RIMS 2004: Tough Talk

While the most recent results of the Risk and Insurance Management Society (RIMS) quarterly “benchmark survey” suggest commercial insurance rates are moderating, it is too early to declare the end of the hard market, delegates to the annual RIMS Conference in San Diego, California learned.

Insurers, brokers and risk mangers were all reticent to call an end to the price hikes, new exclusions and tighter terms and conditions that have categorized the marketplace since 2001. “Stability is in the eye of the beholder. We are still in a very fragile marketplace,” says Lance Ewing, past president of RIMS and vice president of risk management for Caesars Entertainment. “The days of the merry-go-round of the insurance cycle are at an end. Now the more appropriate word is a roller-coaster.”

Ewing points to industries such as oil and gas, and entertainment, all of which remain caught in the jaws of the hard market. “We’re getting a [price] correction, but I’m not sure it’s the right price.” Companies may see moderating rates, but they are still taking on high retentions, and in some cases “going bare” without coverage for certain unattainable risks, he observes.

“It is a little too early to declare victory,” concurs Perry Brazeau, manager of Canadian operations for FM Global. “If your loss experience isn’t good, there are still rate increases.” That said, there are hints of moderation, as capacity depleted after 9/11, returns. “Particularly in the last six months we’ve seen markets come back in.” But, this is selectively placed capacity, he stresses, “the test will be to see if it stays”.

Risk managers continue to fret about the financial health of their carriers, says Max Taylor, deputy chairman of Aon Ltd. “The insurance industry is a hell of a lot healthier at the end of 2003 than it was at the end of 2002,” he says, but “different insurers emerged from the storm [of the last three years] in different shape”. Risk managers have been challenged by the high number of insurer insolvencies seen over the past three years, Ewing notes. “I have to stand in front of my boss and say, ‘Kemper’s out of business, Reliance is out of business.” Despite widespread financial strength ratings downgrades, Ewing says he holds fast to a minimum rating threshold in light of this instability.

“I’ve heard a lot of questions from investors, analysts, brokers and customers about whether I think our industry has hit smooth sailing,” comments James Schiro, CEO of Zurich Financial Services. While it may be early to call it “smooth sailing”, there are signs of “improved seamanship”, he adds. “Our industry is headed in the right direction”

COMMON BOND

The question for risk managers is, can the industry keep its ship headed in a consistent direction? Both sellers and buyers agree the industry was its own worst enemy, pushing prices to unsustainably low levels and then taking swift, severe remedial action in reaction, particularly in the absence of investment returns to bolster shoddy underwriting. “I’m thrilled we’re back to underwriting,” says Ewing. “We were driven by sales and I think that’s what caused all the problems.”

At one point, Ewing explains, a risk manger could simply pick up the phone and get easy, cheap coverage. Now, those risk managers are forced to show their value by educating insurers about their businesses, and their risk control initiatives. Despite insurer results bouncing back significantly in late 2003 and early 2004, carriers contend, maintaining the current cycles – characterized by long soft markets and short, severe hard markets – is bad for everyone.

“Shareholders were taken on a bumpy ride, or in my case, down a steep slope,” Schiro says of the prolonged soft market which culminated in 2002, the worst year on record for North American insurers. “I continue to see realistic pricing and the need to make an underwriting profit as indisputable.” Risk managers need stable pricing and terms they can plan for, rather than price hikes and exclusions which amount to “taking the umbrella away as soon as it starts to rain”. To ensure this kind of “better managed cycle”, Schiro predicts, “I believe you [risk managers] would be willing to pay the right, the technically correct price.”

Insurers need to invest in new, better tools to ensure they are charging the right prices for the right risks, comments Brazeau. He adds that his company is “tying capacity to engineering”. Risk managers also have a role to play in maintaining a more stable market, says Taylor. “There is no benefit to anyone if prices fall to the point they are not economical.”

REMAINING HURDLES

Certainly many lines of business are facing continued market pressure. In fact, while there is moderation in specific lines or for specific customers, “the average across all lines will see an increase”, says Urs Uhlmann, senior vice president of Zurich Canada. This is because insurers continue to see a 6%-7% growth in loss costs that must be factored into rates.

Specific lines are feeling an even tighter pinch, specifically directors’ and officers’ (D&O), and in this respect, one only need to open the paper to find the shareholder lawsuits prompting withdrawal and price hikes in this line. “It’s almost to the point where you have to say, ‘is there sufficient volume?’,” says Uhlmann. New RIMS president Nancy Chambers agrees. Many companies are asking “are we going to get the levels of coverage we need” when it comes to D&O, she says.

Construction and contractors continue to face a difficult market, Uhlmann points out. But, his biggest concern is “areas we as an industry have identified where we take on unlimited exposure”, such as fire-following and defense costs outside the limit. Insurers must be able to quantify a worst case scenario in order to price the risk, but unlimited exposure makes this impossible.

Insurers and risk managers are realizing they have a common cause in some respects in dealing with legislative issues, from unlimited exposures such as terrorism to tort reform.

In the U.S., says Schiro, insurers need to “de-politicize” the tort reform process and wrest some control over “the most aggressive litigation system in the world”.

There is also concern south of the border with the upcoming sunset of the Terrorism Risk Insurance Act (TRIA) at the end of 2005. Hearings on Capitol Hill have seen insurers urging legislators to secure the renewal of TRIA, something Taylor sees as very much up in the air. “Capitol Hill may not be very interested in what might seem to be a handout, especially to an industry that just reported a very profitable 2003.”

Risk managers in both Canada and the U.S. have been bending the ears of government. The RIMS Canada Council recently made its first formal trip to Ottawa to build bridges there, reports council chair Nowell Seaman. “Rather than trying to respond to regulators, our hope is they will contact us to talk to about them [issues].” He says risk managers also plan to meet with the Insurance Bureau of Canada (IBC), the Insurance Brokers Association of Ontario (IBAO), and the Insurance Institute of Canada (IIC) to improve communication.

The U.S. RIMS lobby has grown in size and influence, says Chambers. This year, 45 risk managers took part in “RIMS on the Hill” lobby sessions, to discuss TRIA and other issues. “For years we were knocking on their [legislators’] door, this year we were invited.”

Some events may be outside of the industry’s control, however, and ultimately insurers continue to deal with emerging risks in an increasingly dangerous global market. Outsourcing in particular has become a political “hot-button” generating much discussion at RIMS. “Many corporations are following the “inexorable path” of moving jobs and processes out of the country, with expectations for foreign investment outstripping those of domestic product growth” says Taylor.

For insurers, this “political hot potato” represents a challenge and an opportunity, says Gordon Knight, president of AIG WorldSource. “[Outsourcing] is a trend that will only accelerate,” he believes, thus creating opportunities for g lobal insurers who operate in many countries. “Anytime someone goes across the ocean, that’s an opportunity.”

“ARTFUL” BUSINESS

The current environment of instability both in terms of growing risks and the fluctuating insurance environment, continues to challenge risk managers, says Ewing. He admits, “I’ve spent more time with my board in the last 12-16 months than at any time in my career.” At one time, “insurance was just another line item on the balance-sheet”, but now it is a focus, and not just because of price. “Price isn’t the issue, service is,” he stresses.

Insurers are also realizing they must return their focus to relationships in the wake of the hard market. And, for insurers who have used the hard market to grow their business, rather than shrink it, this is a time of building new relationships with new clients, notes Brazeau.

Service is becoming the new watchword for risk mangers in terms of their relationships with insurers. “A concern for insurers is that they are not providing what their customers want, because their customers want alternatives,” notes Taylor. And, with the return of softer market conditions, insurers are now concerned the relationships severed during tough times may not be repairable – risk managers who made the leap to alternative risk transfer vehicles (ART), or even those who took on high deductibles, will have to be given a reason to revisit the insurance market. As Taylor comments, “premium may not be flowing back into the market just because prices fall”.