RIMS Canada 2002 Conference: A Hard Market Face-Off

When risk managers gathered in Saskatoon recently for the 2002 RIMS Canada Conference, an air of tension could be felt. Rising pricing, shrinking capacity and new exclusions have caused a rift in insurer relations with their commercial buyers.

It was during last year’s RIMS Canada Conference (formerly CRIMS), that the tragic events of September 11 took place, forever changing both the personal and professional lives of risk managers and insurers. As this year’s conference opened in Saskatoon, memories of 9/11 played heavily and the impact of those events on the corporate world, equity markets, insurance capacity and rates and on the business of risk management were under the lens.

September 11 was not the only event of the past year to cause corporate panic. The scandals of Enron and Worldcom among a long list of corporate failures, the rise of class action lawsuits, environmental concerns from mold to the lingering asbestosis issue, and the continued malaise of investment portfolios have challenged companies. In insurance, shrinking reinsurance capacity and rising rates have bolstered the need for drastic primary price increases and withdrawal. The result has left risk managers scrambling for markets, cringing at the price and simply unable to get certain coverage, most notably for terrorism.

EMOTIONAL ISSUE

In an informal survey of about 35 Canadian risk managers, the “most emotional issue” is price, says Susan Meltzer, assistant vice president of insurance & risk management for Sun Life Financial. “And they used the word ‘gouging’.”

“After the year we’ve been through, I’m amazed anyone can be surprised by price increases,” responds Janice Tomlinson, president of Chubb Insurance Co. of Canada. She notes that the most recent soft market was an “unprecedented” 10 years long, and even with increases in the range of 25%, it will take insurers years to get rates back online. “This [pricing] is not going to be solved in one or two years.”

There is “profound” justification for price increases, observes Don Callaghan, president and CEO of reinsurance brokerage Guy Carpenter & Co. in Canada. Reinsurers were forced to raise rates, creating a trickle-down effect on insurers, who were already facing price inadequacy. Callaghan points out that Canada had experienced one of the softest reinsurance markets in the world. An “opportunistic” supply curve was created by the reduced number of primary insurers as a result of consolidation. In Canada, there is one reinsurer for every two primary carriers.

Coupled with this is the fact that reinsurers have lost about one-third of their capacity, and the Dow Jones Industrial Average has lost 20% of its value since the beginning of 2002. “From a reinsurance perspective that’s devastating…just about everything is working against the market.”

Furthermore, a recent Guy Carpenter study shows that reinsurance rates have not yet reached the 1993 level, despite an average increase of 44% this year. The “logical and responsible” response is to increase prices, Callaghan says. “The challenge is to do it consistently and maybe that’s where we’re falling down.”

Despite the current throes of the market, Callaghan is convinced the reinsurance market remains strong. To the question of whether risk managers have a right to know who their insurer’s reinsurance partners are, he gives an unequivocal “no”. He sees these contracts as a strategic advantage for insurers that they would necessarily want to keep from competitors. But, he notes, risk managers can rest assured that despite 9/11, most reinsurers are financially stable. “Reinsurers have emerged scathed but still they have emerged and that says a lot about their capital adequacy…the market, as far as I am concerned, is very secure. [Industry] capital has been significantly depleted [and not just by 9/11] and it needs to be replenished through price.”

Insurance is driven by equity markets, and thus will continue to take its cyclical course, says John Chippendale, president and CEO of Marsh Canada. And the need to raise capital is pervasive. He is optimistic, however, that insurers are still looking for long term partners in their corporate clients.

CHANGING RELATIONSHIPS

Meltzer says risk managers need to take this “partnership” role to heart, and understand that their value is not simply in getting low premiums. “What were we giving [to insurers] during the soft market? Were we giving good underwriting information? We do need to take accountability for our part in this.” And, she adds, “There are many of us in this room who rate our insurers by our ability to contact senior management, but don’t want insurers to have this same access to our senior management and to our information.”

Risk managers are not simply “customers”, they are asking for something in return from insurers, Meltzer points out. “A 5% [premium] increase is nothing compared to the denial of a $20 or $30 million claim.”

While she fears that underwriting is not being practiced and price increases simply instituted across-the-board, she does allow that even the current market is still “open for business”. However, she cautions insurers that, like other organizations, they need to manage the risk of fluctuating equity markets.

As the market shifts, so do relationships between risk managers, brokers and insurers. At one point, this relationship was very linear, with the broker the conduit to the client, notes Tomlinson. Now, companies are seeking a “circular” relationship – the broker is still a necessary partner, particularly when multiple companies are involved in a portfolio, “but the CEO of the insurer needs to know the CEOs of the companies they’re insuring”.

Chippendale adds that brokers now need to be specialists, rather than generalists. Ten years ago, they were looking at traditional hazards and market leverage to get “the best deal”, today there is an expanded risk platform, and brokers need to be able to “sell the virtues of their client’s governance and business practices”.

NEW RISKS

Governance has become a key new risk area in the wake of recent corporate scandals and investor lawsuits. There is a “crisis of confidence” in public companies, who are all being tarred with the same brush as Enron, Worldcom and others, says Tomlinson.

New securities regulations under the Sarbanes-Oxley Act in the U.S. were “put together hastily” and companies are struggling to comply based on different interpretations, she adds. Among the new requirements is an audit committee process for complaints and whistle-blowing and protection for whistle-blowers. These new laws and regulations directly target directors and officers and senior management and will impact these types of coverage, specifically “Directors and Officers” (D&O) covers. “Underwriters need to be more cynical in assessing these risks,” Tomlinson observes.

Another key risk concern is terrorism, with the U.S. Congress not having reached agreement on an insurance backstop plan – at least at the time of the RIMS Canada conference. When questioned about the need for and variety of terrorism exclusions in the Canadian market, Tomlinson noted that the industry “reacted” to 9/11 and many carriers may be reviewing those actions a year later.

Callaghan adds that insurers largely led the drive to write exclusions on terror coverage and reinsurers still do offer coverage for many “non-target” risks. He uses the example of a mall in the middle of Saskatchewan, an unlikely terrorist target, which should be able to find coverage. However, Meltzer calls the exclusions an over-reaction, and says the only positive is that this over-reaction has not extended to money-lenders who do not perceive the same risk as insurers and are still willing to finance developments. “The reason there is not a [government terrorism reinsurance] pool is the lenders have not shut off the money.”

CRISIS LEADERSHIP

Other sessions at the conference focused on crisis management, with speaker William Leiss, Ph.D. noting that the fastest emerging risk areas are genetic modeling and climate change. These examples highli ght the two “languages” of risk – that of the expert, based on science, and that of the public, based on perception. “Good risk communications builds a bridge between these two languages,” he adds.

In the case of gene cloning and therapy, the potential scientific good, which could result in curing hereditary diseases and fighting world hunger, is at war with public fears about “designer babies” and “Frankenfoods”. On the environmental front, some companies have taken a proactive stance, positioning themselves as being prepared for life after the Kyoto Protocol and other environmental limitations, while others are lagging behind. Good crisis management requires seeing the public concern and proactively addressing it, he says.

“Traditional crisis management is ineffective, fragmented and reactive. Crisis management is part of the problem, not the solution,” observes Ian Mitroff, Ph.D. As we come through a time of intense controversy – from Firestone tires to Catholic Church scandals, from 9/11 to Enron – there is little public trust left in institutions. “In every case, a major crisis destroys our ‘taken for granted’ assumptions about the world,” says Mitroff.

Crisis management needs to be focused, proactive and attentive to the human element. And companies need to make crisis management a key driver in their organization. “Crisis leadership needs to be a competitive advantage. If risk management is perceived as insurance and not as a competitive advantage then I don’t think it’s going to succeed.”