Time for risk managers to step up to plate as market turns

Rather like a cyber incident, risk and insurance managers across Europe and worldwide need to face up to the fact that it’s not a question of if the market will continue to firm in coming renewals, but rather how quickly and how aggressively. Comments made during the latest round of insurer, reinsurer and broker results – not least on Marsh’s quarterly index – all point in one direction in terms of insurance rates: upwards. But as was discussed during the recent Airmic Harsh Market webinar, which I hosted towards the end of October, this is not a repetition of 2001/2002. That was a very dramatic and genuinely market-wide hardening as the international insurance and reinsurance market faced up to $50bn or so of catastrophic losses from the 9/11 terror attacks, rapidly followed by plummeting bond yields and equity prices – a real double whammy. What followed was a period of serious reserve strengthening that battered carrier results, and saw off a handful of key players and high-profile industry leaders. Most importantly, it forced the market to seriously reassess its risk management practices. The silver lining was that by the time the credit crisis hit in 2007/2008, all but a couple of the leading insurers and reinsurers had really got their houses in order and weathered the storm pretty well, particularly in comparison to the banking sector. As capital desperately sought a new home post credit-crisis, suddenly the insurance and reinsurance sector looked pretty attractive, hence the floods of capital we have seen in the past few years and the prolonged soft market. But now it seems the good times are over. The excess capital meant that underwriters forgot how to underwrite properly and customers, it seems, have had it too good for too long. Julia Graham, technical director and deputy CEO at Airmic, chose the phrase ‘harsh market’ rather than hard market for good reason during the webinar. As the panellists agreed, this is not a hardening market of the sort experienced in 2001/2002; it is patchy by line of business, region and across Europe itself. There are some very tough areas, notably financial lines and D&O in particular, especially if you have a US or Australian listing. Marine, mining and construction are all tough too. But the insurers are not overwhelmed with joy. The words used during the recent third-quarter earnings calls were decidedly conservative. Brian Duperreault, CEO of AIG, gave a typically measured analysis during his Q3 call with analysts, though tellingly he is optimistic that the firming will continue. “Well, I guess there are plenty of people out there saying it’s accelerating into the third quarter,” he said. “So, why, what’s going on and… is it going to end tomorrow? This one is more rational. It seems to be much more based on fact. The pricing models are indicating that [if] this is not a good risk, the risk isn’t taken… there is discipline around the decision-making on an industry-wide basis. I would say that’s very good news because it says that the decisions about risk will be based on the kinds of return characteristics.” “We know in many lines of business the price declines have been excessive for a very long time. Terms and conditions have been broadened… in a phase of changing tort climate and other inflationary factors. There is more rehabilitation required for the industry’s portfolio. There is a reason why it’s sustaining itself and that is because it’s needed, and it’s being looked at on a rational basis. We will see if that holds, but I am encouraged by it,” he added. Not exactly dancing on the tables, but happy that terms and conditions are finally moving in the right direction from the underwriters’ perspective. Clearly, in a patchy market such as this, each individual risk manager will face a different set of challenges depending upon the sector and territories in which they operate. But overall, experts during the Airmic seminar agreed that risk managers, many of whom will not have experienced a market like this before, must brace themselves for the following challenges: Unjustified increases in pricing Reductions in the scope of cover Restrictions in limits of indemnity required Increased deductibles Delayed decision-making by underwriters and significant last-minute changes. This potentially leaves risk managers in a very uncertain and uncomfortable position when the CFO asks what is going on. They need to be prepared and shift onto the front foot to make sure that they do not wind up with serious quantities of egg on their face, and even seeking new employment. The big question asked during the webinar was therefore: what does the risk manager need to do right now to make sure that egg is avoided? The following sums up the actions required. Make more active use of your captive to increase retentions and ameliorate the impact of unwelcome changes. Make sure your CFO is warned of the potential changes required in good time. Seek out alternatives. For some covers, there may be different ways of financing the risk if capacity becomes unavailable at a reasonable price. Perhaps now is the time to try something different. Sit down with your broker as early as possible to work out exactly what you really need. During the soft market, you may have added cover that you do not really need because it was so cheap. Reassess your risk appetite. Get your risk out into the market as soon as possible so that you can assess with your broker what kind of appetite there is out there and where challenges will arise. Finding out that the market really does not like your profile at the end of December is not a good idea. Get on the front foot and market your risk actively. Do your homework so that you can prepare a fact-based ‘sales pitch’ to the market. Assume that you are actually in competition with other customers for limited capacity. Don’t be shy. Tell the market about your risk management and loss prevention successes. Invite the market in to see your risk and meet your people – not least the c-suite. Third-party affirmation of what you are saying will help ensure that you are taken seriously when you ask for more budget for the first time in 15 years. Prepare your colleagues, and most importantly bosses, for the new environment. Market yourself internally and try and meet with the CFO and c-suite to explain what is going on and how it may affect your programme. This could save your bacon come year-end. Airmic’s Ms Graham quite rightly pointed out that all of this actually represents a great opportunity for risk managers to shine and prove their real value. But do not try and blag your way through this one. That would be a very dangerous tactic indeed. Roll your sleeves up, do the hard yards and hopefully enjoy a winter break in January.

Time for risk managers to step up to plate as market turns

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