RIMS Canada 2004: Raising Standards

Among the many impacts the traditional property and casualty insurance industry experienced as a result of the 9/11 disaster was a recognition of the abysmal state of service taking place in commercial insurance ranks. So said a panel of speakers representing all segments of the market at the 29th Annual RIMS Canada Conference, dubbed “Portage 2004”, which was recently held in Winnipeg.

In an interactive session which allowed the audience to select topics to be addressed by the panel of speakers, risk managers foremost wanted to hear thoughts on the issues around the collapse of the World Trade Center (WTC). And, while the “one occurrence” versus “two occurrence” discussion arose, speakers agreed that the real lesson to be learned from the WTC claims litigation process was that the industry had to do more in the area of service levels. “The key issue is that our industry is just bloody awful with documentation,” comments David Pegues, executive vice president of Aon Reed Stenhouse in Toronto. He says that in some cases insureds do not see a policy for months or even years after buying the coverage, with business conducted through phone conversations and emails – the result being that when cases such as the WTC claim go to trial, the courts are left with a “dog’s breakfast” of documentation.

“The lack of documentation is exceedingly poor,” agrees Susan Meltzer, panel moderator and assistant vice president of insurance & risk management at Sun Life Assurance Co. But, she adds, risk managers must also take the steps necessary to ensure they are receiving policies in a reasonable time frame, and ensure there are consequences if policies are late.

Looking back to 1999 when RIMS released its first “quality scorecard”, insurers were shocked to learn of the poor perception their commercial clients had of service levels, observes Lynn Oldfield, vice president of corporate marketing at AIG Canada. She says that companies are now making strides to provide better service, and that e-mail has helped significantly to facilitate this. However, over 60% of the audience, comprising primarily of risk managers, feel that insurers’ service levels have not improved since 9/11.

Disclosure of broker compensation was also a key concern for risk managers at the RIMS Canada event. At the time of the conference, New York’s attorney general Eliot Spitzer had not concluded his investigation (or laid charges) with regard to “placement service agreements” (PSAs) and other commission practices. But, a poll of audience members proved portentous: 47% said contingent commissions influence broker placement decisions. While speakers agree that some level of disclosure is necessary, others see the issue as a “tempest in a teapot”. “For at least 10 years, insurance was sold well below cost and [such arrangements] didn’t prevent that from happening,” points out Don Callahan, president of Guy Carpenter & Co.

Pegues points out that most front-line brokers are likely unaware of what overall agreements are in place between their firm and insurers, and most would “bridle” at the idea of placing business based on such PSA agreements, rather than on the client’s best interest. He adds that contingent commissions or PSAs represent a very small portion of brokerage revenues and many insurers do not even use them.

CAUTIOUS OPTIMISM

Surprisingly, the “state of the insurance market” fell well behind service issues for risk managers. Moving forward, Swiss Re Canada president Brian Gray expresses optimism regarding the marketplace: “Increasingly it [the marketplace] will be less volatile than it has been in the past.” It seems that risk managers share this optimism – 71% of the audience polled say they are still with the same insurer they were three years ago. This “promising outlook” is welcome news for insurers and reinsurers, as speakers note that even with market softening there is significant pressure on rates to remain technically adequate and for terms to remain tight.

Insurance investors will not tolerate the violent market swings of the past, notes Gray, and have become much more educated about the industry – they now know what a 10% drop in rate will do to a company’s financial results. “They [investors] are absolutely punishing any insurer or reinsurer not pricing product to costs.”

Oldfield says after just six successive quarters of profitability, insurers give into price competition at their own peril, and commercial buyers need to seriously consider the financial stability of any carrier who appears to be undercutting prices. Meltzer, who is coming off her third “hard market”, says her concerns about the state of the market focus more on the “aggressive nature of the denial of claims” she is witnessing, rather than rates. “I’m less worried about a 5% price increase than I am about the $30-$40 million claim I need paid.” Relationships are being strained around the issue of claims payment, Pegues comments. “There are a lot more lawyers being hired in the claims departments of insurance companies and without a knowledge of commercial policies, they tend to take a ‘legalistic’ view of claims.”

ERM REALITY

While risk managers are holding their insurer and broker counterparts up to higher standards, the RIMS Canada Conference also emphasized the need for improved professional standards for the risk management community. In the wake of the corporate governance scandals and high-profile lawsuits of recent years, the role of risk manager has been thrust into the “spotlight”, the experts say. The current environment represents risk managers’ best chance to push enterprise-wide risk management (ERM) to the board level and breaks down the corporate “silos”.

Risk managers must “expand upon their traditional roles”, says Bill Kelly, director at Pricewaterhouse Coopers LLP, and past president of the Risk & Insurance Management Society (RIMS). “If we, as risk managers, are to enhance our contribution, we must enter into new territory and command the respect and recognition of the members of management who are completely outside our community.” One stumbling block in this regard is the lack of advanced professional degrees amongst risk managers, he says – while the “risk fellow” (RF) designation is making progress in Canada, he is less optimistic about its progress in the U.S. Another challenge will be to better manage relationships with intermediaries, to take advantage of their resources while not becoming dependent on them. Overcoming these challenges is necessary if risk managers are to make ERM a reality, and to make risk management “an integral part of [your] firm’s value proposition”, he adds.

This is a time of “unprecedented interest” in risk management, observes Tim Leech, principal consultant for Paisley Consulting. ERM practitioners can reap the rewards in terms of stature and wages, he explains, “because the consequence of not managing risk and insurance is enormous” for corporations. “Risk management practitioners that maintain and defend old style risk management silos will be marginalized,” he adds.

Both speakers pointed to recent guidance risk managers can access around ERM, including the COSO framework and portions of the “Basel Accord” relating to operational risk, as well as the International Federation of Risk & Insurance Management Association’s (IFRIMA) white paper on ERM.

ELEVATING RISK

The COSO framework is likely to gain a great deal of attention in the corporate ranks, says David Mair, president of Risk Excellence, and a past president of RIMS. Speaking at a discussion on global risk management standards, he notes that, while COSO may not become the “one and only” standard, because its sponsoring organizations are large and varied, it will “find a very broad audience”, he predicts.

At the same time, the Inter- national Standards Organization (ISO) has developed its own global standard for risk management. The standard has some positive aspects, points out Kevin Knight, president of the Australian Institute of Risk Management, and a contributor to the ISO standard. One is the search for a common language o f risk which mirrors the language of business, another is the elevation of risk to the highest corporate levels. But, Mair says the ISO standard is flawed in that its architects did not fully represent the broad scope of the risk management community. “We [risk managers] are not going to be held accountable for standards that are not ‘ours’.” However, both Mair and Knight agree that one characteristic any global standard must possess is an understanding of the link between a corporation’s risk management strategy and its overall corporate strategy.