Risk Management Finds Its Voice

As the 34th Annual “Risk and Insurance Management Society (RIMS) Conference” kicked off in New Orleans recently, there seemed to be cause to join in the city’s nearly constant state of revelry. U.S. president George Bush had just made a speech, with representatives of RIMS in attendance, urging the Senate to pass a solution to the lack of terrorism reinsurance available in the private market.

Although at the time of this writing that solution has not come to pass, the ongoing discussions have marked a watershed for the Society. RIMS is positioning itself as “the organization” representing corporate insurance buyers,” outgoing RIMS president David Mair told attendees at the opening conference session. “RIMS has been recognized as the credible voice on that subject [terrorism coverage]…We have shaken the doors of government in Washington wide open.”

The society is influencing decision-makers as never before, both in industry and the legislature, adds incoming RIMS president Chris Mandel. And, with the Canadian government waiting for a U.S. decision before it acts on terrorism coverage, Mair says, “you can expect to see us in Ottawa very soon”.

“VITAL” CONFERENCE

Risk managers will be challenged to find their voice as never before in light of the severe hardening of the commercial insurance market both in the U.S. and Canada since the September 11 terrorist attacks. “A year ago in Atlanta [site of the previous RIMS Conference], September 11 was just an autumn day and Enron was just an electricity trading company,” notes RIMS’ executive director Jack Hampton. In the fall of last year, “RIMS’ executive” met to discuss how the conference itself must change to keep pace with the shifting “post-9/11 market”.

RIMS wanted the conference to be a place “where people can come and talk with other people in the business of managing risk and learn what has changed in the world of risk,” Hampton says. And, he believes this goal was achieved in New Orleans where, despite concerns that economic and security factors might dampen attendance, there was a solid turnout of about 10,000 delegates, exhibitors, press and guests. Risk managers are being asked as a result of the hard market to explore new options and to work increasingly closely with their insurance partners. “There are no lazy risk managers this year,” notes Hampton. “You can’t just say send me a quote and a policy.”

CHANGING APPETITES

There is most certainly a high level of volatility and uncertainty in the marketplace, says Perry Brazeau, manager of Canadian operations for FM Global. Some January renewals are still not completely resolved given rising rates, changing terms and the lack of available coverage for many risks, even beyond terrorism coverage. “Good” property accounts, with clean loss histories, are facing 25%-30% increases, observes Robert Landry, president and CEO of Zurich North America Canada. Property accounts with prior losses are looking at much higher increases. Casualty lines are also looking at a 25% minimum rise in rates, adds Urs Uhlmann, senior vice president of international and industrial business at Zurich N.A. Canada.

These changes are not simply the result of reinsurance market forces, but of insurers’ need for sustainable rates in light of several years of declining returns across the board.

Zurich N.A. Canada is one example of a company that has chosen to focus its business more sharply, with its personal lines portfolio now being taken over by ING. Zurich is now aiming at Canada’s high-end corporate market, a move Landry says makes sense given that the commercial market in Canada has seen better results than in the U.S. “There was probably less far to come back” for Canadian commercial insurers, compared to their U.S. counterparts, in order to achieve profitability.

Risk managers are not only facing premium increases, but also vastly different terms. For example, multi-year deals are much harder to come by in the current market, notes Uhlmann. Of course, it has been the exodus from the terrorism coverage market that has made headlines since September 11, but as Uhlmann points out, some “stand-alone” products are beginning to pop up, if in limited numbers.

Terrorism coverage has elevated insurance into a very visible role in corporations, says Brazeau. “The terrorism issue has hit the boardroom.” But, the changing market goes well beyond the lack of terrorism coverage. Insurers, over the course of an extended soft market, were inclined to “throw in” coverage, particularly in the property market, which was too “wide open”, Brazeau says. “Most risk managers are finding coverage, to the extent that it was available in the past, is not there now.”

With regard to business interruption and contingency coverages, insurers are also finding it difficult to generate the limits they might once have been used to. “This is definitely an area where reinsurers have shown discomfort,” says Brazeau. One of the factors defining the current hard market, beyond its rapid inception, is that it is being driven by reinsurance, he adds. The previous hard market was largely driven by casualty line losses, but now reinsurers’ concern for aggregation of losses is playing a significant role. Certain insurers, in turn have lost some of their appetite for risk, he explains.

ADDED VALUE

Many risk managers and brokers have never seen a hard market, and given the pace of the current hardening, there is a great deal of confusion being felt, Brazeau observes. And, with so many renewals happening just a few months after September 11, some of these January renewals are still up in the air. Companies may have bought certain coverages, but be lacking others, or be moving forward with coverage levels below that which they have been used to.

Confusion is also being experienced over just how long the current hard market will last. This has become the “$64,000 question”, says Landry, but the fact that it takes 12 to 18 months to see the effect of rate increases on an insurer’s bottom-line should be considered. The extent of loss costs in the near future may also play a role. This confusion may serve as an impetus for insurers, to show their corporate clients some added value to soften the blow of rate increases and coverage limits.

As a result, insurers and risk managers alike will learn who their “true business partners” are in this market, as they will be the ones looking for solutions, comments Landry. Most customers understand the cyclical nature of the insurance market and the current pressure insurers face, he adds, but “no one enjoys the kind of increases we’re seeing”. In this respect, there is a definite flight to “quality” in the market, notably insurers with “sound financials” and high levels of customer service, Landry observes. And, “insurers will be tested,” he predicts, especially in claims handling, where companies can either “wow a customer, or turn a customer off”.

Informational resources, including online resources, will also be seen as a crucial customer service area for insurers with their corporate clients. Insurers can therefore help risk managers as their job becomes more high profile by being able to provide answers to the most senior levels of corporate management.

ART-istic” SOLUTIONS?

Are risk managers getting the “right answers” from insurers? Mandel notes that having spoken to some risk managers at the conference, “the feedback we got from members was they didn’t feel they were getting a lot of answers”. There is also some sense that insurers are taking credit for having paid September 11 losses, but in moving forward were not giving their corporate clients a great deal of information on what to expect from the marketplace.

Risk managers facing stiff increases, potentially even multiples of last year’s premium, are wondering just how long the bleeding will continue and “how much deeper into corporate pocketbooks” it will go. Some insurers “have vastly over-rated the tolerance of risk programs”, notes Mair, who had heard of some extremely high premium increases for corporate programs. His own experience as ri sk manager for the U.S. Olympic Committee was an example of a “target risk” that faced a tough insurance market.

Risk managers warn that a lack of appropriate “answers” from insurers may spawn a new drive toward alternative risk transfer (ART) programs – such as captives – the managers of which were in heavy presence at this year’s RIMS conference. While this January’s renewals came too quickly for these options to be thoroughly explored, risk managers clearly are going to be prepared next time, Mair predicts.

Uhlmann admits that risk managers who do leave the traditional insurance market may not be won back when the hard market is over. This means insurers must broaden their scope and be able to offer a variety of options for their clients. As risk managers “get informed” about their options, there is always the fear they might not return to traditional insurance, Brazeau allows, but with the flight to quality comes a natural desire to find stable, known coverage. Those insurers who can show added value to their clients should come out on top when the dust settles.