Hardening Market Forces Risk-Transfer Reassessment

New York

Risk managers in this hard market must get back tobasics and make up their minds about whether they are a short orlong-term buyer of insurance for particular exposures, one leadingcarrier here warned.

Kurt Falk, key account manager for oil and petrochemical exposuresat Swiss Re New Markets Corp. in New York, made his comments in arecent talk at the monthly seminar sponsored by the Risk andInsurance Management Society's New York Chapter.

History, he said, has shown that the hard insurance market trendwill reverse itself. "In the long-term view, prices will averageout," Mr. Falk said.

However, for the short-term, risk managers should "look at theiroverall risk landscape and assess which risks are insurable andwhich are non-insurable," he explained.

The insurable risks, he said, should be analyzed to decide how muchto retain, how much to transfer, and how much to finance.

Regarding those exposures deemed to be non-insurable, he said, "youcan see if some of the alternative solutions in the market wouldhelp in managing those risks."

He explained that alternative solutions include contingent capital,finite-risk facilities, credit solutions and catastrophebonds.

Mr. Falk said risk managers and treasurers are working more andmore closely together and have similar goals because whether riskis traditional or financial, "its all risk."

"They are basically talking about the same thing: How do I managethe risk for my company? Do I transfer it, do I finance it orretain it?" he said.

The chief financial officer or treasurer, he explained, looks athedging and credit lines to manage their risks, while the riskmanager looks at transferring or retaining more tangible exposures."But if you throw it all into a basket, in the end it comes to thesame thing: How is our company exposed to these risks that we haveidentified?" he said.

As to how long the current hard market will last, he said, capitalcoming into the insurance industry could influence a shortening ofthe cycle, depending on how much new money is raised.

"Weve seen $15 billion-to-$20 billion" in new capital enter theindustry to replace at least some of the capacity lost in the Sept.11 terrorist attacks, he explained. "But we believe that is stillonly a percentage of the capital that was destroyed in the previousyears. So we will have to see what the influence of this newcapital will be," he said.

He continued that "if there is more capital to come, we canenvision a shortening of the cycle."

A pessimist among insurers, he said, would argue that "the[current] cycle started in 1996, for the soft part, and its nowtowards the end [of a complete five-to-seven year cycle]. We onlyhave one year left to recover" before prices fall.

An optimist, on the other hand, would say that, "its only the startof a new cycle, so we still have some time to recover ground" lostin the last soft market, Mr. Falk said.

He added that the hard market "really got going in 2001. So if 2001was the first year of the hard cycle, we are now in the secondyear, which gives us a bit more time."

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 4, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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