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Risk managers face more volatility in changing world

Risk managers face increased volatility, broader exposures

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CHICAGO—The “new normal” confronting risk managers and the insurance industry since the 2008 financial crisis is marked by economic pressures, new and increasing risks, and an ever faster pace of change, a panel of industry leaders noted last week.

“If we start defining the new norm, the first thing that comes to my mind is, "I wish we had the old norm back,'” Hugh Burgess, New York-based CEO of Allianz Global Corporate & Specialty (Americas), said last week during the 21st Annual Insurance Executive Forum presented by the Katie School of Insurance and Financial Services of Illinois State University.

Mr. Burgess told the Chicago audience that to him, the new normal includes a lower gross domestic product, higher unemployment and low investment yields. “It's something we all have to get used to in terms of planning,” he said.

Kip Kelley, resident managing director in the Chicago office and regional managing director at Aon Risk Solutions, said he sees the “new normal” as encompassing more risk.

“Risks are increasing in terms of magnitude, in terms of complexity,” he said.

Along with those risks, however, are tremendous opportunities for risk managers to demonstrate the value they bring to their organizations, Mr. Kelley said.

Sarah E. Pacini, vp of risk management and insurance at Advocate Health Care Network in Oak Brook, Ill., said she sees rapid change as a key characteristic of the “new normal.”

“I think the difference we're seeing in today's environment is the volatility and frequency of that change,” Ms. Pacini said. Organizations that want to succeed need to anticipate that change and be flexible enough to respond, she said.

Cost pressures facing organizations are tremendous and can present a burden, Ms. Pacini said, but at the same time offer risk managers an opportunity to prove their value to their organizations. If a risk manager can quantify the value of loss-control efforts through benchmarking or by evaluating “near misses,” they can demonstrate their value to their organization's top executives, she said.

But, she added, the fact that economic issues have executives in some organizations viewing risk management as an area that might be subject to budget cuts “is really distressing.”

“When you think about what's going on in our economy, a lot of times there is pressure on discretionary spend,” said Aon's Mr. Kelley. Often that results in what he suggested are ill-advised moves to cut loss control efforts.

Speaking of the “near misses,” Randy Nordquist, managing director of property and casualty claims Americas at Swiss Reinsurance Corp. in Overland Park, Kan., said the value of those events too often is overlooked.

“The best time to learn is on the near misses,” Mr. Nordquist said, though frequently they are allowed to pass without risk managers and the industry taking the information that could be gleaned from them and applying it to improve risk management.

Asked about choosing her organization's insurers, Ms. Pacini said she considers the companies' financial data, but she also looks at the individuals the insurer brings to the table during the underwriting meeting.

“I like to also see the claims person,” she said. When there is a claim, she said she wants to know early on who is handling the claim for the insurer and their claim philosophy.

Mr. Nordquist said from his perspective, he wants the company's customers to know about Swiss Re's approach to claims before an event occurs. “We want our customers to understand what we're doing from a claims perspective,” he said. “We want to have a relationship before we have any type of issue.”

He likened the keys of a successful client relationship to those of a successful marriage. “Work really hard; don't take anything for granted; and communicate, communicate, communicate,” Mr. Nordquist said.

In general, long-term relationships are incredibly important in the industry, said Mr. Burgess. “From an underwriting perspective, it's a matter of quantifying risk,” he said. “A lot of risk is uncertainty, right? So to the extent that you can build long-term relationships, you have less uncertainty.”

Asked about market conditions, Ms. Pacini said she senses a potential change in pricing, but Mr. Kelley said there are areas of the market that remain soft.

“The property/casualty industry needs to be healthy long term. Can it get softer? I think it is getting softer right now in plenty of pockets, but that's not what we need as an industry,” he said. “I think we all have to recognize that there is a partnership between the client side, the broker side, the underwriter side.” For the system to work, Mr. Kelley said, “we all have to win.”

Any pricing change, however, will require an event or events that significantly draw down industry capital, Mr. Nordquist said. “The market has to change for us to be an ongoing concern as an industry,” he said. “All the (catastrophes), even the Japan cat, have been profit-reducing cats. We need a capital-reducing cat.”

This year's Katie School Insurance Executive Forum was moderated by Millie Workman, director of training and education for the Dallas-based International Risk Management Institute.