REFLECTIONS and CHANGE

The Canadian Risk & Insurance Management Society’s (CRIMS) 25th annual conference – which was recently held in Edmonton, Alberta – centered on “Reflections” as an underlying theme for the event. The Alberta chapter of CRIMS, which organized this year’s event, also selected the “Northern Lights” as a visual metaphor reflecting back on the past development of CRIMS’ parent organization, the Risk & Insurance Management Society (RIMS). However, the “reflections” of the Northern Lights proved as effective a symbol for the rapid changes and many challenges which the risk management profession in Canada will face in the coming years.

There is no doubt that the Canadian commercial insurance market is under-priced and insurers will have to be more disciplined with pricing in the coming year, comments Andrew Duguid, head of business development North America at Lloyd’s of London. Duguid, and several other senior underwriting executives, presented their views as a insurer panel discussion on what the future risk landscape facing risk managers will likely be.

Although commercial insurance pricing corrections in Canada will be less severe than some of the actions already undertaken by insurers in the U.S., Duguid points out that the insurance industry globally has been operating in an unprofitable position for some time. The result of this, combined with an increasing claims to premium ratio in Canada, will see upward adjustments to the price of commercial insurance next year, he confirms, which from a positive standpoint, should produce long-term stability to market conditions. “I expect risk managers will want a stable insurance market.”

Two significant developments have emerged within the international insurance marketplace, notes Alfred Gossner, an executive director of Allianz Insurance Group, that being the impact of globalization on the structure of risk programs and the affect of the long-established “soft” insurance market. Commercial insurance pricing will have to firm next year, Gossner concurs with the other panel members. The cause of the insurance market’s irrationally low pricing over recent years largely resulted from the booming stock market, which over the past ten years created excessive capital and thereby writing capacity within the marketplace. However, the poor earnings figures and overall low shareholder returns of insurance companies over the past two years has signaled the need for an industry-wide change in direction of pricing, he adds.

Clive Tobin, CEO of Bermuda-based XL Insurance, also believes commercial insurance pricing has “bottomed” this year. However, unlike past rate hardening periods, Tobin expects the coming price corrections will be introduced with responsibility. “I don’t expect the pricing disruption that occurred in 1996 as a result of asbestosis damages. The asbestosis losses were very specific and contained to one area, whereas today the losses are smaller per event, but spread across nearly every line of business.” As such, he expects price increases of next year will be moderate but widespread in application.

New landscape

Although corporate globalization has altered the commercial risk landscape toward enterprise-wide risk management, insurers that maintain close partnerships with clients in the countries they operate in will gain a competitive edge, maintains Duguid. He points out that Canada is Lloyd’s second largest foreign marketplace with roughly $655 million in annual premiums. “We want to be seen as a Canadian carrier rather than a distant underwriter.

And, Duguid notes, the Canadian risk profile is changing on several fronts. In addition to increasing severity of natural disasters in Canada, businesses are also facing greater risk exposure through international expansion and the Internet.

Tobin says the most exciting change currently underway in the insurance world is convergence of financial services. “Customized cover is the most likely development…The next 10 years will be exciting in seeing how the banks and insurers can work together to create truly integrated risk programs.”

Furthermore, Tobin believes that corporate globalization has been a significant driver behind the changes in the insurance industry. And, he adds, this will likely continue into the future, with insurers adapting to more creative risk packaging and new business partnerships. “The name of the game of the future will be capital management, combined with risk diversity and globalization.”

“The complexity of the risk environment is increasing all the time due to the global interconnectivity of the corporate world,” remarks Gossner. He too supports the theory that globalization will have significant future sway on both the insurance industry and the risk management profession. Risk management is set to become a paradigm of corporate management. Globalization is closely linked to the use of the Internet and growth in e-commerce. The Internet is here to stay, and it will reform how we do business in the future.”

The “E” challenge

“You had better understand technology and be customer focused and competitive,” says Bill Bollinder, head of North American operations for Zurich Financial. “There is no question, despite the failure of some high-profile Internet companies, that we’re moving toward a ‘new economy’…this is going to be a big thing of what we do.”

The Internet and e-commerce has opened up several doors on the risk management field, Bollinder observes, the most obvious being greater transparency and consumer choice. However, the Internet is also erasing international borders and bringing about deregulation of financial services – all of which bodes well for the insurance buyer, namely risk managers. Insurers and risk managers have to ask themselves whether, against this backdrop, they hope to simply survive or to “shape the process”. Another factor which, sparked by technology and the drive for cost efficiency, will likely have a significant influence on the risk financing field is consolidation. Bollinder expects the two major drivers of “e-commerce” and “globalization” will have a significant impact in terms of consolidation of not only the insurance industry, but the corporate world as a whole. “We haven’t even seen the beginning [of business consolidation] yet.”

Duguid points to a recently held Lloyd’s survey of risk managers which indicated that over 70% of the respondents believe e-commerce will emerge as the biggest risk of the future. “The growth of cyber commerce is changing the corporate risk profile…Protecting knowledge and intangible assets is going to become a key area of the risk landscape.”