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Risk managers urged to adapt


The hardening commercial property/casualty insurance market and the emergence of new risks will test the mettle of risk managers, industry leaders say.

While top broker and insurer executives said the extent of the market turn is still unclear, they said pricing is becoming less competitive for some lines of coverage as a result of recent natural catastrophes, low insurer investment returns and stricter regulations in nearly every jurisdiction.

But risk managers need to think beyond insurance as they look to cover emerging risks, such as cyber risks and supply chain exposures, amid budget restrictions, the executives said during the Senior Executive Forum held Tuesday at the Risk & Insurance Management Society Inc. conference in Philadelphia.

Commercial insurance rates are increasing in several areas, said J. Patrick Gallagher Jr., chairman, president and CEO of Arthur J. Gallagher & Co. in Itasca, Ill.

In particular, the commercial middle market and small account market are seeing rate increases across all lines and in most geographical locations, he said. Workers compensation and property lines are seeing the biggest increases, Mr. Gallagher said.

But the current market turn is different from previous hard markets. Mr. Gallagher said he has experienced four market turns, and while the previous three were a response to cash-flow underwriting, the current turn is a result of lower investment returns and better underwriting, he said.


Aside from price increases, risk mangers have other concerns, said Eric Andersen, CEO of Aon Risk Solutions-Americas.

“The role of the risk manager outside of the normal corporate financial or legal framework—I think those days are gone,” he said. “For the work that is done by risk management to be valued and invested in their organizations,” risk managers' language needs to change from “insurance-speak” to “financial-speak.”

Risk managers should take a more strategic approach, focusing their insurance purchasing on exposures that have the potential to cause the greatest amount of damage to their organizations, he added.

“You have to know…what brings the firm down,” Mr. Andersen said. “No one is budgeting any more money for insurance. If the prices are going up, you've got to figure out where you need it, where you like it, and where you can do without it.”

Growing globalization also is creating new exposures for businesses, according to John Lupica, chairman and president of ACE USA in Philadelphia.

“There is no question that our clients in North America are more multinational now than ever before. The growth rate of their overseas exposures outpaces that of their North American exposures,” he said.

Shivan S. Subramaniam, chairman and CEO of Factory Mutual Insurance Co., which does business as FM Global, said contingent time-element losses stemming from the Japan earthquake and tsunami and the flooding in Thailand show how businesses increasingly are intertwined globally.

The incidents also prompted the realization that “insurance coverage is only going to take care of part of that exposure,” Mr. Subramaniam said, noting that “a lot of that exposure is going to have to be mitigated through risk management principles.”

Peter Eastwood, president and CEO of the Americas for Chartis Inc. in New York, recommended that risk managers make greater use of predictive modeling to gauge the potential financial impact of such catastrophes on their organizations and tailor coverage.

And David Bidmead, Marsh Inc.'s CEO-U.S., suggested that in some cases insurance solutions that have worked historically may not be as effective in today's business climate.

“Don't get too comfortable with…what you've done in the past,” he said. “If the market changes—and maybe it's going to change quickly—the expectation that people who we all report to have about our contribution is going to change. Members of the C-suite are demanding more of risk and insurance professionals.”

As a result, risk managers should be prepared to challenge convention, explore alternatives, be open to new ideas and, above all, be creative, Mr. Bidmead said.