Lingering economic uncertainties, political issues, naturaldisasters and other catastrophic events present a challengingenvironment for businesses and risk managers in their ongoingefforts to protect the enterprise against loss. The need for strongrelationships between insurers and clients therefore has never beengreater.

As commercial insurance clients are becoming more cost consciousand focused on price and coverage limits more than long-termrelationships, insurers must be more responsive and attentive thanever. Will businesses be willing to turn to external partners tofinance their risk, or perhaps might they throw caution to thewind, downplay risk and buy less coverage?

The events on 9/11 twelve years ago forever changed thelandscape. The unpredictability of external risks, like terrorattacks and super storms, leads some risk managers to actuallypurchase less coverage. To be sure, preventable risks throughoperational breakdown—such as the BP Horizon catastrophe, cyberattack and simple human error—as well as often-positive strategicor entrepreneurial risk taking—such as building a fertilizer plantnear a school because of a railway's proximity—are indeed morepredictable and arguably require more attention.

Risk management concerns also abound in the public sector, asmunicipalities and other governing bodies are challenged to botheducate and protect citizens from safety, environmental and otherrisks in a struggling economy.

“The fundamental question is, how much risk do we really want totake upon ourselves in this world of uncertainty,” asks BillCoffin, Group Editorial Director, PropertyCasualty360° “And how canwe effectively manage realistic or unrealistic stakeholder, whethershareholder, employee or citizen, expectations against what they'vebecome accustomed to?”

Nearly 60 percent of participants in “Time for a SecondHelping…or More Than We Can Chew,” a recent PropertyCasualty360°risk management webinar, cited sluggish economic conditions as thesingle greatest influence on clients' shifting risk tolerances.Just more than 26 percent identified catastrophic events like SuperStorm Sandy with 14 percent pointing to an uncertain politicallandscape.

For these or other reasons, individual small independentbrokers' business has fallen anywhere from 10 percent to 50 percentsince 2009's economic meltdown. The weakest economic recovery sinceWorld War II doesn't auger well for operations looking to take onadditional risk, whether strategic (by getting into new lines ofbusiness) or operational in nature.

There is also legislative unpredictability out of Washington,including questions over whether the National Flood InsuranceProgram (NFIP) will be renewed, a big concern for property andcasualty insurers. As is the periodic renewal decision regardingthe Terrorism Risk Insurance Act (TRIA), a Federal backstop forterrorism protection in an age where terrorism risks and eventscould inflict damage beyond what traditional insurance is able tocover.

Debate over various State regulations also abounds, withdecisions potentially transforming how the insurance transactionitself fundamentally operates.

“Major losses can occur at anytime, anyplace,” Coffin said.“Insurers should engage clients on the importance of adequatecoverage. The West, Texas, fertilizer plant that exploded this pastsummer carried only $1 million liability coverage. That is a prettyamazing wake up call, showing that even with operations where you'dexpect rock-solid risk management, the need to manage riskaggressively is huge.”

Another insurer concern as it relates to risk managers' coverageappetites: continued rate increases. Recent Risk and InsuranceManagement Society survey figures for 2012 showed a 5 percentincrease in the total cost of risk to $10.70 per $1,000 of revenuefrom $10.19 per $1,000 of revenue. These costs rose only 1.7percent between 2010 and 2011.

Increased pressure for more profitable underwriting fuels higherrates, resulting in tighter limits. At the same time, persistentlow interest rates force insurers to make money the old-fashionedway, ironically by writing and selling insurance. This poseschallenges for cost conscious buyers and risk managers.

“These factors have spurred us to do what we can to work evenharder to prevent losses or to consider no longer providing variousservices, which is difficult as we are here to serve our citizens,”according to Sarah Perry, Risk Manager for the city of Columbia,Mo.

As a result, Perry and other commercial and public sector riskmanagers are considering, or actually leveraging, risk coveragealternatives such as pools and hedge funds providing specialtyproducts for one-off, catastrophic or re-insurance, which in turnexerts pressure on the traditional markets.

Captive insurance, once available only in several small states,is now domiciled in more than half of the U.S., Coffin notes. Itincludes group captive participation, which National Underwriterestimates to account for $1.5 billion of annual premiums,increasing by $200 million in 2012 alone.

“This is becoming an increasingly attractive option formid-market companies, which makes it more imperative for brokersand carriers to engage clients in deep conversation and alsoperhaps consider crafting non-traditional insurance solutions oftheir own,” Coffin said.

Clients are willing to listen.

“Surprisingly, I've never had a broker or a carrier ask me aboutmy risk tolerance,” Perry said. “Today's environment presents aperfect opportunity to educate their clients on how to evaluatetheir risk tolerance and whether it makes sense to increase ordecrease deductibles.

This is a win-win. Getting under the hood, so to speak, withclients to better understand their overall risk and risk tolerancemakes it possible to craft better solutions, which in turngenerates more business for insurers.

What it all boils down to is this: brokers and risk managersboth need to ask the right questions, bearing in mind that brokersand agents also carry their own risks and must ensure that they'redoing all of the right things in placing coverage with carriers andin programs that will be around for years to come.

“It is a balancing act,” Perry explains. “We really do sometimesneed something that might provide us with broader coverage,coverage at a reduced price, or some other considerations. But wealso recognize that we, the customer and risk manager, must do ourown homework to learn about the options. You can't expect yourbroker to know everything.”

For its part, Columbia, Mo., about two years ago joined analternative risk management pool for its packaged liability programas traditional insurance rates began to increase. The city has beenable to get broader coverage at competitive prices.

“Being part of a pool also gives us the chance to bounce ideasoff of other like-minded risk managers and learn from each others'mistakes,” Perry said. “But this doesn't mean that we'll excludecommercial policies forever from consideration.”

Clients and carriers in this market would also do well to get toknow each other better, Coffin and Perry agreed. “Carriers oftenare unaccustomed to having a relationship with the client,” saidPerry. “Brokers are important, but you also must know theunderwriters within the carrier's organization, especially duringrenewal.”

Indeed, as in any economic market or political or legislativeenvironment, insurer and client communication is key to enablinginsurers to build a better book of business, regardless of clients'appetite for risk. Brokers, agents and risk managers each havetheir own sets of risks; they therefore all need to ask the rightquestions.

Only then will insurers be able to maximize revenues, especiallyduring challenging times. And only then will the insured be assuredof receiving adequate coverage that matches their continuallyevolving appetites for risk.

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