Risk & Insurance: Strategies in pursuit of a softer market: waiting for kinder, gentler renewals

RIMS president Chris Mandel has seen the future of risk management -- and it's on DVD.

Mandel, assistant vice president of Enterprise Risk Management in San Antonio, Texas, marvels at a multimedia presentation in DVD format that one of his peers prepared for underwriters to ease the renewal process. The idea was the brainchild of Whirlpool director of risk management Gary Kilburg, who earned the Alexander Hamilton Award for his efforts.

It's no wonder these steps are being taken. The hard market is filled with "more submissions than many underwriters even have the time and resources to consider," Mandel observes. "So it's incumbent on the buyer to provide some efficiency in this process. Every risk manager should adopt the view that it's a matter of selling your risk to the marketplace and convincing an underwriter to produce the risk-premium trade-off at a more favorable level."

Seeking Clarity

Insurers clearly are in the driver's seat at a time of steep price increases and coverage restrictions, though not everyone is convinced that a seller's market has taken hold across all product lines. The question is, how are they positioned to retain customers once the market softens and what sort of strategies might be pursued?

Joe McSweeny, chairman of New York-based Willis Risk Solutions North America, has noticed movement away from a pure class-underwriting approach that paints loss-prone industry segments with the same wide brush.

"As they go through that round of renewals," he says, "they're looking more carefully at individual account risks and underwriting them in accordance with their company's risk profile." That means looking for larger, more comprehensive submissions with much more risk-control detail and data, which poses a manpower challenge for underwriting talent who are expected to work harder with the same or fewer resources.

Two of the biggest issues risk managers face are posting collateral and improving the agreements that govern these arrangements, according to Bob Card, assistant treasurer and director of risk management for Philip Services Corp. in Houston.

The problem is, there's a lack of clarity regarding how collateral will be evaluated when it's released each year, he explains. Absent are explicit instructions on how to figure collateral -- for example, multiplying or subtracting certain factors from the amount that shows up on loss runs.

"Carriers are under a lot of pressure to be properly collateralized," Card says, "so they get conservative about how they evaluate their losses. They also have flexibility in placing a surcharge on the collateral for companies whose financials have been downgraded." He suspects that as senior management becomes more aware of how these agreements work, they'll be less likely to sign unless the terms are clearly spelled out.

One lucky market strategy is simply letting the facts speak for themselves. Robert Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, says "many of the stronger insurers are emphasizing their financial rating -- the fact that they have a triple-A or double-A rating -- and using it as a selling point to not only attract new business but retain current business."

The strategy is designed to make clients think twice about bolting to a competitor that has a lower rating, with insurers casting doubt on whether or not these players can offer the same breadth of coverage or fight for customers when they're needed the most.

Service Milestones

A look inside one of the industry's behemoths underscores the importance of an approach some may consider back-to-basics.

"It's very easy in this business to under-service and sometimes over-service," explains Paul Krump, chief operating officer of Chubb Commercial Insurance and executive vice president and managing director of Chubb & Son, a division of Federal Insurance Co., in Warren, N.J. Still, he finds it difficult to speak for the industry as a whole because "there are so many players, and everyone seems to pursue different strategies."

Chubb is taking several steps to position the company for the inevitable return to a softer market, including educating agents and insureds alike about the services being delivered and reminding clients when promises have been delivered on service milestones. "We try and understand why buyers are coming to us in the first place," he says, then tailor the service to meet their primary needs.

A strong emphasis has been placed on beefed up education and training to ensure that key personnel are prepared to describe in detail the insurer's global capabilities, coverage enhancements and policy differences vis-a-vis competitors. "They need to know what the features and benefits of the contracts are," Krump says, "as well as make sure they're correctly underwriting the account and espousing the philosophy of an underwriting profit to our agents and insureds."

Rush to Judgment?

Following a soft market of 15 years or longer, Mandel believes many insurers are to some extent exploiting the seller's market. "There's evidence of it all around," he notes. Like so many industries, the focus is on short-term profits, though he says one could argue "the approach they're now taking is to look downstream and stabilize their financial strength in light of their losses of the past few years in particular."

McSweeny doubts that a seller's market is as pervasive as Mandel and others believe. While rate increases are clear on the property insurance side, he characterizes other product lines such as casualty and directors and officers liability as "still pretty tough, even in the high excess market layers." He believes another round of renewals will be needed before judging the casualty and D&O markets in favor of sellers.

Buyers have their hands full dealing with dramatic increases in premium in some lines for which they're not budgeted, according to Mandel. In the post-Sept. 11 environment, he says, risk managers are grappling with the proper risk-premium trade off, especially where it concerns terrorism coverage.

Adds Hartwig: "It's probably been a bumpier road than most expected." He traces the hard market to late 2000, after which it endured multiple setbacks associated with Sept. 11, the corporate-governance crisis, large asbestos liability and other reserve issues.

"Insurers have made the best of a bad situation," he believes. "Rates are rising and bottom lines are on the mend, but we're three years into the hard market and many companies still have a long way to go."

Hartwig cites as an example the financial results in the property and casualty market, which bottomed out in 2001, and despite last year's improvement, return on equity was still only about 4.4 percent compared to about 10 percent for the Fortune 500. "While profits returned to many insurers, they were still inadequate going forward," he adds.

Forging Partnerships

In the meantime, what can insurers do to make it easier or cheaper for risk managers to design insurance and risk management programs? The answer is never easy, but observers do have a few ideas on where to start.

Such efforts include customizing programs so clients can decide what kinds of self-insured retentions or deductibles to take and the correct limits to carry to avoid over-insuring, notes Chubb 's Krump. His company also devotes considerable time to the liability side so insureds minimize or transfer as much risk to others to ensure they're not taking on unnecessary risk. The objective, he says, is to develop a partnership approach to understand client exposures and help mitigate the cycle.

Willis' McSweeny believes there's a need for insurers to help clients understand where the underwriter's pain is in order to achieve what he calls "a better mutual understanding of what the risk is and what everybody really wants out of their risk management program." This will give organizations more leeway when it comes to negotiating trade-offs on pricing and coverage restrictions -- and pave the way for a return of risk management disciplines, he adds.

Card, the risk management director, has noticed the emergence of more senior-level contact between carriers and clients. While it's commonplace for risk managers to meet with underwriters once or twice a year, he reports that senior management from both the vendor and client side are now huddling, "which I think is healthy to do in a hard market," he says.

Some of the solutions that are eventually pursued depend on employer goals, according to Card. "If risk transfer is what the customer needs," he says, "then this is a difficult market to be in because prices are high and coverage is restrictive." One way to counter this is for risk managers to craft an alternative risk-finance vehicle like captives or self-insurance to offset costs.

While rising rates are inescapable, the Insurance Information Institute's Hartwig points out that insurers will design programs that allow for higher deductibles and coinsurance provisions to share risk with carriers -- creating an incentive to prevent losses. Insurers also can bring other expertise to bear, such as risk management checkups in the workplace to identify ways to reduce workers' compensation claims.

"Given that many corporations are pinching pennies and every department is being instructed to cut costs," he says, "it's difficult for the risk manager to approach the CFO and say, 'sorry, our rates are going up 30 percent next year.' So they want to look for ways to economize but at the same time they don't want to play Russian roulette with company capital."

Mandel of RIMS believes there's now an opportunity to work in a partnership format to make programs more manageable for companies by making smart decisions about risk assumption that include the proper consideration of loss prevention and control. "Plenty of underwriters I've been talking to will say you can achieve a flat renewal," he says. "It's just a question of how much risk you're willing to absorb."