Hard Market Makes Life Tough For RMs

Risk managers in the year ahead will need an abundance of knowledge, skills and patience to overcome the challenges of a hardening insurance market, risk management experts say.

Carol Murphy, management director for Aon Risk Services in Chicago, sees several hurdles facing risk managers. Ms. Murphy, a casualty and alternative risk-financing expert, said her first concern for 2002 is reductions in excess liability capacity. Several factors could be to blame, including a loss of treaty reinsurance support, she said.

Insurers also will be “more judicious in deploying their capacity on a single risk,” she warned. While they will have the capacity, insurers “wont make the full capacity available in all cases,” she said, adding that “insurer financial rating downgrades will also eliminate some insurers as viable sources for capacity.”

The plus side of this trend, she noted, is that capacity losses will to some degree be cancelled out by new insurers entering the field. “Were seeing a flurry of activity in terms of new markets coming into the excess liability and property arena,” said Ms. Murphy, explaining that the new players will “offset some of the loss of capacity that were seeing.”

She said that for most liability risks there should be enough capacity, but that coverage is becoming “extremely contracted” for certain classes. An example, she said, is in the long-term care industry, where coverage is “difficult to find. So we see that trend continuing into 2002, even more so than it is now.”

Ms. Murphy added that its still too soon to know whether the situation will be eased by the new players entering the market. Those that have been introduced in the past few weeks “have not given a list of industries they will or will not consider,” she added.

Although her risk manager clients are concerned with premium increases, she said more attention is being paid to alternative market options. “Were seeing a tremendously heightened interest in alternative risk financing strategies, such as captives, capital market solutions, self-insurance and integrated risk,” she said.

Although alternative facilities provide opportunities that “help mitigate some of the challenges” in the traditional insurance marketplace, alternative risk transfer programs are often complex, requiring analysis and the involvement of the companys chief financial officer, she explained. “It takes work and scrutiny to make the best, most customized” solution, she said.

Diane Askwyth, director of risk management at Avaya Inc., a communications systems and software provider in Basking Ridge, N.J., also sees a difficult market in the year ahead. “We need to make sure underwriters understand what their companies do for a living and what our risk profile is truly about,” she said.

Risk managers in 2002 will need “an excruciating level of detail” in their underwriting submissions, she explained, and will need to make sure that submissions are of the “highest quality” because choosy underwriters will “walk away from risks they dont like or understand.”

Another challenge, she said, is getting value out of brokerage partners, “given the tremendous loss of talent the top two brokerages [Marsh and Aon] suffered on Sept. 11, and the difficult marketplace these people have to operate within.”

Many brokers now, she added, “havent lived though a hard market and dont know how to manage it. Everything will take more time to get done than were used to.”

Ms. Askwyth said risk managers will most likely see significant coverage restrictions imposed “in areas where we are used to broad coverage, such as property insurance.” Some organizations, she said, will lose blanket property limits–in their place will be limits per location. “Were ill-equipped to deal with that,” she said. “People have been sloppy about collecting and reporting accurate values.”

The state of the insurance industry will have far reaching effects on many industries. Lewis Glenn, vice president, safety and program, for Outward Bound in Garrison, N.Y., an educational outdoor adventure program, said there is a sense among those in his field that the “outdoor adventure industry may be negatively affected” by higher rates.

“Following 9/11, there is a sense that rates will go up, and maybe by as much as a third,” he said, adding that rate hikes will mean that “some people cant afford [coverage] and some who are perceived as less insurable wont get insurance.”

He is optimistic about continued reasonable rates because of Outward Bounds “good, long-term relationship” with its insurer, St. Paul. “We share a lot of information and we work together. Were collaborators.”

Coverages and rates, Mr. Glenn said, were a frequent topic of discussion at the Wilderness and Risk Management Conference held at Lake Geneva, Wis., in October. As a speaker at the conference, Mr. Glenn stressed that a relationship with an insurer is “not just a service you buy.” He said its important to “establish a level of trust with an insurer and make sure you know what youre getting.”

Getting low-priced coverage and maintaining a good relationship is “a dance, a balance between the two,” he said. Whats more, “finding the right balance can have a positive effect on premium rates,” he added.

He said that as a risk manager his biggest ongoing challenge is finding qualified staff to run his firm's programs, including licensed river runners, qualified Outward Bound instructors, mature and qualified camp counselors, and drivers. “When we have students in activities in the mountains, on rivers or on lakes, thats the biggest determinant of whether a program is safe–the experience and quality of the staff,” he said.

Mr. Glenn said that coverage for staff has generally not been a problem since the early 1980s–in fact, “rates have dropped three out of the last four years.” The drop, he said, is due to a combination of a good safety record and the formerly soft market. “But I think the marketplace is changing,” he added.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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