Expert Commentary

Risk Management Services Report Card

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.


July 2009

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:

  1. 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.
  2. Reasonableness of terms, including price (do not push for the bottom—avoid the top of the pricing cycles).
  3. 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.

Solid working relationships with underwriters should:

  • Be direct as possible (net and treaty basis) to reduce transactional costs (brokers and reinsurers).
  • Assure high credit quality and the ability to pay losses.
  • Allow complete disclosure to enhance underwriters' willingness to pay.

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?

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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