June 1, 1999 by Lowell Conn
The risk management profession is undergoing its next stage of evolution as North American businesses examine holistic risk management — utilizing alternative risk transfer vehicles, enterprise risk management, and in a growing number of scenarios, creating a new portfolio and designation for the chief risk officer.
The implications of these developments are significant — risk managers are gaining greater power within corporate North America as insurers brace themselves against the competitive hedging alternatives.
With over 500 speakers presenting 150 seminars in all areas of risk management, RIMS 99 lived up to its advance billed theme of ‘Many Goals, One Direction’. The consensus among delegates, exhibitors and speakers was that the educational segment embodied the event’s motto, that the profession is headed towards greater exposure as it expands both horizontally and vertically across the corporate map of business operations.
RIMS 99 also marked a celebration for the organization. RIMS turns 50 this year and began its anniversary in true style with an organizational first. A source of pride among Canadian delegates, incoming president Susan Meltzer, vice president of Sun Life Assurance of Canada, represents the first Canadian woman to be appointed to the position.
At the annual general meeting marking the first morning of the conference, as RIMS’ reins were passed from former president Mark DeLillo, Meltzer unveiled the 50th anniversary logo and circulated commemorative pins to delegates. While focusing on the future, Meltzer says, the organization will undergo a project establishing a written historical record of the profession. “We will use the 50th anniversary celebration as the catalyst. The theme for our fiftieth year will be to build a strong future from our past,” she says
The strong future Meltzer speaks of spells greater involvement by risk managers in traditionally non-insurance decision making functions, delegates were told at a seminar entitled Managing Balance Sheet Risk. The forum examined enterprise risk management, one of the emerging trends in holistic risk management.
Seminar speakers Kay Rahardjo, Liberty Mutual vice president of national market, and Chris Lewis, Ernst & Young LLP senior manager of risk management, advocate mapping organization-wide risk to determine which are the most frequent and the most severe in order to allocate risk resources more effectively. The practice shifts the risk concentration from catastrophe/hazard insurable focus to an organization-wide portfolio of insurable and uninsurable risk. The goal, Rahardjo says, is to focus on more frequent and uninsurable risks — such as profits, cash flow and share price — and concentrate less on the less frequent but hazardous insurable risk. “Only through an organizational audit of risk — through enterprise risk management — can companies multi-package risk and create hedge models to protect the uninsurable as well as the insurable losses.” For some companies, she notes, concentrating more on hedging currency shifts and economic turnarounds are more important than strict catastrophes and hazards due to the inherent higher frequency of the former.
Another advantage is a more seamless planning of organizational risk, says Raharjdo. “Your organization can prioritize its risk this way, as oppose to planning contingencies on a patchwork basis.”
The possibilities surrounding insuring traditionally uninsurable areas has not been lost on insurance companies, delegates were told. U.S.-based Reliance National recently introduced a balance sheet product, Enterprise Earnings Protection Insurance, billed as the first policy designed to protect publicly held companies against earnings disruption volatility. Rahardjo conducted a poll of audience members finding only one risk manager who investigated earning protection insurance. “We chose not to go with it at the time because the premium costs made it prohibitive,” the delegate says.
Lewis maintains corporations can reap the same earning protection by using capital market strategies — and other hedging options — as contingencies. He adds this corporate-wide view will make all managers — not just risk managers — conscious of risk.
Delegates were skeptical of the costs associated with enterprise risk management. While companies can bring in management consultants to run the program, Lewis says risk managers can just as easily develop the program in-house. He adds one recent program, developed by Ernst & Young LLP for an Asian corporation, cost in the low hundreds of thousands.
Pamela Rogers, director of risk management at Sears, Roebuck and Co. and moderator of the seminar, adds the cost factor should not deter companies. “I don’t think you’re going to find any gaping holes in risk. I think you’ll find your company over-managing. Three systems and two people managing risk is unnecessary. We’ll free up resources and finance less but manage risk across the company better,” she maintains.
Rahardjo insists this holistic approach is in line with a growing trend towards appointing an organization-wide chief risk officer to examine all forms of company-wide risk. “This is the move away from event-based risk and towards planning for every business concern that will keep your executives up at night,” she notes.
With more companies moving towards these holistic alternatives — to alternative risk transfer, derivatives and other capital market solutions, and self-insurance — the question abounds whether insurance companies are headed towards extinction in the commercial p&c risk market. At a forum entitled Do You Really Need An Insurance Company, Walt Disney vice president and former RIMS president Stephen Wilder, chief executive officer of advanced risk management services at Willis Corroon James Davis, and Ty Sagalow, chief underwriting officer at National Union Fire Insurance Company, debated the future of carriers. The consensus was insurers will continue to prosper, but only through an innovation in service offerings.
Wilder notes risk managers might side against insurers for a variety of reasons — capital markets, big bank alternatives, holistic risk and self-insurance — but he believes they benefit considerably from carrier-provided expertise.
Besides the cost-efficient nature of p&c insurance over capital market alternatives and a regulatory environment that dictates insurance coverage on most business assets, insurers bring specialty knowledge to the table. “This cannot be understated. An insurer is the best partner you could have in a liability lawsuit. They’ve been through the wringer many times and access to their database of information is good to have on your side,” he maintains. He adds insurance companies must respond to the technology needs of risk managers and create an online purchasing mechanism. “If not, you’ll soon see insurance replaced by some sort of risk-trade function online where qualified investors could snap up Disney risk through the Internet,” he predicts.
Davis does not believe the capital markets pose as large a future risk for insurers as “disintermediation” — which concerns all levels of the industry. He says big corporations are jumping over the insurers and connecting directly with reinsurers. “In many respects, the insurance industry today is a lot like Silicon Valley — your ally today can be your competitor tomorrow.”
Enterprise risk will explode in the near future, Davis contends, noting the driving force will be Wall Street investment analysts demanding consistent earnings per share. He says insurance companies must recognize this and create products accordingly.
Not surprisingly, Sagalow was the lone panelist to say insurers are well solidified for the competitive future. He believes carriers have already undergone serious change — in policies and in service levels — over the past few years in order to compete in the future.
He says insurers have begun to proactively assist its insureds protect themselves against liabilities — a valuable c
ustomer service and protection for the insurers underwriting profit. In the past, an insurance company would collect the premiums and handle the liabilities with little or no insured involvement. Today, insurers are flexible to rewarding corporations that effectively assist against liabilities through reduced premiums or waived deductibles. Says Tagalow, “Three years ago this type of practice was unheard of. Today, carriers are taking these extra steps.”
Conscious of other alternatives, insurers today are offering traditional products with non-traditional twists he says. “AIG recently provided a retroactive directors and officers claim policy to a company that was subjected to a lawsuit while discussing a merger with another company. This was a situation where the companies’ merger and acquisition might not have happened if not for the retroactive product offering,” he recalls.
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