Canadian Underwriter

The Risk of Terror: Lessons From the Disaster

October 1, 2001   by Vikki Spencer

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What had begun as a relaxed occasion of learning and networking, the Canadian Risk and Insurance Management Society (CRIMS) Conference, recently held in Ottawa, became caught in the maelstrom of the tragic events that unfolded in the U.S. on September 11.

It was a sign of the impact the terrorist hits on U.S targets had on the insurance industry that half of the panel slated to anchor the educational sessions at the conference were unable to be present. In the face of the devastation, many in the insurance community were suddenly wondering about the fate of co-workers and loved ones, particularly in New York. The offices of Aon and Marsh, both located in the World Trade Center, housed not only U.S. staff, but visiting Canadian staff of the companies as well.

Despite the chaos and fears, the Tuesday afternoon panel discussion brought together dozens of risk managers and insurance industry personnel, now focussed on the tragic events of the day. Many wanted to know, as RIMS president David Mair asks, “Why didn’t we see it coming?”

“Mis” information

The disaster provides some insights into the profession of risk management, Mair, also a risk manager with the U.S. Olympic Committee, notes, including the speed at which information about such a crisis can become available. Unfortunately with this ready access to information comes a wealth of misinformation, he adds. The challenge for risk managers is to sort out the truth and to communicate this to senior company officials in a fast, accurate manner. One example, highlighted particularly by the WTC catastrophe is the need to account for all employees in such a scenario.

Gail St. Germain, senior vice president of human resources for Marsh Canada Ltd., notes that this was a real-life situation now being faced by her company, who had at least one Canadian executive unaccounted for at the time who was expected to have been in the building complex. “This is a difficult day for Marsh as a representative and a leader in our business,” she told delegates. She went on to say that Mercer Management Consulting and reinsurance broker Guy Carpenter, both part of the Marsh family, also had offices in the towers.

St. Germain, who was to speak on the link between human resources and risk management, explains that human capital is a company’s greatest resource and must be protected. The attacks in the U.S. and other terrorist events serve to threaten employees’ sense of security and, as leaders, risk managers need to work to restore that sense of security.

Human resources has become a “profit center”, with a great deal of a company’s value resting in its employees, agrees panel moderator Robert Pazlett, general counsel and group risk manager for Scotia Investments Ltd. But, he adds, the human element is also the hardest to manage and control.

People risks

In terms of crisis planning, risk managers are the “teachers” of the corporate strategy for dealing with emergency situations, says Keith Gibson, risk manager for the Municipal Insurance Association of British Columbia. The key role they play is in communicating, including knowing what information should be given to whom.

Mair adds that disasters challenge risk managers to be leaders, to assist high level executives being bombarded by information and decisions and to “function calmly, insightfully”. Risk managers need to know what is happening following a crisis, even before it happens, and they need to fulfill the human resources function of advising on employee needs in the wake of tragedy. These needs are not only about physical safety, but also include psychological concerns, such as the many corporations worldwide that chose to close their doors on September 11, because employees were simply too upset to work. Risk managers also need to be aware of the latest in crisis counseling.

With the world becoming smaller each day and the concept of a “global community” growing, Pazlett agrees companies need to be aware of how events outside the company may be affecting its employees.

Risk managers are often focussed on the physical aspects of their business, observes Lovel Vining, director of risk management, northern region, for Mayne Nickless Ltd. Vining says he “watched with horror” the events of the day. Risk managers, he adds, need to “go beyond [the physical risks] and look at the people. People drive our business.” Beyond hazard risks or financial risks, there is a need to address “people risks” in a crisis.

The future

A late arrival on the scene, Gary McMillan, resident vice president & CEO for American International Group (AIG), says he was told to shut down the company’s Canadian office, as all worldwide AIG offices would also be closed. American-based companies were feared to be potential targets for further terrorist incidents.

And, matching the doom and gloom of the day, McMillan had little positive to offer risk managers about the state of the insurance industry, and how it may be affected by the losses resulting from the attacks on New York City and Washington D.C. The industry is already in “sad shape”, he notes, with income down 70% in the first half of the year compared with 2000 numbers. The overall combined ratio is also dismal, sitting at roughly 110% and “investment portfolios are going right down the tank”.

And reinsurance results are even worse, where retrocession cover has all but disappeared in the wake of poor returns and “reinsurers are more exposed than they want to be”. The trickle-down effect means insurers are looking at 20-25% rate hikes on their reinsurance renewals and risk managers are going to feel the effects come policy renewal time.

U.S. exposure

One of the reasons for the losses experienced in recent times is U.S. exposure, particularly to the litigious trends south of the border faced by an increasing number of Canadian companies. Even smaller companies now face cross-border risks. And, as far as insurers are concerned, “we’re not getting adequate dollars for that exposure”, admits McMillan. Now, some insurers are cutting out these segments of their business, particularly in lines such as transportation and trucking, which may not be profitable.

Directors and officers (D&O) coverage is another growing concern, with more companies being listed on U.S. exchanges and facing potential stockholder lawsuits and other legal action aimed at their senior executives and boards of directors.

Many companies, including insurers, will be holding their breath to see the short and long-term impact the terrorist attacks will have on the stock market. At the time, McMillan could not guess what the effect might be, although Pazlett says that the stock market reaction will be critical for insurers.

What McMillan could say is that the attacks would certainly have significant implications in terms of the losses. Ironically, in his original presentation, he was to touch on how catastrophes are affecting the insurance market. Prior to September 11, “it was not a great year, not a bad year” for cat losses, which he estimates stood at about US$4 billion. With numbers more than triple that being speculated early on for losses from the attacks, the impact was most certainly going to be felt throughout the industry. McMillan predicts when all is said and done the losses will be “astronomical”, and will touch every line of business.

Despite the disaster and its worldwide implications, McMillan believes there is “a window of opportunity” for insurers to implement price increases in a reasonable fashion and patiently wait for business to “smooth out in two to three years”. He does not see a repeat of the drastic rate hardening of the mid-1980s. However, he adds, “if we miss this window, I fear that some companies are not going to make it through the next [pricing] cycle”.

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