There are a variety of strategies risk managers can use to optimize their insurance that will help their company's bottom line during the economic downturn, brokerage firm experts advised during a Web seminar yesterday.
Brian Elowe with Marsh Global Risk Management, who moderated the risk management seminar, said that risk management programs are not immune to cost cutting and there are several strategies risk managers can employ to reduce costs through higher retentions, reducing limits, shedding some coverage, or cutting risk controls "and hoping for the best."
However, there are strategies that can be employed to help reduce costs and, at the same time, maintain adequate risk protections of the business.
Paul Sherbine, with Marsh's Global Partner Analysis Group said the insurance industry, overall, is financially sound, despite the troubles at American International Group whose involvement in credit default swaps caused it to seek federal involvement to keep it afloat.
He said rating agencies have maintained many insurers' ratings, and he appeared to voice some optimism that AIG will be able to work through its problems.
John Davies, with Marsh's Global Risk Practice in London, said for a company to understand what insurance placements to make in its best interests, the client needs to understand their risk appetite and what blending of risk exposure they are comfortable with.
He said insurance purchasers should perform a risk optimization study that examines the risk issues and helps determine what the business' risk appetite is.
One solution that insurance buyers turn to is captive programs, noted Arthur Koritzinsky with Marsh's Capital Solutions Practice. He called captive programs an integral part of many larger programs, and said that there are growing opportunities to create captive programs as more jurisdictions permit such operations.
Captives can also serve as investment resources, he noted, helping companies with their bottom line besides providing risk solutions where the transfer of risk seems less feasible.
Another financing tool that can help companies in this turbulent economy is trade credit insurance, advised Pieter VanEde with Marsh's Trade Credit Practice.
Basically, he explained, the insurance covers risks when foreign entities fail to pay for products due to bankruptcy or other financial factors.
As claims rise, insurers are practicing strict underwriting standards, all the more important when a nation, such as the case in Iceland, can essentially go bankrupt in this economy, Mr. VanEde noted.
The use of this coverage is primarily by European countries, but its use is growing elsewhere, he said. Companies can use the insurance to make financing more predictable, utilizing it for catastrophic events.
"The current environment, even though it is bad, still allows many of our clients to structure solutions from unexpected losses," said Mr. VanEde.
As buyers look to their Jan. 1 renewals, the possibility of some price hardening might be on the horizon, said Adam Kagan, head of Market Relations for Marsh in North America. Price decreases in some sectors appear to be moderating, and double digit price decreases appear to be a thing of the past, he noted.
Better risks can still expect price decreases, he said, but underwriters are looking for complete submissions as they adhere to strict underwriting standards. However, plenty of competition remains in the markets, he advised.
Mr. Kagan did note there may be more pressure on employers' liability insurance as layoffs increase opening up avenues of litigation.
He said one thing risk managers are seeking to do is balance their portfolios of insurers so it is not too weighted to any one particular carrier.
Insurance broker Marsh is a subsidiary of the professional services firm Marsh & McLennan based in New York. A replay of the seminar is available online at www.marsh.com.
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