Risk managers cautioned to prepare for possibility of hard market

Risk managers would be wise to start preparing for a hard market insurance cycle that they haven’t seen for while, a panel of senior U.S. insurance company and broker executives told delegates of the 2012 Risk and Insurance Management Society (RIMS) Annual Conference & Exhibition in Philadelphia on Apr. 17.

“Be ready to buy insurance from the top down,” advised Eric Andersen, CEO of the Americas for Aon Risk Solutions. “Today, we tend to buy insurance from the bottom up: we get as much as we can, and we have certain break points on price.

“But the reality is, if the market gets more challenging over the next 12 months, and knowing what the economy is looking like over the next 12 months, no one will be budgeting more money for insurance. And if the prices are going up, you’ve got to figure out: Where do you need it? Where do you like it? And where can you do without?

“You need to know where you can take certain losses within your organization and where you need to trade it, and then buy things that actually matter, as opposed to what you’ve always bought. The pressure of that [hard market] cycle increases as you are forced to make choices inside of a budget that is not increasing.”

Panelists agreed the insurance marketplace is not a “classic” hard market stage yet. Hard insurance markets typically feature higher insurance prices and a lack of capacity to underwrite risks, leading to issues of insurance availability.

But the current market seems to be in a transitional state, with pricing firming up in some lines and not others, and capacity still available to underwrite current risks.

“The reality is, there are multiple markets out there,” said Andersen. “The question [about insurance pricing] is around which segment, which geography and the suite of products.”

Still, based on current trends, it’s conceivable that the market could start entering a hard market phase in three years’ time, suggested John Lupica, president of ACE U.S.A. And if this turns out to be the case, then are risk managers ready?

One panelist observed a large chunk of clients haven’t been exposed to a truly hard market period such as in the 1980s, when a 1986 Time magazine cover headline once famously read: ‘Sorry, America, Your Insurance Has Been Cancelled.’

Shivan Subramaniam, chairman and CEO of FM Global, observed that in any given era, statistically speaking, 33% of clients in that era wouldn’t have been exposed to the reigning market cycle at that time (be it a hard or a soft insurance market).

“The thing that will be different two or three years from now, versus where we were in the past, is that you have far more analytics, far more technology and far more models at your disposal to present your case [now] than you did back in 1986,” Subramaniam said to risk managers attending the panel discussion. “It’s a different situation: you really have a lot of knowledge…that will help you prepare for any kind of market.”