Risk Managers Cautiously Optimistic in San Diego
May 2004
Risk managers at the recent RIMS conference
seemed to be optimistic in their outlook for the near term, at least partly
due to the apparent stabilization of the insurance market. But if the insurance
marketplace pendulum has reached its apex, how far will it swing back in their
favor? Insurance industry spokespersons proclaim it will be in no one's best
interest to let it swing very far, but new market capacity may defeat their
intentions. On the other hand, such drivers as the expiration of TRIA, inherent
tort system costs, and the potential for man-made or natural catastrophes, could
quickly turn the market back in the other direction, giving rise to a cautious
outlook.
by Jack P. Gibson
IRMI
This year's annual pilgrimage to the Risk and Insurance Management Society
(RIMS) conference was quiet and reserved compared to the last few. If I had
to summarize the overall mood at the annual conference in two words, I'd have
to say it was one of "cautious optimism." There was record overall attendance
with something over 10,000 in total. RIMS spokespersons indicated that about
4,000 of these were risk managers. The other 6,000+ would be spouses, exhibitors,
speakers, service providers, the press, and assorted groupies.
Overall, the atmosphere was cheerful, but risk managers were also serious
about why they were there. While the venue, San Diego, was filled with distractions,
and the weather could not have been more cooperative, RIMS reported record attendance
in the seminars. This seems to confirm the resolve I sensed on the part of risk
managers to make sure they took something back to the office with them other
than memories of a good time at the expense of their insurers and brokers.
The exhibit hall was huge, with nearly 350 exhibitors showing their wares
or giving away brochures and trinkets. All the usual suspects were there—the
major insurers, brokers, third-party administrators (TPAs), coverage attorneys,
investigators, managed care service providers, and RMIS vendors—as well as some
interesting newcomers, such as catastrophe modelers, security/terrorism intelligence
information companies, and disaster consultants. The exhibit hall was bustling
except for the last 2 hours of the last day when the bored exhibitors had nothing
better to do than start discreetly tearing their booths down so they could get
back to their rooms and soak their feet.
I spent most of my time visiting with people in the exhibit hall and attending
press conferences held by brokers, insurers, and others. My primary observations
regarding the insurance marketplace and interesting insights into today's risk
manager's mindset are summarized below. Also, see the article TRIA's Sunset: The Dawn of a New Workers Compensation
Crisis? which was partially based on research conducted at the 2004 Annual
RIMS Conference and Exhibition (April 18–22).
Today's Risk Manager
A number of organizations have traditionally conducted surveys of risk managers
prior to the annual RIMS conference and released the results at the meeting.
This year was no exception, as ACE, Marsh/RIMS, and Munich American Re all shared
insights into today's risk manager's mindset.
The Marsh/RIMS study is probably the most significant contribution of the
three. Sponsored jointly by Marsh and RIMS and conducted by a strategic consulting
and survey firm, the study sought to shed light on the attributes that make
a risk manager successful. The survey respondents were drawn from professionals
recognized in years past by Business Insurance magazine as a "Risk Manager of the Year" or named to its "Risk Manager Honor
Roll." Since these individuals had distinguished themselves as leaders in the
field, it makes sense that a study of what made them successful would provide
some relevant insight into the field. One of the conference sessions provided
a preview of the report that will soon be issued.
Here are the key findings in the Marsh/RIMS survey of excellence in risk
management.
- More than two-thirds of the participants held advanced degrees, including
MBAs, JDs, or both. Nevertheless, almost all cited the need for greater
understanding of financial, accounting, and tax issues as being of paramount
concern moving forward.
- In addition to robust technical and analytical skills, study participants
cited as keys to success their abilities to interact with senior management;
to communicate, persuade, and motivate; and to understand the financial
accounting and tax implications of risk management strategies and programs.
- The broker relationship is key. Selected brokers are considered either
trusted advisers or actual extensions of the risk managers' organizations.
- Study participants prioritize risks by assessing their impact on the
income statement, developing policies and procedures to address each risk,
and establishing effective loss-control programs.
- Participants in the study have developed a hierarchy of information
that builds on claims and loss data as a foundation. The application of
analytical tools then provides trend data, internal benchmarking, and specific
cost allocations to individual operating units. At the highest level, strategic
insights can be acquired through external benchmarking and the use of incentive
programs to create a sort of continual feedback loop of information from
the field to the risk manager.
- Slightly more than one-third of the study participants have what they
consider innovative risk management technology.
The preliminary results are interesting. The final report will likely be
an excellent partial blueprint for risk management success, both from an organizational
perspective and a career planning perspective.
The other two studies focused on the top issues risk managers are facing
and the techniques they are employing. In ACE's survey, risk managers of very
large organizations identified the following as their top issues.
- Containing the cost of their programs was far and above their top priority
- Addressing enterprise risk management
- Workers compensation programs
- Getting the right terms and conditions
- Managing their directors and officers coverage
- Consolidation and financial security of carriers
- Internal risk management organization
- Contingency planning
The biggest surprise I found here was the high positioning of enterprise
risk management as an issue for this year. While I agree with the need for this,
I haven't seen a lot of evidence that risk managers are really pursuing it.
The fact that ACE's survey focused on very large organizations probably had
something to do with the high ranking. Supporting this conclusion, Lance Ewing,
president of RIMS and director of Risk Management for Caesars Palace, told me
that he strongly believes that ERM is still a pursuit of risk managers. Maybe
more progress is being made on this front than I realized.
Munich American Reinsurance Company's survey developed a similar list of
issues. Their top four included the following.
- Cost of programs
- Changes in terms and conditions
- Coverage exclusions (e.g., mold and terrorism)
- Availability
Cost of programs is therefore the number one issue developed by both surveys.
The Munich American Re survey polled a larger number of risk managers, which
likely would include smaller firms than ACE's survey. This probably accounts
for the higher positioning of terms and conditions and the concern over coverage
exclusions that were not as prominent in the ACE survey.
ACE's survey also identified the following as being the top four key projects
of risk managers for 2004.
- Internal risk management processes
- Specific program reviews
- Enterprise risk management and alternative risk transfer (ART)
- Captives
Since most of the respondents already have captives, the inclusion of this
item in the list is interesting. On the order of 55 percent of the respondents
said they expect to use more alternative risk financing tools next year. These
risk managers are looking for ways to improve their use of these vehicles. Some
of the projects involve using them for financial planning, exploring the feasibility
of insuring employee benefits, and expanding their use of captives.
Robert Davis, senior vice president of ACE Captive Solutions, also indicated
that many companies are using domestic captives to insure terrorism exposures.
This provides them with the federal Terrorism Risk Insurance Act of 2002 (TRIA)
backstop subject to reasonable deductibles and retentions (since they are based
on the earned premium of the captives). It will be interesting to see how TRIA's
sunset affects these programs.
Munich American Re's survey confirmed the focus on alternative risk financing
uncovered in ACE's survey. More respondents plan to use captives, risk retention
groups, and risk securitization this year than last. Other tools, such as large
deductibles, self-insurance, and excess insurance/reinsurance showed slight
to moderate decreases in usage. The hard markets of the past have resulted in
permanent dislocations of risk to the alternative market and this seems to indicate
that the last hard market will not be an exception.
As the Pendulum Swings: The Insurance Marketplace
It's common knowledge that the insurance marketplace has begun to stabilize.
You see it everyday as you work in the market. If you need evidence, however,
a number of surveys recently released by The Council
of Insurance Agents and Brokers (CIAB), RIMS, and others confirm it. It was
also acknowledged by speaker after speaker at RIMS. Thus, the pendulum has reached
is apex, is currently stationary, and will soon begin to swing the other way.
The only question is, "How far will it swing?" The apparent stability of the
market probably accounts for much of the cautious optimism I sensed last month.
Insurance industry spokespersons are now trying to convince each other, their
customers, and the intermediaries that it will be in no one's best interest
to let it swing very far. For example, Monday's keynote speaker, Zurich Financial
Service's CEO James J. Schiro focused his address on the need for a better managed
insurance cycle. In his presentation, "Breaking Out of the Insurance Cycle,"
he told risk managers that they will be better off over the long term paying
the "technically correct price" for insurance.
"I continue to see realistic pricing, and the necessity to earn an underwriting
profit is not disputed," said Mr. Schiro. "The building blocks are in place
for a better business model, one that may help us to break out of the stark
cyclicality of the past."
At a press conference following his keynote presentation he stated in no
certain terms that Zurich would not sell insurance below the "technically correct
price."
Lloyd's of London Chairman Lord Peter Levine made a similar statement during
Lloyd's press conference. "We are not going to write business at unprofitable
rates," he said.
These types of proclamations are to be expected at this stage of the market
cycle, but it remains to be seen whether insurers will fall back into their
old ways. There is much new capacity coming into the market, from Bermuda companies,
such as Axis and Endurance, as well as U.S. companies. Most of these insurers
are not faced with the legacy of past underwriting decisions, which puts them
at a competitive advantage. An example of new U.S.-based capacity of this type
is XL Capital, which announced during the conference that it would enter the
market for primary casualty insurance for risk management accounts ($1.5 million
or more in premium). XL Executive Vice President Dennis Kane indicated that
they expect to write 40 to 50 accounts in their first year. Of course, Arch
Insurance has now been around for a few years, and they are also very active
in the market.
When questioned about the effect of this new capacity, insurance executives
are usually quick to point out that this is not "naïve capacity," since the
management teams of these new insurance operations have been around the block.
Of course, the proof of an end of the insurance cycle will come when insurers
resist the temptation to drop below the "technically correct price" when faced
with losing a prestigious account. The Munich Re survey discussed above may
provide some interesting insight on what may happen. A whopping 74 percent of
the risk managers responding to this survey said they were considering changing
insurers. Only time will tell how far the pendulum will swing the other way.
Another hot topic that will become even warmer in the coming months is TRIA.
Insurers and risk managers alike have concluded that the only solution to the
problem of insuring terrorism is some type of governmental program. The industry
is going to lobby hard for reauthorization of TRIA when it expires at the end
of 2005, and the risk managers support this. All the insurance industry executives
who I heard make addresses at the conference—James Schiro, Lord Peter Levine,
and Aon Limited's Chairman Max Taylor—called for a federal government solution.
Likewise, the leadership of RIMS indicated that they would like to see a temporary
reauthorization of TRIA followed by more work to provide for a permanent solution
involving a partnership between the insurance industry and federal government.
Since any insurance policy put into place during 2005 will have a portion
of its policy period fall after TRIA's sunset, we will begin seeing problems
on renewals in the first quarter of next year, particularly for the workers
compensation line in major metropolitan areas or other high risk locations.
Following the developments in this area in the coming months will be interesting.
Conclusion
Risk managers have reason to be cautious in their optimism. The market currently
appears to be stabilizing, but it wouldn't take much to disrupt this stability.
As RIMS President Lance Ewing put it, "We're in a fragile insurance market in
which catastrophes can cause problems." There is plenty of risk of natural and
manmade disasters that could disrupt the stable market and cause risk managers
other headaches. For that matter, the sunset of TRIA may be catastrophe enough
to cause insurance marketplace problems, at least for insureds in the high exposure
cities. I wonder what will transpire between now and next year's pilgrimage
to Philadelphia, the venue for the next Annual RIMS Conference? Somehow, I think
the mood will be much different.
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