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Canadian Risk Managers: Change in the Air


November 1, 2003   by Vikki Spencer


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Amidst hard market conditions and an altered risk environment, risk managers spent less time complaining about rates and focused on how to better manage their organizations’ risks at “Changes 2003”, this year’s RIMS Canada Conference. Set in usually picturesque Victoria, BC, the conference took place in the eye of a storm that saw floods leveling parts of the province, cutting off access to some regions.

The storm was but one more in a long list of perils that have challenged risk managers over the past two years, starting with 9/11 and following through 2003’s trials: SARS, the blackout, forest fires and Hurricane Juan. While the hard market has been, and continues to be, the talk of the town for risk managers, the conference was not simply a venue to lobby insurers for lower rates and better terms. In fact, much of the talk was about taking advantage of the spotlight currently thrust on risk managers to bring about change within corporations and public organizations, with enterprise risk management leading the way. And with insurers advocating a continuation of strict underwriting and rate discipline, risk managers may do well to turn their minds to risk control.

DECADE OF GROWTH

The concept of business risk in Canada has changed dramatically over the past decade, notes Julian James, director of worldwide markets for Lloyd’s of London. “The Canadian economy is no longer dependent on lumber, mining, [and] cars,” he notes, now it is high tech, tourism, and a much wider array of enterprises contributing to the country’s growth. Canada has also become a “truly international economy”, trading not only with the US, but also extensively with the European Union (EU). James notes that two-way trade between the EU and Canada was $56 billion last year. There is a need for insurance and risk management to support both traditional industries and this new economy, he adds.

Certainly, the Canadian economy sits in a strong position currently, having “outpaced the rest of the developed world by leaps and bounds”, James observes. In the insurance market, Lloyd’s, like others, is reaping the benefit of hard pricing and terms, having rebounded from successive years of losses to post record profits last year and with strong forecasts for 2003.

After almost three years of premium increases and stricter underwriting, risk managers may be tempted to say, “we want to go back to where we were three years ago.” But it is not time for insurers or their corporate clients to “pop the champagne cork” yet, James says. “My belief is we should still be drowning our sorrows.” Canadian insurers last year posted a dismal 1.6% return on equity, and claims growth of 17%. With the cost of capital projected at 10%-12% ROE, “if you’re earning 1.6%, you’re not doing it”, James comments. “Our industry faces extreme challenges.”

Among these is natural catastrophes, with the change in population concentration causing insured losses to skyrocket, growing 20-times between the 1960s and the 1990s. “100-year events seem to happen every 25 years now,” James notes. In Canada, the 1990s alone saw the Manitoba and Quebec floods, as well as the 1998 ice storm. Added to these are rising tort costs, and increasingly complex business risks. Even with price increases, “nobody is making money”, he says. With a 98% combined ratio for Lloyd’s, this is still well off the 95% target needed to make the cost of capital. The rating agencies have taken note and have lowered the boom on insurer financial strength ratings.

While James sympathizes with risk managers having to face their companies with limits cut in half, higher deductibles and rate increases, a return to the soft market “would be foolhardy”. He adds, “the old mentality of having hard markets followed by soft markets isn’t working”. Maintained underwriting discipline is needed, not only to help insurers remain profitable, but to lend stability to the market. Stability for risk managers means not having to explain rate fluctuations, and being able to plan for future projects and exposures. While the Canadian market is intensely competitive, “competition should not breed financial suicide,” says James. “That’s not in anyone’s best interest… I hope that sense will prevail… I hope that we’re not standing here 10 years from now saying ‘well, we did it to ourselves again’.”

BRACING FOR CHANGE

Risk managers seem to be preparing for insurers to stick to their guns on rates and terms, for the time being at least, with the reality that insurance rates are just one among a host of challenges they currently have to deal with.

“Preparedness and response… since 9/11, that has been a mantra for all of us,” says Steve Wilder, senior vice president of risk management at The Walt Disney Co. Disney, like many organizations, has faced a host of challenges including and following the September 11, 2001 terrorist attacks. The 9/11 terrorist attacks affected all aspects of the multi-faceted company, which includes movies, theme parks, a cruise line, television stations, sports teams and music companies. “Our losses were just incredible,” says Wilder of the 9/11 experience. But the tragedy also provided lessons in how to deal with complex claims such as business interruption. In this case, Wilder said to adjusters, “let’s forget how you adjust claims and do something different”. The result was to bypass months of negotiation and settle the claim fairly within a few short months. Risks as diverse as finding workers compensation cover for war correspondents in Iraq, or deciding whether to launch a production in Toronto during the SARS scare, continue to challenge the risk department.

All of this comes on top of the “huge, time consuming, corporate governance ordeal” under the U.S. Sarbanes-Oxley legislation. Not to mention the growing cost of risk, which has been “a disaster” in Wilder’s experience. For example, just as the company was negotiating its directors’ and officers’ (D&O) coverage renewal, Business Week came out with a survey of top companies listing Disney as having among the worst boards in the country. Again, the company had to look at new solutions. “For the first 14 years I was at Disney, we studied captives,” Wilder recalls. Like most organizations, Disney has conducted captive study upon captive study, but did not actually make the leap. Then, as a result of rising insurance premiums, its first captive was established in just three days, “not based on a study, but because we had to,” he explains.

“We [risk managers] have kind of been under a microscope,” he says. With the risk function front and center in organizations, risk managers now have an opportunity to promote the concept of spreading the risk function throughout their organization through enterprise risk management (ERM). “How can you be a world class organization and not have a risk management program running through all of your organization?” Wilder asks.

RIGHT TEAM

This means assembling a “risk management team”, with members from each business unit who have expertise in that part of the operation. At Disney, that team’s is “chartered to pioneer new and futuristic approaches while acting as a catalyst for change”. This means the risk department needs to be involved from the ground up on projects, for example, assessing risks for a building before it is constructed rather than after the fact.

Added to this, every “cast member” or employee is part of the risk process. “How does this happen? Do we walk in and throw pixie dust on them?” Wilder jokes. In fact, each employee goes through an orienteering program wherein safety is highlighted among the four key elements of success. In the case of Disney, the rise of the risk function has extended as far as creating a program that brands safety as a core value of the company. The program involves everything from a chief safety officer and annual safety report, to promoting safety in theme parks through buttons and prizes for guests.

Risk managers going back to their own organizations after the conference need to take with them some serious questions, in light
of the new focus on risk, says Lance Ewing, president of the Risk and Insurance Management Society (RIMS). Among these is: Who will champion ERM, and what is the role of the board in risk management, what are the roles of the chief risk officer and the central risk management team in terms of accountability? As well, organizations need to look at how centralized the risk function should be, he adds. “Everything we do as risk managers can be outsourced. Don’t kid yourself. And that’s not always a bad thing.” The goal for risk managers in the changing landscape is to remain the site of accountability, Ewing observes. “Leadership and integrity are what set us apart from other professions.”