Terrorism Tops List Of Buyer Concerns

Terrorism coverage, the hardening insurancemarket, alternative risk-financing options and job security areamong the most critical challenges facing corporate insurancebuyers in 2003, leading risk managers say.

“At the top of a lot of people's lists is how to respond to theterrorism reinsurance act's implementation,” said Chris Mandel,president of the New York-based Risk and Insurance ManagementSociety. “The onus is on the industry to do that now, and it has 90days to do it. I think it will put a lot of pressure on buyers tomake decisions quicker and with less formality than in thepast.”

Mr. Mandel said this could soon be a problem because insurers“are putting out quotes that we have 30 days to respond to, or theywill add the exclusion back into our policies.”

Buyers will be pressured to figure out how to respond,“especially if they have to go through certain internal hurdles toget decisions like that made,” he said.

Concentrated workers' comp risk is another challenge facingbuyers, “and it relates to the same matter, and that is terrorismrisk, because concentration risk is the new exposure thatunderwriters hadn't given a lot of thought to before,” heexplained.

Mr. Mandel maintained that “broader enterprise risk discipline”will take on new urgency this year, due to the threat of terrorismand partly because of corporate failures–which, he said, havehighlighted the need for a broader risk management perspective.

“This means traditional risk managers need to get out of theirboxes and sign up for the broader question of addressing all thematerial and significant risks to your enterprise,” he said.

This raises all kinds of “thorny issues for people because ifthey didn't take that initiative before and they try to now, theymay find all kinds of results,” including the possibility that theinternal auditor or some other function head “has beat you toit.”

Even worse, the question could be raised whether certain risksbelong under the auspices of a risk manager at all, he added.

The question risk managers need to be asking themselves, hesaid, is: “Are you really a world-class operation?”

He warned that chief financial officers who are “under the gun”because of recent corporate failures and accounting scandals will“not take that heat by themselves.”

Since the majority of risk managers report to CFOs andtreasurers, he said, “I think they're going to distribute thatstress down through the ranks to their other function leaders, likerisk managers,” and expect that the risk managers are runningworld-class operations, he said.

What does “world class” mean? It implies that risk managersshould be getting respect to the point of being treated like “theinternal expert that you are supposed to be,” he said. Othersshould “listen when you talk and display your opinions,” headded.

In today's business climate, he warned, risk managers also haveto become more efficient.

“This has become very real and has manifested itself insignificant ways,” he said. There is danger that after downsizingand getting rid of their risk managers, he added, some companiesmay ask, “'do I even need one'which I find incredible. It's the oldcontinuing problem of do-more-with-less.”

In mid-sized companies, where the chief financial officer ortreasurer distributes duties to other staff, there could be anoverlap between functions, he said.

“If you have, say, a group focused on financial risk managementand they've been able to get the banners and the attention thatinsurance risk managers haven't, a CFO may see them as being morequalified to handle risk management as they define it.”

Mike Mead, immediate past-chairman and a director of the CaptiveInsurance Companies Association in Minneapolis, said that insurancebuyers seeking better coverage and a reprieve in the alternativemarket from higher premiums might have to stay where they are.

As a captive promoter, he said, “I almost hate to say this, butI'm afraid for many of them their only choice is to spend moremoney in the traditional marketplace” even though “the marketplaceis going to continue to shrink and there will continue to be greatdifficulty with availability.”

Although many have tried, both successfully and unsuccessfully,to turn to the alternative market as a potential solution in 2001and 2002, “the facts have never changedcaptives and alternativesare not for everybody,” he said. “The fact that you can't find anyinsurance doesn't change the fact that you may not be qualified fora captive.”

Mr. Mead said that he is “happy to talk to people about[captives and risk retention groups] and help them set them up, butfronting is going to get worse and worse, reinsurance will getworse, fees will go up. People are going to spend a lot more moneyto finance their risks in 2003.”

One of the main reasons organizations may not qualify, he said,is size. “All of us in the captive management industry get peoplewhose premium went from $35,000 to $70,000 and so they want acaptivethat's ridiculous,” he explained. “You really need to beabove $1 million in annual premiums to look at a captive.”

He said other qualification aspects are often overlooked, suchas the resources of management.

“You have to have the ability to have a high-level decisionmaker involved in running the captive,” he said. “If otherpressures of business and the economy don't allow you to dedicate aperson to do that, you shouldn't be doing the captive because it'snot going to go well. You have to look at a lot of aspects of thesituation.”

Tracy Dahl-Webb, president of the Public Risk ManagementAssociation in Arlington, Va., and human resources and riskmanagement director for the city of Brookings, S.D., said that theunique challenge for the public sector is “the magnitude of what wehave to handle and how far spread it can be,” as well as thepublic's right and perception that “we'll take care of things sothat they don't need to be worrying about them.”

Specifically, she said, public risk managers have multipleissues with insurance including loss of coverage, increaseddeductibles, lower limits and in some cases complete denial ofcoverage.

“It's the compounding effect of the hardening market and theincreased exposures that we have now recognized with the activitiesall over the world,” she said.

Also, she said, experiences and exposures for public riskmanagers vary depending on their location.

In regards to terrorism coverage, she said, “we have a lot ofentities that have huge holdings, and not having that coverage is avery scary thing.”

She said PRIMA would be following the Treasury Department tokeep its members–especially large cities that are fullyself-insured–informed of updates in implementing the Terrorism RiskInsurance Act, which requires insurers to offer the coverage anditemize the price, but does not require buyers to purchase it.

What's most difficult for public entities is that they areexpected to maintain standards such as response time for firedepartments despite having fewer employees due to budget cuts.

“Being public servants, people continue to strive,” she said. “Ilook at my own employees. The hours they are putting in and theefforts they are putting forth are increasing, but how long canthey continue to do that?”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, January 6, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.