IRMI Update—Issue #163

An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
June 20, 2007

In This Issue

• Message from the Editor
• Risk Tip: Provides Rules of Thumb to Help Set Retention Levels
• What's New in The Risk Report
• New Expert Commentary
• Find a Qualified Agent or Broker in the CRIS Directory
• Expert Commentator Profile: Dr. George Head
• How To Subscribe/Cancel IRMI Update

Message from the Editor

Colleague,

An interesting aspect of directors and officers (D&O) insurance is that the purchaser is not generally the insured with the most at risk. Corporations choose policy limits and coverage terms on behalf of their directors and officers. Traditionally, most of the directors and officers, particularly outside directors, have little or no input into the insurance purchase decision, even though they rely on it to cover the substantial personal risk they face as a director.

Recent high-profile D&O claims have caused outside directors in particular to become much more inquisitive about the coverage being afforded on their behalf—and you can't blame them. Some even require the company to pay a consultant or attorney to provide an independent review of the D&O program. Others rely on less expensive summaries prepared by the risk manager or broker.

D&O policies are quite complex. Considerable time and effort can be expended in reviewing the terms, negotiating placements, or preparing analyses. IRMI can help. D&O MAPS is a valuable tool that can help at a very reasonable cost.

D&O MAPS contains detailed analyses of the good, the bad, and the ugly provisions in 250 currently used D&O forms. Prepared by D&O experts, these analyses highlight broader-than-usual provisions in blue and more restrictive provisions in red, allowing quick identification of the strengths/weaknesses of every D&O form.

Considering the cost and the importance of D&O insurance, I wouldn't buy or sell a policy without consulting its analysis in D&O MAPS. Supplemented and updated monthly, thousands of risk managers, agents, and brokers rely on it. D&O MAPS is available on IRMI Online or through SilverPlume Sage. You can learn more or subscribe.

By the way, we also offer a free e-mail newsletter that focuses solely on D&O insurance. Learn more and sign up.

Thank you for the confidence you have in IRMI to meet your information needs.

All the best,

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI

Risk Tip

Provides Rules of Thumb to Help Set Retention Levels—One of the more difficult tasks in designing a risk financing strategy is determining retentions. There are insurance market factors that impact these decisions, and there are industry benchmarks that can be useful. But a broader issue to consider is what level of unexpected loss your organization can withstand—its financial flinch point.

Often, senior management will know these levels. However, they may want validation of that when it comes to making retention decisions for risk financing. Some rules of thumb that stimulate the discussion and give them the benchmarks they are seeking include:

• Annual revenues test: 1 percent of revenues from operations.
• Pretax earnings test: 10 percent of pretax earnings.
• Working capital test: 2-5 percent of working capital.
• Current assets test: 1-5 percent of current assets.
• Operating income test: 1-8 percent of operating income.
• Operating cash flow test: 2-5 percent of operating cash flow.
• Allowable budgeted cost variation: One might allow budgeted retained losses to fluctuate as much as 50 percent upward and establish that amount as the annual retention capacity. Therefore, an organization with a $3 million estimated annual cost of losses could be willing to absorb up to another $1.5 million under its risk retention program.

Working through some of these guidelines may help produce a consensus on a single number or at least a small range. Then the parameters for selecting retentions are defined.

Drawn from Practical Risk Management, Topic B-1, Risk Retention.

IRMI Online subscribers will find it here.

SilverPlume Sage subscribers will find it here.

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. Submit your tips. We'll acknowledge your contribution.

What's New in The Risk Report

The June issue of The Risk Report by Tyrone Childress, "Minimize Coverage Disputes with Better Communication," examines various critical junctures in the claims process and suggests ways policyholders and insurers can help avoid or minimize certain recurring problems that make resolution of coverage issues more difficult.

For IRMI Online and Print subscribers.

For SilverPlume Sage subscribers.

New Expert Commentary

There are now over 900 risk management and insurance articles on IRMI.com. Below you'll find summaries of some recent additions with links to the articles.

• Insurers' Right—and Duty—To Say "No!"—Following disasters, pundits often call for radical change in the insurance mechanism. Dr. George Head believes this is a mistake, and explains why. Be sure to see Dr. Head's profile below.
• In the Beginning: Managing Risks—Jack Bogardus and Robert Moore look to the past to see how the insurance industry has evolved over the centuries.
• Pay for Results—Gary Bausom examines the supplemental commission debate and why financial managers need to focus on the value of information to mitigate unnecessary expenses.
• Risk Mitigation—How Corporate Aviation Can Work—With a real-life example, Adam Webster explains the importance of intelligent risk mitigation for any organization that operates aircraft.
• Household Exclusion Bars Coverage for Foster Children—Kevin Merriman describes an Alaska Supreme Court decision concluding that foster children qualified as "insured persons" under a homeowners policy.
• Wrap-Ups and the Issue of Collateral (Part 2)—Rich Resnick helps navigate confusing collateral issues by answering typical questions posed by insureds.

Find a Qualified Agent or Broker in the CRIS Directory

More than 900 professionals have earned the Construction Risk and Insurance Specialist (CRIS) designation. Contractors can use the CRIS Broker Directory to find an insurance professional with a demonstrated commitment to the construction industry. The CRIS continuing education program demonstrates specialized expertise and consists of five courses presented entirely online. Only $49 per course! Learn more.

Expert Commentator Profile: Dr. George Head

Dr. Head has written 11 articles on ethics since he began writing for IRMI.com in 2005. He also answers readers' risk management questions as part of the Ask George Head service. Dr. Head, the man behind the Associate in Risk Management designation, is now retired as Director Emeritus of the American Institute. IRMI is lucky to have him so involved in IRMI.com. For more information on Dr. Head, see his full biography.

A list of all his IRMI.com articles can be found here.

How To Subscribe/Cancel IRMI Update

IRMI Update is sent to subscribers by plain text e-mail twice each month. To initiate your free subscription, use the e-mail registration form.