I attended my twenty-second RIMS conference a few weeks ago. In many respects, it was much like all the others; however, the tone was more serious than in recent years due to the hard market (but not as frenetic as 1985). The sessions were packed. Conversations focused on terrorism risks (and the lack of insurance), premium increases, captives, and risk retention groups. There were a huge number of exhibitors, and many were touting technology products. Not surprisingly, the number of dot-coms in the exhibit hall was a fraction of 2 years ago, but there were more international delegates in attendance. As our national economies become more global and interdependent, risk managers worldwide have more in common. I suspect this is a trend that will continue.

Responding to all the interest in captives, IRMI has fast-tracked the development of a special seminar focusing on captive alternatives for the middle market, to be held in three U.S. cities in July. The seminar will address group, association, and rent-a-captives and how to pick the one that's best for you (or your clients). This will be a practical seminar, with limited seating to facilitate learning and discussion. For details, see this Web page.

Last week, IRMI Update reached the 19,000-subscriber mark. Much of our growth comes from personal recommendations by supportive subscribers. We take this as a very high compliment and appreciate it greatly. Please do forward IRMI Update to your colleagues and friends in the industry.

We've added some interesting and timely new articles to IRMI.com and had a huge response to my editorial on terrorism exclusions in homeowners policies, and they're summarized below. Thank you again for subscribing to IRMI Update.

All the best,

Jack

Jack P. Gibson
President
IRMI

Risk Tip

Integrate Equipment Theft Prevention into Your Business Operations. Heavy equipment theft costs insurers and owners as much as $1 billion each year, with as little as 10 percent of this equipment ever being recovered. Not investing time or money in risk management programs may save a few dollars in the short term, but in doing so, equipment owners increase the risk of major financial loss and/or increased insurance costs in the long term. The first step in theft prevention is integrating your theft prevention thinking with the rest of your business.

Make your theft prevention policy part of your business plan and link it to incentives for employees.
Allow time in your employees' day to adhere to responsibilities outlined in the theft prevention policy.
Consider joining local contractors' theft prevention organizations to exchange ideas and information about theft prevention and the pooling of resources.
Conduct unannounced and random work-site visits to ensure nothing unusual is occurring while work is not in progress.
Invite and be open to suggestions from field employees about security and theft issues; they are on the site and know what potential problems exist.

A complete guide to heavy equipment theft prevention can be found at this Web site.

By: Glen Sider
National Equipment Register
NER Operations Manager
E-mail:

Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. We'll acknowledge your contribution as we did for Glen.

Advertise in IRMI Update!

IRMI Update reaches 19,075 risk managers, insurance agents, brokers, adjusters, lawyers, and underwriters who look forward to reading the tips and articles offered in each issue. Since yours will be the only ad in this space, it will be seen and acted on by key decision makers. For more information, contact us or click here.

New Expert Commentary

There are now 286 articles on IRMI.com, and many more are in production. Below you'll find summaries of some recent additions with links to the articles.

Captive Structures—There are many different structures for a captive insurance company. Michael Mead discusses the most common structures and their potential uses.
Contract Documents of the Design-Build Institute of America—Kent Holland examines a few of the more significant clauses of the DBIA standard forms affecting risk allocation and potential insurance coverage.
Bankruptcy and the Insured versus Insured Exclusion—Robert Suomala examines litigation surrounding the insured versus insured exclusion in D&O policies and claims by a trustee, receiver, or other official of an insured corporation in bankruptcy.
Insurance Litigation Review: 2001—Insurance coverage disputes are a mirror to casualty and liability losses throughout the world. In this article, Jill Berkeley lists the more important insurance cases of last year.

New IRMI Insights

RIMS Conference 2002: A Sense of Betrayal—IRMI President Jack Gibson comments on his perceptions of the RIMS conference and the reactions of those who are dealing with this century's first hard insurance market.

Captive Seminars

Group Captives and Other Art Solutions for the Middle Market: New IRMI Seminar!―Middle market companies―those much too small to be counted among the Fortune 500―are being severely affected by the hard insurance market. Unfortunately, their size does not give them the capacity to implement sophisticated alternative risk transfer (ART) programs on their own. However, they can create the capacity to do so by banding with other companies that are experiencing similar problems. Designed for agents, brokers, consultants, and risk managers, this new seminar from IRMI will give you proven solutions for dealing with the hard insurance market by forming or participating in group, association, protected cell, and rent-a-captives.

Your View—Terrorism Exclusions In HO Policies

Jack's last editorial, criticizing the industry for attempting to gain regulatory approval of a terrorism exclusion for homeowners policies, drew a huge response. An overwhelming majority of readers agree with his stance. Some pointed out legitimate catastrophe exposures. Most who did not agree with Jack blame the need for an exclusion on the reinsurers, and many called for Federal involvement. The following is a sampling of reader comments. We had many more thought-provoking responses than we could run here, so we will include a much more complete rendition in the Executive Briefing to the next supplement of Personal Risk Management and Insurance.

I can understand your point in chastising the industry for applying terrorism exclusions on personal lines, however, some of the decisions were driven by the reinsurers. If I am an underwriting officer of a primary carrier and we don't have reinsurance protection for something that could be catastrophic in nature, I would be derelict in my duties to expose our company's surplus unnecessarily. You have to remember, the industry will pay anywhere between $35 billion-$60 billion (depending on who's figures you look at) from the 9/11 event last year and never collected one penny in premium for that peril.

With regard to the comment on the commercial market being hard, I beg to differ. The commercial market is only showing a correction in pricing from the 12-13 year free ride most commercial insured's enjoyed since the mid 1980s. In fact, 2002 rate levels are still only 60-70 percent of what they were 6 or 7 years ago. Unlike the last hard market of the mid 1980s which restricted coverage, ceased writing certain lines of business, and increased prices all at the same time, the current market correction is by and large based on pricing only. Most carriers are freely writing all types of risks they have always written.

—Tim Riedl, Director of Underwriting Services,
SECURA Insurance, Appleton, WI

"Homeowners" does not just mean "house-owners." Apartment, Condo and Co-Op policyholders qualify, too. And what is the average density of housing units in any of our major cities? Enormous. That's where the catastrophe potential is. In Chicago, 8 stories of the 100 story landmark Hancock building are residential occupancies.

In New York City, many thousands of residents (some being my co-workers) living quite accurately in the shadow of the WTC in recent, upscale residential buildings, were evacuated because of the dust, gases, and lack of utility and other living services caused by the collapse. I understand that for most, the duration exceeded their policy's built-in "temporary residence due to Government action" living expense reimbursement term.

Now the tough part — residential catastrophe potential does exist and it exists mainly in target areas. But whether residential persons and families should, in our society, be subject to a Terrorism exclusion—well, that hits a little bit closer to home and to friends and to family, and perhaps may more—rightly be a public policy issue rather than a business issue. As it was handled by the NAIC. With their hearts, rather than their solvency tests.

—Dave Rojek, American Re-Insurance Co.

I agree 100 percent with your comments. The insurance industry becomes its own worst enemy whenever it seeks to implement a knee-jerk response and exclude the risk du jour. We are in the risk assumption business.

Such a broad-brush exclusion is contrary to the main purposes of insurance, transfer and spread of risk. It is folly to think that consumers do not understand this point; they do. Historically there have been greater losses each and every year from various weather-related events, which spread through much wider geographic areas than would be likely from a terrorist act. These losses seem to be absorbed or mitigated through rate increases in the homeowners book.

I can see where the selective and intelligent application of a terrorism endorsement on problematic commercial risks has merit. Underwriters need to evidence discipline and good judgment; that is what we are paid to do. The exclusion of terrorist acts on homeowners policies makes no sense. While there may well be losses in the future from terrorist acts, these claims should be minor and be absorbed throughout the book of business of the various homeowners insurance companies.

The NAIC should be commended. Their position shows a grasp of reality and good judgment that others lack. If the insurance industry does not address this problem, others in the financial services industry will be forced to, and that may pose a bigger problem for the insurance business than the payment of a few terrorist related property damage claims.

—Richard Legere, ARM, CIC, Program Manager,
Chubb Specialty Insurance, Simsbury, CT

I thought I was alone in my dismay as I saw the insurance industry scramble to assemble various terrorism exclusions. I also questioned the need for what clearly appears to be an overstated risk of loss. How much wasted effort went into drafting these exclusions? How is a "terrorist" loss, by definition, any different than any other form of vandalism or intentional mischief? At a time when the insurance industry could have put its best foot forward by reassuring fellow Americans with solidarity, it instead stumbled badly.

I suspect that a great deal of the current industry anguish and angst comes more from lost investment income rather than terrorism, storms, or other catastrophes.

—Paul C. Dispensa, Vice President and Counsel, LIRB

I agree with your opinion regarding excluding terrorism on homeowners policies. I also concur with your use of the term "knee jerk," as in automatic reflex done as a habit with no thought. I wonder how long our industry can continue to exclude every new threat that comes down the pike: lead, mold, terror etc. While other industries are striving to become more customer centric, we often run from our customer's risk financing needs. This can be further exacerbated by irresponsible claims handling, such as using the pollution exclusion to avoid coverage of indoor events. I believe we are headed down a dangerous path, which will lead toward heavier regulation, more adverse court decisions, and loss of market share to alternative risk financing options.

—Andrew N. Forrest CPCU, ARM, ARe, ASLI

I understand the need for the carriers to protect themselves against future losses of the magnitude of 9/11 and the fact that this tragedy went over all lines of coverage. However I feel that the reaction to this potential has been a knee-jerk one by the carriers. As you can see from my address I was right there on 9/11 and while nothing can ever compare to what happened, I see an analogy to the Y2K issue.

Prior to Y2K, carriers were panicking. There was talk of monumental losses, economy coming to a halt, traffic lights going out etc. I remember getting voluminous questionnaires about DRPs, etc. Carriers were scrambling to exclude any possibility of Y2K coverage for a "disaster" which never seemed to materialize. I find it most interesting that several major players have now come into the market with terrorism coverages. With great interest I noted that one carrier who is always at the forefront with innovative coverages and "innovative" pricing has reduced its pricing for this since the initial roll-out.

We now realize the need for prudent risk management on the part of insureds. Hopefully consistent underwriting practices, not panic driven ones, will prevail and keep our market able to provide necessary coverages, appropriately priced and prudently underwritten.

—Alan Doloboff, Director, Frank Crystal & Co., Inc., New York

The backbone of the American economy is the home. Take that away, and we will be back to caves and teepees. America didn't become the nation it is by shying away from a challenge. The insurance industry in this nation has prospered over the years from taking risk. Now that there is a potential for attack against individual homeowners, they want to avoid this risk. What about the theory of spread of risk? What is insurance for anyway?

—George Louis Males, Vice President/Account Executive,
Lockton Companies, Inc.

Terrorism in the United States is not as widespread as in my country (Colombia), where bombs go off or are deactivated every day. Yet we do not have the exclusion you mention on homeowners policies, because insurers see that the risk on homeowners policies is not as cumulative as it is on public buildings or infrastructure (where limits on terrorism coverage are imposed).

—Thomas Guezmacher, UOL Premium, Columbia

How To Subscribe or Unsubscribe

A subscription to IRMI Update is absolutely free. Use the e-mail registration form to initiate or terminate your subscription.

IRMI Update—Issue #40

In This Issue

Print Preview Unavailable