Risk-Adverse Directors Could Hinder Corporate, Insurer Risk Taking: Duperreault International Editor

Dublin

Issues of corporate governance and trust are leading to a pullback from corporate risk taking, according to an executive from ACE Limited.

The legislative and regulatory actions recently enacted in the United States in response to the corporate scandals of the last 18 months “will have a profound effect on the worlds societies, economies and financial markets for many years to come,” said Brian Duperreault, chief executive officer of ACE Limited in Bermuda.

“Demands for greater accountability from corporate boards, together with prescribed best practices for corporate governance, have shifted the center of corporate power from day-to-day management to the board of directors,” Mr. Duperreault said. “The immediate impact will be a reduction in entrepreneurial spirit.”

As the decision center shifts from management, which is motivated to take risks, to the board, which is inherently risk adverse, “the entire spectrum of corporate risk taking will fall,” he said, during a speech at the recent European Insurance Forum, sponsored principally by Aon. “This will undoubtedly slow American corporate growth and will have a similar effect upon markets around the world,” he said.

Mr. Duperreault explained that a manager makes a decision based on perhaps 60 percent hard data and 40 percent skill, intuition and experience. “If he is now called up to account for his decision to his board and has to defend his decision, he may find himself being second-guessed by a less-experienced, but risk-adverse, directorship.”

This phenomenon of power shifting from the CEO to the board is particularly true when its a new CEO, which is likely to have profound effects on the insurance industry, he indicated.

Mr. Duperreault explained that the insurance industry had no fewer than eight new CEO changes in the last year. “And perhaps none of themdepending on how you define ithave come from the p-c industry,” he said.

“Their instinct and skill levels are less, I think, than one would require under normal circumstances,” he contended. “But these arent normal circumstances. This is an extraordinary moment in time, when the world is becoming more risk adverse and theres only one industry in the world that takes risk and its being run by people who dont know the business.”

Mr. Duperreault said he was certain that these practices will slow the economic recovery. “Im equally sure that the cost of defensive corporate governance will rival the cost of defensive medicine.”

Nevertheless, the insurance industry is likely to emerge from this difficult, tumultuous period on a healthier footing, he said. While the scars are clearly visible in many, many insurance companies, pricing conditions are favorable, interest rates can only go up when the economy has improved, and asbestos reform is possible, he added.

“The net result should be a stronger, more viable industry that is better able to withstand market cycles and meet the needs of its customers and producers,” he said.

Mr. Duperreault predicted the industry is moving from a demand-driven cycle to a supply cycle over the next 18 months.

Although the words “excess surplus” are no longer applicable to the insurance business, Mr. Duperreault said his personal opinion is that capital is adequate to meet current demands, although not much more.

“There is no overwhelming incentive for anybody to chase market share, and demand increases will put a severe strain on capital going forward,” he affirmed.

The capacity to grow is not evenly spread among insurance companies, he said. “Increasingly, the business is dividing into haves and have-nots. Those companies who learned their lessons well about underwriting discipline, who are paying attention to risk reward dynamics, will be the ones who are squarely on the side of the haves.”

He said the industry is at a historic crossroad. “This year, well see fewer and fewer haves and a change in the world order rankings.”

“This is the first truly global hard market and its having a profound effect on who are the global leaders in our business.”

He pointed to another interesting effect of the current market, which is the relative strength of reinsurance companies versus direct writers.

“This market began hardening well before 9/11certainly in the year 2000, the market began to harden,” he said. “It was not driven by reinsurers. It was driven by the direct writers.”

“Reinsurers have been along for the ride and even post 9/11, with that catastrophic event, reinsurers have not driven this market,” he said.

However, post Sept. 11 [2001], most of the new capital went into the reinsurance market, he said. “There are fewer direct writers, but there really are not fewer reinsurers.”

He thought the difference would exacerbate the power shift to direct writers from the reinsurance market, he said. “It raises questions about one being a pure reinsurer going forward.”

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 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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Risk-Adverse Directors Could Hinder Corporate, Insurer Risk Taking: Duperreault

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