RIMS Conference 2003: The Age of Risk

“In the last 18 months, our industry and profession have entered the ‘age of risk’,” says Lance Ewing, incoming president of the Risk & Insurance Management Society (RIMS). At the society’s recent annual conference in Chicago, Ewing notes that risks have become more plentiful and more visible since the fall of the World Trade Center (WTC) towers following the 9/11 terrorist attacks. “The number and types of risks facing risk managers continue to grow as never before. Market risk, global risk, currency, equity, technology collateral, political, operational, regulatory, liquidity risk – the list goes on and on.”

The result of this, observes outgoing RIMS president Chris Mandel, has been a spotlight on the role of risk managers. “Risk managers are being called to a new level of service, reflected in the elevated need to do more and to do it better. Our jobs have a new relevance and higher potential contribution to helping our firms manage new and greater risks and their long term success.”

As such, RIMS’ profile has grown, as the media relied on RIMS representatives for expert commentary, particularly as the government implemented the Terrorism Risk Insurance Act (TRIA). “We are more than ever a significant voice in the risk and insurance community and growing stronger in stature all the time,” says Mandel. He notes that membership in the society increased 4% in the last year.

WINNING OVER WASHINGTON

RIMS was victorious in its intense lobby effort to see a government backstop for terrorism insurance after 9/11. However, the results have met with mixed response. Many corporations have not opted for the coverage, saying it remains expensive even with the government stepping in to fill the terrorism reinsurance void. “Clearly we didn’t get a perfect solution,” says Mandel. However, the solution at least allows for real estate deals stalled by lack of terrorism coverage to proceed.

Mandel notes that many large insurers are unhappy with the government program, saying the high deductibles they face mean that if another 9/11 event happened they would face the same high level of payout. Ewing adds that some people are concerned with the definition of a “terrorist event” resting with the Treasury Department rather than the new Homeland Security office. The real concern, however, is what will happen when the terrorism insurance program runs out in two-and-a-half years. “There is still reinsurance capacity that is not very responsive to this issue,” says Mandel. And, notwithstanding another terrorist attack, he does not expect an extension of government assistance when the program runs out, so private market solutions must be worked on now.

RIMS will also spend the year ahead promoting its new online “benchmark survey”. “We are aggressively collecting loss and renewal data,” says Jack Hampton, RIMS executive director. “We have high-technology tools to access and manipulate the data online.” More than 600 contributors have posted data, with first quarter 2003 figures already available. These virtually “real-time results” mean risk managers do not have to rely on brokers to explain how their corporation’s program compares with others in the market, explains Mandel. Another program, the “quality improvement process”, is taking fruition, with the “risk manager and broker partnership tool” now online, to develop performance expectation agreements between the two partners.

SIGNS OF SOFTENING

Risk manager responses on the benchmarking survey indicate some signs of price moderation, specifically in the property line. However, directors’ and officers’ (D&O) and fiduciary coverage remain expensive and difficult to find. Risk managers are having a hard time placing business, taking more time in negotiations, and paying more for coverage. The survey also confirms that risk managers have increased retentions over the past two years in response to the hard market. However, average limits remain virtually flat, suggesting the continuing need for substantial risk transfer despite rising premiums.

This is confirmed with the release of a joint study by FM Global, the Financial Executives Research Foundation and the National Association of Corporate Treasures under the title “Protecting Value” which indicates that 80% of risk managers have not changed their transfer strategy with the hard market. “This tells everyone there is a long-term proposition [in insurance],” says Perry Brazeau manager of Canadian operations for FM Global. Alternatives such as captives may appeal to some, but captives rely on fronting companies, and are often as dependent as insurers on the reinsurance market, where premiums are up and capacity scarce.

Insurers interviewed at the RIMS Conference confirm that commercial property risks are seeing moderation after their steep increase following 9/11. “A year ago, people [insurers] were reacting, now they’re being ‘smarter’, that’s a positive development,” says Urs Uhlmann, senior vice president with Zurich North America Canada, of the current risk selection environment. This year, property risks are lagging behind liability in terms of increases, he adds.

The relative lack of natural catastrophes in 2002 is also a likely sign of a return of some reinsurance capacity, easing the reinsurance cost burden for insurers, notes Mike Molony, president of Liberty International Underwriters Canada. However, he adds, “capacity is gold right now, [as an insurer] you have to use it prudently…The profession of underwriting has come back.” Uhlmann agrees insurers still have a long way to go to get back to a reasonable return on equity. “While there have been significant efforts made by the whole industry to get an acceptable level of return, it’s not quite there.”

“It’s only been 18 months of pretty significant changes after 13 years of premiums going south,” confirms Brazeau. The fundamental issues have not changed since 9/11, he notes, with investment markets still giving dismal returns and insurers dealing with rising loss costs as they attempt to give shareholders a reason to put capital into the industry. “The only way to do that is through profitable underwriting, it’s not going to be on the investment side.”

For risk managers asking, “When will the hard market end?”, the answer may not be what they want to hear. Insurers predict hard market conditions at least through the end of this year and into the next. “The pain of prior [claim] years is not over for many companies,” observes Maurice Greenberg, CEO of AIG and one of the keynote speakers at the RIMS conference. “The industry needs to raise capital, failing to do that means a shortage of capacity.” In this respect, he points out the greatest challenge facing insurers – who would want to invest in an industry that does not provide a reasonable return?

TORT CRISIS

Underwriters confirm risk manager claims that liability coverage, specifically D&O, is the target for rate increases and scarce capacity in the coming year. Canada’s liability increases are largely fueled by events in the U.S. and elsewhere, explains Uhlmann, with Canada’s risk managers “facing similar increases and capacity shortage as in other countries”.

Molony agrees that casualty and specialty casualty rates are going to climb this year and into 2004 as long-tail losses make their way through Canada from the U.S. and other countries. D&O specifically is a “truly global product, underwriters don’t have Canadian-specific capacity,” he says. “Capacity has dried up. There are a group of underwriters who are dedicated, others dabbled and now they’ve ceased underwriting it. You have to have expertise.” Those companies still underwriting D&O are eager to see standards for corporate governance invoked in Canada, and corporations aim for the highest levels of accountability.

In the U.S, tort issues have reached a near crisis level. “Clearly it’s out of control,” says Greenberg. Speaking specifically of asbestos, he notes that insurer CEOs have been in Washington pushing for resolution of key issues to stem the tide of potential losses that caused many insurers to t ake hefty reserves recently. Among the issues they seek to address are consolidation of cases in one venue, a cap on legal fees and a definition of impairment. “What good does it do to bankrupt companies, lose thousands and thousands of jobs, and the only one making money is the trial bar?” Greenberg asks. The tort system overall has blossomed to 2.5% of U.S. gross domestic product (GDP), he notes. “We have an economy that’s struggling, we badly need this monkey off our backs.”

U.S. insurers took heart in a recent Supreme Court decision in a State Farm case that appears to place limits on punitive damages. But, Ewing remains skeptical that without legislative tort reform, the Supreme Court decision will set a long-term precedent. “Lawyers will already be figuring out an end run around the Supreme Court decision.” He predicts tort reform will not likely come this year, with so many other issues on the agenda.

Canada faces its own litigation hurdles. “In the next three to five years, this is going to be a major issue if we don’t have reform,” suggests Molony. The availability of class actions and the recent introduction of contingency fees in Ontario are signs of a potential Canadian tort boom.

INSURANCE VALUE

Insurer financial strength has become a heightened concern with continued weak results for 2002 despite tighter underwriting and premium hikes. At the executive level, there is more focus on solvency, says Brazeau, with corporate clients wanting to know insurers’ financial stability and levels of reinsurance.

Rating agencies have had a “faster trigger” in downgrading insurers, but with good reason, says Greenberg. “You can’t pay claims out of goodwill.” The volatility of equity and bond markets has left insurers exposed and led to concerns about solvency and capital adequacy especially when it comes to the ability to pay long-tail losses. But, with an almost industry-wide downgrade taking place, the traditional desire to place with a “triple-A” rated insurer may not be realistic. “Risk managers have to really prioritize before renewals,” says Molony. “Is triple-A what you need? Is price? What do they want to achieve in negotiations.”

Risk managers will also have to decide if they want to transfer risk to insurers, to alternatives, or retain it, notes Mandel. “This market gives an opportunity a lot [of risk managers] will take advantage of to look at how much risk absorption their corporations are taking on. Where is their optimal trade-off point between risk and premium?”