO, Integro Ltd.; Philip V. Moyles, executive vice president of Marsh; and Donald Bailey, CEO of Willis, North America.

Contingent Commissions

The panelists were divided on the question of whether or not disclosure was sufficient to address the issue of contingent commissions. A majority of CEOs on the panel argued that transparency is the cure to a conflict of interest; others suggested transparency merely highlights — but does not address — a potential conflict of interest that may arise when brokers receive contingent commissions from insurers.

Egan stressed the importance of transparency as an antidote to the potential of a conflict of interest. “With transparency, that form of [contingent] income will become the subject of negotiation with buyers as to what the overall compensation will be for brokers, and that’s healthy,” he said.

McGill agreed transparency is important, but he said he’s not sure of the direction the industry is taking on the matter. Referring to A.M. Best research, McGill noted that in 2006, across commercial and personal lines, brokers took in roughly US$4.6 billion of contingent profit — a US$1-billion increase over 2004, which pre-dated New York state attorney general Eliot Spitzer’s investigation of the industry’s practice of collecting contingent commissions.

Bailey said Egan’s exclusive reliance on transparency was “offensive.” He argued the potential for a conflict of interest is not eliminated just because it is disclosed. The focus needs to be on delivering value, he stressed. “It’s not a question of what’s legal, it’s a question of what’s right,” he posited.

Disagreeing with Bailey, Moyles said contingent fees are not going to be replaced and are here to stay. “From my personal perspective, determine what you are, and who you are, and represent that to your clients and prospects,” Moyles advised. “And then you can have a discussion about compensation and where it comes from — whether that be the marketplace, directly from the client or a combination of thereof.”

Terrorism Coverage and Government Backstops

During the broker panel, RIMS Canada chair Kim Hunton noted the risk of terrorism is increasing and the government is reluctant to fund such losses. Based on this observation, she asked: What changes are required to allow the insurance industry to underwrite terrorism risk?

McGill estimated a dirty bomb attack on a major metropolitan area could cause between US$500 and $750 billion in damages. Currently, stand-alone terrorism capacity is about US$1.5 billion, he said. And the reinsurance industry, with capital markets factored in, could chip in between US$8 billion and US$10 billion in additional capacity.

The huge gap between the estimated insured losses from a terrorist attack and available capacity, when combined with a whole host of other factors, could create a major problem, McGill said. Exacerbating factors include a disconnect between what reinsurers are charging and what insurers are willing to charge their clients, no long-term government solutions, a lack of confidence in modelling capabilities for such an event, and “a real disincentive to the industry to more readily support terrorism placements and a disincentive to capital markets,” McGill said.

Bailey, Egan and Moyles all agreed, stressing the insurance industry is in dire need of some kind of long-term government solution. “We have to have a government backstop,” Moyles said. “We need to look at a backstop as a risk mitigation tool. The whole purpose of a terrorist attack is to disrupt economies. The insurance industry is a large part of the economy. That said, a backstop would mitigate the risk of a massive disruption.”

INSURER CEO PANEL

Contract certainty and delivering shorter service times remain sticking points in the relationships between insurers and risk managers, delegates heard at the insurance company CEO panel at the Halifax RIMS Canada Conference.

Also, the panelists agreed, everyone in Canada’s insurance industry must work together to find solutions for adapting to climate change.

Following on the heels of the broker panel, the insurer panel was co-chaired by RIMS president Janice Ochenkowski and RIMS Canada Council member Kim Hunton. The panel included Brian J. Hurley, executive vice president of FM Global; Kristian P. Moor, executive vice president of AIG, and president and CEO of Domestic Brokerage; Urs Uhlmann, senior vice president of Zurich Canada; and Richard Ward, CEO of Lloyd’s of London.

Contract Certainty

As a relative newcomer to the insurance sector, Ward said he was surprised when he realized customers would accept the terms without ever having seen the contract covering a risk. “Insurance is still able to do it on a bit of a wing and a prayer,” he mused, adding that it’s a common practice for documentation to follow long after risk managers and insurers first agree upon the contract. Of course the parties need to focus on getting the contract right, Ward said, but documen- tation should be finalized within 30 days.

Uhlmann, too, wondered why the industry would ever consent to committing “huge amounts of money” to the process “without having a contract organized.” He observed further that in Mexico if you don’t have a policy in your hands, you don’t have a contract.

Moor agreed with the other panelists that contract certainty is important. He asked delegates to “think about how bad we are, if 30 days is really good.”

Quicker Times for Service Delivery

The timing of service delivery could and should be improved by speeding up the claims process, the panelists agreed.

Claims information needs to be processed in a timely and efficient manner, Ward said, noting that the promise of indemnity to a client is an insurer’s essential role. The key is to determine how technology can be used to speed up the process. Ward suggested that if the claims information were to be submitted electronically to a repository that anyone — including clients, insurers and brokers — could access, then the claims process would run much more smoothly. Interested parties would be able to watch the claim process unfold, and the process for transferring claims funds would be easier and quicker.

Moor agreed, adding that fixing delays is not something that can be done alone. It needs to be an industry-wide effort, he said.

Hurley said the industry must enter a production mode in which it can be efficient and deliver cost-effective solutions. “It’s really only solved by working together,” he said, agreeing with Moor’s point.

Climate Change

The industry needs to work together in facing the challenge of climate change, the insurer CEOs agreed.

“I think the industry is really improving in responding to these challenges,” Hurley said, noting that in Canada, Zurich is working together with Simon Frasier University.

Hurley said he operated on the assumption that many insured losses arising from hurricanes and floods are “preventable.”

Prior to 1992, Hurley noted, FM Global operated on the same article of faith as did the rest of the industry: when a hurricane happened, a company hoped it had a handle on things and started to write cheques.

After Hurricane Andrew, however, the company took a look at the windstorm results and data. Based on its a nalysis, the company was able to identify ways to prevent losses. The company began to work with clients who owned locations in wind zones to minimize future damage.

Just over a decade later, between 2004 and 2005, seven major storms caused massive insured losses. This time, Hurley said, FM Global compiled data on the damages caused by the 2004-05 hurricanes and placed the locations that were in the path of the hurricanes into two columns: Column 1 contained the locations that had completed all of the recommendations set out in 1992; Column 2 included locations that had one or more of the 1992 recommendations left to implement.

Locations that had completed all of the 1992 recommendations reduced their 2004-05 losses by an average of 84%, Hurley noted. On the other hand, locations that had not completed one or more of the 1992 recommendations had six times the reported loss in 2004-05.

How much did it cost each location to implement the 1992 recommendations? On average, it cost US$10,000 for each location, in addition to whatever the normal building code would require, Hurley said. “A very, very good investment,” Hurley observed, saying similar principles could be applied to earthquakes.

Response plans are very effective in minimizing damage, Hurley said.