Figures Lie On Cost-Of-Risk Trend
Although the "2001 RIMS Benchmark Survey" shows that the cost of risk declined 7 percent last year, risk managers should take this number with the proverbial grain of salt, one of the authors of a report on the survey warns.
A major change in one key variable–the survey sample itself–skewed the result, while events in 2001 have changed the cost of risk outlook entirely for this year and next, noted Steve Lawrence, national practice leader with Ernst & Youngs Insurance Risk Management Practice in New York, co-producer of the report. "Whats going on now is increases, even though on an aggregate basis [cost of risk] went from $5.20 [per $1,000 of revenues in 1999] to $4.83 in 2000," he said.
Mr. Lawrence pointed out that the lower figure cited in the New York-based Risk and Insurance Management Society report was mostly due to the fact that eight companies participated in this years survey with more than $50 billion in revenue, versus only two last year. He noted that a comparison of the same companies as surveyed last year actually shows a 3 percent increase in the 2000 cost of risk, to $5.36.
Thus, risk managers should be under no illusions that the cost of risk is dropping. In fact, in the first half of 2001, insurance costs typically were already rising by 10-to-20 percent, and after that increases remained "pretty steady until Sept. 11," said Mr. Lawrence. However, since the terrorist attacks, he noted, renewal hikes are averaging in the "30 percent to 50 percent range."
The reports executive summary suggests that risk managers "follow industry publications to continuously monitor the actions of insurers and the outlook presented by insurance industry analysts for the time period ahead."
Mr. Lawrence cautioned, however, that the survey's value should not be judged by cost-of-risk figures alone. "The survey is still helpful for retentions, to know where other companies are so you can understand how to strategize as you go forward," he said.
Other important survey data to consider are liability limits, he said. Especially useful is the fact that companies are broken down by industry and size–less than and more than $1 billion in sales.
On page 96 of the report, for example, is the risk management measurement for restaurants. Under the chart labeled "liability limits," under "umbrella/excess," he noted that the chart helps food service risk managers determine the appropriate limits of insurance to buy for umbrella, employment practices, and directors and officers liability insurance.
In addition, he said, the "deductible/retentions" chart, also on page 96, illustrates what deductibles companies have for workers compensation, general liability, auto liability, directors and officers, and property insurance.
Risk managers, he said, should focus on survey results for limits, retentions and retained loss measurements.
Other benchmarks in the survey that are "very valid," he said, are administrative costs and retained losses, which, even though premiums might go up, "dont change as much from year to year." (The survey found that retained losses per $1,000 of revenue is .6 percent.)
The survey also found that the commercial insurance industry's combined operating ratio for 2000 dropped to 94.8 from 97.6 in 1999. "Here," he explained, "future numbers are difficult to determine because of the several factors that go into calculating the overall operating ratio for the industry."
Thomas Welgoss, director of risk management for the Massachusetts Turnpike Authority in Boston, and a member of the RIMS research committee, said the significant losses from the World Trade Center catastrophe "will cause reinsurers to incur heavy losses, which will affect insurance capacity."
With lowered capacity, he said, underwriters will focus more carefully on the risks they underwrite. "This is where risk management practices will help mitigate future cost increases," he explained. "Those companies that paid attention to risk management fundamentals will have lower increases and be able to buy the coverage they need," although most likely at higher prices, he added.
Mr. Welgoss said that while workers comp and property insurance are most likely to be affected by the hardening market, "my experience is that underwriters simply look more carefully at the quality of the risk that they underwrite. Those that have had significant losses that havent managed their risk properly will have a difficult time."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 17, 2001. Copyright 2001 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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