Bridging Troubled Waters

In the “pre-September 11 world”, risk managers’ concerns centered around heightening the profession’s profile within corporations. Now, for better or worse, risk management is taking center stage.

With the pressure on corporate governance in the wake of the accounting affairs of Enron, WorldCom and a host of other “household” corporate names, the insurance marketplace in the “post-September 11 world” has added a whole new meaning to the phrase “a hard market”. Not only are risk managers facing reduced coverage capacity and steep pricing adjustments, they also have to contend with new terms and restrictions on cover. As this year’s Canadian Risk and Insurance Management Society (CRIMS) conference chair, Nowell Seaman points out, risk managers have their work cut out for them.

There is then, perhaps no better time to take advantage of the educational and networking opportunities at this year’s CRIMS Conference to be held in Saskatchewan, says Seaman who is the manager of insurance services for the University of Saskatchewan. He notes that the 2002 conference theme is “connections”. Connections is about more than the seven bridges spanning waters around the city, and goes to the core of what risk managers face today, Seaman explains.

Among the risk management profession’s top priorities is the need to communicate more effectively at the senior management and governance levels, Seaman says. As well, risk managers see the introduction of higher levels of technology into the business, spreading risk management throughout the corporation in an “enterprise” approach, and working with business partners, including insurers, as being core factors influencing the direction of the profession.

The Enron example

“Risk management has continued to take a much higher profile at the corporate governance level, particularly in the wake of Enron and now WorldCom [as well as several other blue-chip corporate accounting mismangements],” notes Seaman. “Corporations need to go beyond raising the profile of risk management reporting at the board level, and establish links to rely actively on risk management departments as an expert resource function for the board, in much the same way as the internal audit function.”

The “reputation” and financial risks inherent in the high-profile examples of corporate scandal highlight the need for risk management to be entrenched at the governance level. Seaman notes that several studies released recently point to the need to push risk management into the boardroom. “It has to be pushed beyond merely the delivery of information, the board has to learn to depend on the risk manager they way they do the internal auditor. It has to be more of a link than simply reporting.”.

A crystal ball

Risk managers are also attempting to “connect” with insurers, hoping to find some concrete answers in what seems to be a volatile market. 2002 renewals were rough, with risk managers facing stiff premium increases in many lines and new policy limitations, Seaman observes. While most risk managers understood the need for change following several years of a “buyers market” that dragged insurer financial results down to their worst levels in history, now they are asking ‘how long will the hard market last?’ “The general impression in January and February was that things would be tough and then stabilize, but I’m hearing that there isn’t a great deal of stability,” he adds. For example, in lines like aviation, bonding and surety, affordable and comprehensive coverage remains elusive.

Risk managers who saw their insurance premiums rise substantially in the last renewal period may have thought the worst was behind them, but Seaman says he is hearing that some companies renewing mid-year are reporting even worse conditions. Several high-profile, experienced risk managers will be on hand in Saskatoon to help provide answers. Among them, SunLife Financial assistant vice president of insurance and risk management, Sue Meltzer, will present findings of an informal “survey” of Canadian risk managers. Seaman notes that after talking to about 40 risk managers, Meltzer learned that the two key concerns were how long the hard market is going last and “will the insurers that have taken tougher underwriting positions be able to sustain their relationships with their insureds?” To answer the first question, one would need a crystal ball, Seaman notes, while the answer to the second likely varies among insurers.

“Throughout the past decades, risk managers have been encouraged to develop long-term relationships with insurers. The current market will undoubtedly be a real test for some of those relationships.” Seaman has seen some insurers “burning bridges” with their corporate clients, but feels that in general “the market is still very much open to write business”. Some insurers, he adds, have the ability to present the same bad news while still preserving relationships.

Seaman also says the current market is not a “bad news only” situation. “Underwriters are necessarily returning to underwriting. The “[risk] engineering” model we’ve seen hasn’t been working.” Assumptions made by insurers about risks have fallen off the mark, as evidenced by last year’s rocketing claims losses. “Once you’ve seen a year like we saw last year, obviously underwriters are going to be paying stringent attention to their assumptions.” As such, he hopes that insurers will be encouraged to reward “good risks” as much as they are hitting “bad risks” with tighter terms and higher rates. “The quality risks should be gaining some advantage for what they’ve done to protect themselves.”

The entry of new capital into the market is also an encouraging sign, he notes. “I have heard that considerable new capital is clearly visible in the Bermuda market, and that risk managers and brokers are forging ahead to establish new business” says Seaman. “For the more sophisticated corporations [in terms of their attention to risk management], we’re going to see some interest in that market. I have heard also that some Lloyds’ brokers and others are very optimistic about returning to profitability in the months ahead.”

Terrorism issues

One issue that continues to hang over the heads of risk mangers is the lack of action to tackle insurer’s withdrawal of terrorism coverage. Despite some movement in the U.S., where the Senate and House have each put forward plans for a government backstop and are working toward a compromise bill, little has been done here in Canada. The Canadian government says it is awaiting a U.S. solution, but newspapers south of the border say that likely will not happen at least until the fall.

Risk managers are wondering why insurers here have not stepped up to the plate, Seaman says. “In addition to concerns about the lack of a government backstop or reinsurance pool for terrorism coverage, risk managers have expressed concerns that the IBC [Insurance Bureau of Canada] does not seem to be trying to solve the problem by establishing a self-funded pool of some sort. The federal government might be more inclined to provide protection in excess of a formal pooling mechanism that would demonstrate the commitment of the insurance industry to providing a solution to this critical problem.”

Lack of coverage has been especially daunting for the construction and real estate development industries. The Saskatoon conference features a special session devoted to construction risks, aimed not only at the industry, but acknowledging that many risk managers will face such projects during their careers.

Seaman himself has been dealing with several construction projects at the university, most significantly the construction of the Canadian Light Source project. This is the largest science research facility built in Canada since World War II, and represents the joint efforts of several national and international bodies. The project is, for Seaman, and ongoing example of the role of communication in risk management. And, despite 20 years in the business, he says he has had a great deal to learn about construction risks.

Befitting Seaman’s dua l role as the university’s emergency measures coordinator, disaster planning and recovery will also feature in the Saskatoon conference agenda. In the wake of September 11, this has become a key concern for all risk managers, and representatives of Morgan Stanley, the World Trade Center’s (WTC) largest tenant, and Willis, broker for the WTC leaseholder will bring lessons from the disaster.

Taking care

Hosting the Saskatoon conference is the pinnacle of a long career and involvement with RIMS for Seaman. Born in Edmonton, Alberta, he later moved to Saskatoon, working for 12 years as an insurance broker, including eight years as a director and partner, at McCallum Insurance Brokers. In 1995 he joined the university to deal with risk management, corporate insurance and emergency planning concerns.

Seaman holds the CIP, CRM and AIIC designations and is an instructor with the Insurance Institute of Canada. He has been a director with RIMS, as well as a delegate for the Saskatchewan chapter. Currently, he is vice chair of the Canadian Risk Management Council.

Now, as conference coordinator, Seaman has surrounded himself with a strong committee whose time, he says, was all the more valuable given the demands of their “real jobs” in the currently troubling market. His wife, Sandra Blevins, has also joined the committee. They have four children, Andrew, Aaron, Ben and Melody.