Risk Management Services Report Card
July 2009
You are the risk manager, and it is the
day for your performance review. What meaningful message can you give your
boss that will leave a positive impression that lasts? The price of
insurance provides an interesting "weather report" but is not a lot
different from a report on interest rates. Your overall contribution to
managing risk issues is a common ground—your boss focuses on it every day.
by Gary
J. Bausom
Bausom & Associates, Inc.
What has the risk manager's value proposition "sale" been to the boss?
What are the quantification details that have been pushed as signs of
success? Have qualitative issues been set forth as elements of the success
of the risk management program?
Are the issues that are being concentrated on sustainable in terms of
value generation? Will the risk manager take an issue to the boss for
consideration and support or would that play out as a weakness for the risk
manager? Managing risk (retained as well as transferred) has to be at least
as important as cost, otherwise the cost should be at or near zero.
If a risk manager has sold price over the qualitative aspects, then any
needed improvements are less likely to be earnestly considered. (Spending
money when success has been measured by cost reductions is a no-win
approach.) When the market reaches the bottom, then what is the sales pitch
to the boss? Is the risk manager selling consulting advice about managing
risk (economic, market and/or political risks) or has he or she been
positioning to take credit for temporarily favorable pricing trends?
Focusing on the Right Q
Changing from Quantitative to Qualitative requires emphasis on:
- Credit quality, complete underwriting specs disclosure,
and clarity of the insuring agreement to eliminate obvious
ambiguity and assure all is on a best-effort basis.
- Reasonableness of terms, including price (do not push
for the bottom—avoid the top of the pricing cycles).
- Getting to know the underwriter and his or her boss to
build a sound working relationship.
Your conduct, in dealing with the markets, will reflect the
treatment/service you receive from them regarding ambiguities within
insuring agreements or large claims. The price of insurance is a commodity,
and you, as a buyer or an individual underwriter, have little real influence
on the state of the market. In addition to underwriters' long memories, the
credit quality property market is limited at $1.5 billion to $2 billion and
the casualty market at $300 million. Arguably, there may be 30 insurers with
high credit quality, as determined by the four principle rating agencies. In
several years, if you burn through the choices of underwriters in the
market, what then? Risk managers want/need underwriters with healthy balance
sheets.
Refocus
How are you, as a risk manager, going to improve on your position with
your boss? The boss is focused on balance sheet integrity, operating
efficiency, and the firm's reputation. Without high-quality earning assets,
the performance of the business will suffer. In a risk management context,
cost effectiveness is important; however, it is equally important to make
sure catastrophic risks are being identified and transferred so when an
event does occur, the counterparty responds to pay a covered claim. The
desired result is a receivable, not an expense! After a notable claim, an
expense is very difficult to explain, when in most cases it should have been
a covered event.
A successful risk management program will
satisfy the boss that the fundamentals are being addressed:
Sound Catastrophic Risk Transfer—Solicit
management's assistance and participation in identifying risk with collaboration
on establishing/improving the program.
Intermediaries—In dealing with
intermediaries, fine-tune the protocol and performance criteria to assure
quality service that adds value. For example, reduce/eliminate facultative
reinsurance wherever possible (reduce cost and improve credit quality).
- Performance measurement requires
accountability on specific transactions and services one at
a time, not on a combination of general services.
- Assure services delivered are furthering your risk
management goals and are not just "nice to haves."
Expected Losses—Risk tolerance should consider, for
example, $50,000 to $100,000 per event or more.
- Assure claims are being settled in an equitable manner.
- Audit criteria should be
defined and employed to assure cost control is maintained and there is
tangible evidence that the all costs are being managed.
Managing Risk—Chart, graph, and communicate the total cost of risk (hedged
and unhedged) to include effective tools for adding measurable improvements.
- In retrospect, what were the goals for the past 12 months and
were they met?
- What has the total cost of risk been over the past
3-5 years?
- What are the specific deliverables for the 12 to 18
months going forward?
All of the above should be reflected in a
comprehensive but brief annual report to the management and the board of
directors. This report should explain how risk management is supporting and
furthering general management's goals.
In Conclusion: Improving Your Grade
and Value
What do you believe are the measures of success? Why? What
is your value when you run short on cost reductions? You may have achieved
thousands in premium "savings," fine, but let's make sure you are ready to
deal with the millions in claims recovery. The premium reductions may have
been helpful; however, it may be more important to focus on the
participating underwriters' ability and willingness to pay losses on a
timely basis. Premiums are not an investment (with an expected rate of
return), but rather can be a prudent hedging cost. Make sure your efforts
focus on sustainable value that improves performance related to the firm's
goals as well as your own.
Communicate with the boss. What are the boss's
measures of success? Earnings are not possible and/or sustainable without
quality earning assets! Expense cutting is very short-term and does not
require a lot of brain power. Are the cuts to expenses truly excessive cost,
or were they supporting results?
What are the important values to obtain
from a risk management program? The boss needs to actively understand and be
informed about:
- Risk identification of significant (material)
exposures
- Transfer of risks with credit quality underwriters
- Interest costs for cash flow exchanges with insurers
- Participation in managing internal risk mitigation efforts
- Clear
and concise reporting of actions taken, the results achieved, and likely
benefits (costs are one component)
From the issues and questions above,
fine-tune your standards and metrics for selecting risk transfer contracts
and services to purchase. Sometimes this is done on a contract-by-contract
basis and a year at a time, without regard for sticking to key principles.
Avoid results that can be arbitrary without a clear rationale to defend or
to garner support from management. Manage risk, deal with credit quality
counterparties, and obtain meaningful service from the vendors used. Get to
know the key individuals, underwriters, and service providers to obtain
their personal commitment to performance and to achieve value, all of which
can be linked to your approved objectives.
Your report card … does it
reflect your actions, delivery, and sustainable value achieved? Are you
satisfied with your grade? What will you do now?
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