CEOs Stress Focus On RM Techniques

Later, a session devoted to the topic of enterprise risk management drew a standing-room-only crowd.

During the CEO panel, Steven Dreyer, North American practice leader for S&P's insurance ratings division, asked two property-casualty and two life insurer CEOs: What were the most significant issues facing their companies? And how have these issues changed the way they managed their business?

"We worry a lot about litigation?the continuing deterioration of the tort environment in the United States," Jay Fishman of St. Paul Travelers said, responding to the first question.

"For us, it's terrorism?TRIA," said Edmund Kelly of Liberty Mutual, warning that if TRIA is not extended once it expires at the end of 2005, "workers' compensation [insurance] will not be available" in major cities like New York City and Chicago.

Noting that TRIA is an "equally critical" issue for St. Paul Travelers, Mr. Fishman said, "We have a risk management committee of senior management that explores and reviews all of these issues. We're not leaving it to individual underwriters in individual cities to make decisions that have impact like that," he continued, an apparent reference to decisions about writing risks that could expose the company to terror losses.

Adding that the risk management team reports to a risk committee of the board of directors, he said, "The board is significantly involved in issues of catastrophe exposure, new lines of business, tort exposure [and] asbestos."

Mr. Kelly said Liberty Mutual has "a very deliberate strategy of diversifying lines of business," so that there is not too much exposure to any single line.

"We have a better understanding of our mix of businesses. [And] we also have a very rigorous internal program to understand concentration of risk," he said, noting that the company is "much more attuned" to concentration of risk than it was three or four years ago.

The two p-c insurer CEOs weren't the only ones jumping on the risk management bandwagon. Indeed, Robert Benmosche of MetLife was the first to utter the phrase during the session. He said that as the public looks for more guaranteed benefits from life insurers, "what we've got to think about is the risk management associated with providing those benefits over time."

Like Mr. Fishman, Mr. Benmosche said MetLife's board is hearing more about risk management and that a special team is now in place that goes through "a very formal process" for the enterprise.

"We've defined the responsibilities of risk management on a more detailed level for our governance committee of the board. They are looking at a lot more detailed analysis [of] where all the risks of Met Life [are]?from liquidity to mortality risks."

Picking up on the risk management buzz, Mr. Dreyer suggested that insurers lagged behind banks in the development of risk management processes, asking the CEOs to explain why.

Mr. Fishman blamed the system of state regulation. "There's no single federal person who feels accountable or responsible for developing national standards of risk management."

"I think that those who are in favor of an optional federal charter see it as a way to make meaningful progress [toward] a broad-based definition of standards [for] capital and risk management," he said.

Mr. Kelly chalked up any lag in risk management to a greater complexity of risk in the insurance world.

"Banking is a simpler business," he said. "At the desk level, an underwriter has a lot more decisions to make than a commercial loan officer in a bank."

"With 38,000 people working for Liberty, there are probably 20,000 people out there that can get us in trouble," he said.

Sy Sternberg of New York Life highlighted the "major strides made by the insurance industry" over the past decade. "Ten years ago, banks were doing risk management. Insurers were not doing risk management."

That situation has changed and the gap is rapidly closing, he said, noting that his company formed a risk management department four years ago. "People now realize that if you don't do stochastic analysis [of] your portfolio, you're not going to find out what, in fact, are some of the risks to the business that's out there," he said, referring to a form of analysis which involves understanding the probabilities associated with predicted risk outcomes.

During the special session on enterprise risk management, William Riker, president and chief operating officer of Bermuda-based Renaissance Re's Glencoe Group, delivered a similar message. Noting that Renaissance Re was formed on the original premise of being able to manage risk better than anyone else before it was in vogue, he said, "Everything we think about is probabilistic."

It's not a "robust analysis," if someone in the company says that a piece of business will produce a loss ratio of 58. "Unless you attempt to quantify the variability" around an expected outcome," you don't understand the risk," he said.

"He went on to warn that risk management models need to be tested continually against actual results. "Just because you have a probabilistic analysis, doesn't mean its any good."