Risk & Insurance: Easing the renewal pain: with the dust settling on the toughest renewal period

Things are likely to get worse before they get better. The ongoing hard market remains the focal point of most risk-management functions. With hardening market issues significantly intensified over the course of the past year, insurance buyers, consultants and brokers are looking for innovative ways to ease their pain.

Whether you describe the current market as a return to sanity or as a wildly irrational and violent spasm of risk aversion, renewal processes have proven a painful experience for all concerned. A few insureds may have been wise enough to take sound advice from their brokers and locked rock-bottom prices with multiyear policies in 1999, says Diana DaValCourt, vice president at Savannah, Ga.-based Palmer & Cay. "Long before 9/11, we were working with our clients to educate them on the changing market conditions. They understood that insurers could only go on plucking a rate out of the air for so long. Our goal was to prepare them for more stringent underwriting requirements, assist with implementation of loss control procedures and stress the importance of long-term carrier relationships to combat the advent of the harder market."

But even these multiyear contracts are now up for renewal in 2003. And very few CFOs had the foresight to anticipate or budget for the kind of pain exerted by a market where the cost of risk is skyrocketing and insurer stability is dwindling. For the first time in nearly 15 years, finance executives have a compelling reason to pay close attention to how much risk their company retains, how much it transfers and which carriers it uses.

The hard market has resulted in increased, ongoing discussions between CFOs, risk managers and their brokers. Short-term tactical decisions need to be balanced with their long-term financial repercussions, explains John W. Schaefer, vice president of enterprise risk management at Redwood City, Calif.-based ABD Insurance & Financial Services. "To understand a corporation's true insurable need is to consider nuances from beyond the risk management department The contributions of key players had been changing with the move toward a company-wide approach to risk management strategy. Now, even where an enterprise approach has yet to become embedded, the increased cost of premiums and claims has prodded C-suite executives into a more collaborative role in risk management."'

Retain Some, Shop the Rest

With no quick and easy fixes in the current market, brokers are taking a fresh look at how much risk an insured should retain and how much to transfer. With the cost of risk so high, self-insurance is again making economic sense even for mid-size organizations. But even captive solutions demand long-term CFO-level planning, lest they adversely affect the company's tax and risk-management strategies. And that process isn't likely to show dividends for at least a year.

This market may be more challenging than the hard market of the mid-1980s, says Mary Marshall, senior vice president at the Minneapolis-based brokerage Hays Cos., but "The underwriters are starting to come back. We're even seeing the signs of renewed competition. With new market entrants popping up, 2003 may be a good year to shop around. It's hard work, but there are deals to be had if insurance buyers are prepared to roll up their sleeves."

With 69 percent of CFOs planning to switch insurer relationships within the next two years, according to one Munich-American RiskPartners study, it has clearly not taken insureds long to work out how to improve coverage for cost. "Of course my clients and I would rather not jump from carrier to carrier," says Arthur E. White, senior account executive with Acordia in New York. "Relationships still count for a lot. But as the CPCU oath says, I always place the interests of my client above my own interests. I am only too happy to make sure we help our clients take advantage of new opportunities available in the marketplace."

Marshall agrees: "The tightening market is a good opportunity for companies to adopt a sophisticated approach to risk management. The most constructive management response is to push harder to reduce risks, prevent losses and prepare to negotiate. There are cost-saving opportunities for finance executives who know how to take advantage of it."

Marathon Renewals

But with expense ratios higher than any other sector in the financial services vertical, commercial insurance renewals were hardly a sprint during the best of times. Inefficient, paper-based processes have made evaluating insurance options a repetitive and exhausting process. Commercial insurance renewals have become a marathon.

If corporations are to ease the pain of protracted renewal negotiations and stay ahead of the market, it is critical that they start early and take a collaborative approach to transactions. "Corporations cannot afford to react passively to developments in the insurance marketplace," says Alec Finch, chairman of Manchester, U.K.-based Alec Finch & Co. "A knowledgeable, committed and proactive broker will drive the renewal process forward. Insurers will allocate their scarce capacity to the companies they feel most comfortable with, which means that senior management--many for the first time--are sitting down with us to help represent their company's operations and risks in the best possible light. We keep our clients very involved in the process. We facilitate meetings with the underwriters, presentations to the claims departments and the construction of flawless submissions."

With today's more rigorous underwriting process, a flawless submission equates to significantly more submission detail. Underwriters today are not just demanding complete and accurate exposure information, inclusive of loss runs, specifications and applications; they also want to be sure a company will remain financially solvent during the length of the policy. As a result, they have become much more interested in the business and financial statements of the enterprises they are thinking about insuring, explains Rich Yarborough, vice president at Cleveland, Ohio-based brokers Hylant Group.

"Carriers want to obtain insight into the short and long term financial condition of the companies they are considering insuring," he says. "What is its accounts receivable balance, how much debt are they carrying, are they profitable? They also want to comprehend a company's contingent liability. To what extent does it rely on outside partners for is computer networks, or on a single supplier for huge quantities of a customized and business critical material? This is all making life more complicated for finance executives, their brokers and the underwriters reviewing the submissions. All parties are working together to collect the right data and documents ahead of difficult contract negotiations. A hard market requires good information, presented in an organized format, delivered in a timely fashion."

.NET Speeds Up Processes

With the organization and dissemination of critical information providing the key to effective insurance marketing, brokers work with their clients to aggregate the requisite materials. This places a renewed emphasis on collaborative and cross-enterprise technologies.

"Our client portal uses collaboration technology to assist us in the data collection process with our clients," explains Finch. "[The software] allows us to provide our clients, as well as all members of the client's brokerage team, with access to a secure electronic filing cabinet of all documents and materials related to the insurance transaction."

Deploying such sophisticated technology does not just help the broker keep ahead of client expectations and on top of the renewal process. This type of technology is also of tremendous value to the insured during the renewal process. Real-time access enables them to make sure that they always have current exposure data and engineering re ports. They are always on exactly the same page as their brokers and their markets.

A new kind of technology called Web services has made it possible for commercial insurance firms like ABD to work with software companies in order to achieve efficiencies in paperless cross-enterprise processes over the last two renewals without gambling on costly and risky proprietary initiatives. This is in part thanks to a pivotal technology trend led by Microsoft, as Phil Cross, Microsoft's developer marketing manager in the U.K., explains.

"The .NET Framework is the programming model of the .NET environment for building, deploying and running Web-based applications, smart client applications and XML Web services," he says. "It manages much of the plumbing, enabling developers to focus on writing the business logic code for their applications. We have proved through working with key partners that the framework significantly improves developer productivity, so solutions can be deployed in significantly less time."

Microsoft's new Web services technology has paved the way for dramatic efficiency and client-service improvements, explains Jann McCully, chief information officer at ABD. "This approach enables transactions and processes to be completed electronically across diverse enterprises. The .NET framework allows companies like ABD to take a federated approach to technology."

The long, happy years of being able to take insurance renewals for granted may have ended, but by being proactive rather than reactive and managing renewals as an ongoing process rather than a one-off event, all parties can help reduce the pain. These new technologies facilitate such a full cycle approach to client servicing and ensure that the expectations of even the most demanding CFOs are exceeded.

Gordon Surbey is an EVP at Riskclick a provider of collaborative commerce software to the risk and insurance industry. Daniel Stander, a manager at Riskclick in London, assisted with the research for this article.