Risk Managers Benefit From Soft Market,But Still Must Cut Losses, Costs In Tough Times

Risk managers whose organizations have been through a near economic collapse and have seen their colleagues lose their jobs have to become more resilient and adaptable, and while a soft commercial insurance market might be making their jobs easier these days, they must keep using tools such as captives to better manage the cost of risk long-term, experts observe.

Not all in the profession have survived in this difficult economy, noted Terry Fleming, president of the Risk and Insurance Management Society.

Indeed, because of the financial crisis, he said, “more and more risk managers are losing their jobs and seeing staff lose their jobs. They are trying to do as much work if not more with fewer resources.”

The soft market–with prices falling and coverage expanding thanks to insurers chasing a shrinking insurable exposure base–has helped risk managers save money for their companies and ease the cost of risk in these challenging times, he added.

“We're really fortunate the soft market has gone on as long as it has,” he said. “Because otherwise things would be really tight, with prices going up and with no resources to pay for things.”

The market is remaining soft for virtually all coverage, he said, adding that he has several policies coming up for renewal on July 1, including property, excess and fiduciary. “We're anticipating a very good renewal, price-wise and coverage-wise,” he added.

Mr. Fleming noted that there are opportunities for risk managers “to get into the marketplace, to get better quotes on conditions, coverage and pricing.”

To make the most of their buying dollars and save money for their organizations, risk managers, he said, are using all the tools that are out there, while still “looking for new ones every day.”

For example, if it is indeed relaunched, as Gov. David Paterson has promised, the New York Insurance Exchange may be a useful tool, he said. Such an exchange “may be another marketplace where we could take our business for competitive pricing.”

The exchange would function similar to Lloyd's, as a market with underwriting syndicates, he said. He added that if Congress follows through on its threat to take away a tax advantage for ceding premium dollars offshore, “this might be a viable option.”

Congress also has recently introduced a bill to allow risk retention groups to offer property insurance–an expansion that has been endorsed by RIMS. “So that could be another tool,” he added.

Barry Franklin, senior consultant with Towers Watson in Chicago, said pricing for big commercial buyers is leveling off from a year ago, when the decline in prices first began to slow.

Mr. Franklin said while there have been small, line-by-line movements, “if you look across the spectrum of the commercial market, prices were pretty flat, and we've seen that continue into the first part of 2010.”

He said that because prices have lowered steadily over the last several years, profits for insurers have suffered and capital took an additional body blow with the financial crisis. But on the supply side, he added, “things have stabilized. The question now is, what is the demand for insurance?”

Risk managers have enjoyed being able to deliver year-over-year savings to their companies in premiums over the past few years, he noted, “and I think you're going to see more of that again this year. But it's driven more by the fact that exposures are down.”

For example, he pointed out that manufacturing companies may not be running full shifts, so workers' compensation exposures are down, inventories are down and business activity in general is off.

“Sales–all the metrics by which we measure exposure–are down. So the premium savings companies experience right now are not due to pricing, as much as exposures being down,” he explained.

He added that while risk managers may be seeing a drop in their overall cost of risk, those savings are smaller than in the past.

He said 2009 was a mild hurricane season, meaning there is little pressure to drive up property prices. As “horrifying” as the earthquakes in Haiti and Chile were to the people and economies in those countries, he added, the insured losses are likely to be far below $10 billion–more like $5-to-$8 billion for the two countries combined.

While those losses are significant, they won't “move the needle much on a global scale for the insurance industry,” he said. And while property rate levels are likely to go up some, “I'm not seeing a big spike.”

Mr. Franklin said the “conventional wisdom” is that there may be some firming in price levels and improvement from the investors' side in the latter half of 2010 and into the first part of 2011.

“You can put all those things in the pot and make your stew and it looks like the outlook for the near term is fairly stable,” he concluded.

But will risk managers like the flavor of the stew?

“From a realistic perspective, they shouldn't dislike it,” he said, reminding buyers that commercial insurance is a very cyclical industry. “That doesn't make it any easier for them to go to their management and say they're not going to be able to save them X-million dollars like they did last year,” he conceded.

Mr. Franklin said risk managers are looking to control their spending with greater participation on a risk. “So as exposures increase–business activity picks up–they're looking at paying higher premiums,” he said. “I'm talking to companies and they're looking at ways to manage that through higher deductibles, managing their limits, and even being more proactive and taking risks into captives they haven't used for the past several years.”

He said they would be “dusting off” some of the risk management tools at their disposal to keep costs down, particularly in workers' compensation. There, he said companies have made real progress in reducing their loss costs.

Workers' comp frequency is down, in part because of declining economic activity, he said. “But when frequency is down, that allows you to focus more attention on your outstanding claims inventory and really work those claims,” he pointed out.

He also noted that risk managers are being faced with questions such as, “'Why do we need to buy $300 million of limits? Can we look at $200 million?' Things like that.”

Risk managers, he added, are not only looking at an organization's risk tolerance to see if they can absorb more of their own exposure, but also at benchmaking more actively against what their peers are doing in the market. He said risk managers are more frequently asking their brokers how much insurance their peers are buying.