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LONG GROVE, Ill.-Managing exposures arising from the shift to a service-based economy might be the biggest challenge facing risk managers today, says the new president of Kemper Insurance Cos.

The general shift away from manufacturing poses an array of new risks to be assessed and managed by risk managers, who already are very concerned with controlling their loss costs, he says.

William D. Smith, who became the Long Grove, Ill.-based insurer's president and chief operating officer in September, brings a risk manager's perspective to his new job.

He became corporate director of risk management at Sears Roebuck & Co. in 1983 and four years later assumed the additional responsibilities of corporate finance/corporate director of risk management, a position he held until 1990, when he joined American International Group Inc. He served as AIG's executive vp-domestic brokerage group immediately before he joined Kemper.

Mr. Smith, 52, said he had a "great time" at AIG, but the Kemper position was "an opportunity I couldn't pass up-it was just that simple."

"Ten years from now, Bill will be in charge," said David B. Mathis, Kemper's chairman and chief executive officer, whom Mr. Smith succeeded as president.

Mr. Mathis makes clear where he wants the company to be at that time.

"I would like to see Kemper first and foremost as a consistent profit-maker, and by that I equate profit with growth in surplus that exceeds what you would get in the normal investment market," said Mr. Mathis, adding that he does not consider the past couple years to represent a "normal" investment market.

"I can't predict how big we'll be. But I'd like to see us continue our dominance in the lines of business we are strong in," such as workers compensation and highly-protected-risk property insurance while "enhancing our business by significant involvement" in some other products, he said.

As he accepts that new job and challenge when traditional property/casualty insurers continue to lose business to alternative markets and other forms of self-insurance, Mr. Smith says he does not think insurers have necessarily lost the best risks to the other markets.

"I guess I'm not sure I buy the premise. I think people choose to self-insure or insure for a wide range of reasons, and not necessarily the best are self-insured.

"I think that has to do with issues in corporate culture and values, whether or not they want to finance risks a certain way, or handle losses a certain way," he said.

"The risk manager today has an array of alternatives that weren't there five or six years ago, so I think we're seeing a lot of investors going back to fully insured programs because they get excellent financial benefits, they increase deductibles wherever they choose, and they get out from under the administration of running a self-insurance program. So I'm not sure it's correct that the best risks are self-insured right now," he said.

"The most progressive risk managers are focusing on, 'What is my real ultimate loss cost?' To the degree that a risk manager focuses on that, and that we as a traditional insurer can provide a service that brings them the lowest ultimate loss costs, we're very well-positioned," he said.

Controlling loss costs is among the critical issues risk managers face today that he faced more than a decade ago at Sears, said Mr. Smith.

Holding down workers comp and health care loss costs, particularly with an aging workforce, is one of the most crucial issues, he said. Another issue is catastrophe exposures and property protection questions, he said.

But the most significant issue facing risk managers arises from structural changes in the economy, according to Mr. Smith.

The United States is "shifting from a manufacturing to a service economy, and the exposures from a service organization are different from that of a manufacturing organization," he said.

"What a service organization might be responsible for: That's sort of like what product liability was for a manufacturing organization. Everybody has a very clear understanding how to risk-manage and (implement) loss control for product liability. I think it's a much less clear understanding of how to deal with the liability issues arising out of being a service provider, and I think that's going to be the issue for risk managers to grapple with over the next four or five years," Mr. Smith said.

He cited health care and telecommunications as examples of enterprises where interdependent services create new questions of liability, questions that haven't yet been answered.

"Who's liable for what? What are the exposures?" he asked rhetorically.

"As we move to a service economy and as the population continues to shift into hazardous areas, this is a real challenge for risk managers. As we shift to services, people have to think about in essence what's kind of a professional liability rather than a products liability, and this is going to be a real challenge," he said.

These types of concerns create new opportunities for Kemper, pointed out Mr. Smith.

"Generally casualty is where we are going to have to expand," he said, adding that Kemper's name recognition should be a plus in this effort.

"So we'll be looking at really the whole spectrum," he said. That could mean Kemper will find opportunities in excess casualty, professional liability or environmental coverages, he said.

In fact, Kemper announced late last week that it will establish a new business unit to underwrite excess casualty insurance. Charles Abruzzo, currently president of Underwriters Reinsurance Group's surplus lines-northern division, will join Kemper in early February to head the new unit.

"We have aggressive business projections and intend to become a major player in this line," said Mr. Smith.

In the past several months, Kemper has put together a product development department to explore new avenues. Mr. Smith said he's told underwriters and marketers to "go find out what others aren't doing, and then start driving the product development mechanism to respond."

Looking for new casualty insurance business does not mean Kemper will turn its back on two lines of coverage in which it has been a significant player over the years, noted Mr. Mathis.

"Clearly, workers comp is an area where we are strong; over the years, generally we outperform the industry," he said.

"We see lots of opportunities related around that workers comp area," said Mr. Mathis. For example, the KemperCare comprehensive workers comp program, offered jointly between the insurer and health plan companies, allows policyholders who choose it to have access to the health plan's occupational network and physician management expertise.

In addition, Kemper National Service is marketing non-occupational disability management.

Kemper also will continue to emphasize its highly protected risk property insurance business, he said.

"We're really managing to refocus that business and not trying to be all things to all people. We'll focus on middle-kind of accounts, such as hospitals, as opposed to giant risks where there's a lot of sharing," he said.

HPR also will continue to play a key role in Kemper's international operations, said Mr. Smith, though he cautioned that Kemper's overseas operation will be more in the area of strategic partnerships rather than as a standalone player.

"We are simply not big enough to compete in 170 countries with some of the companies that are established for a long time. Even if we wanted to, we couldn't build that network in our lifetime. So I think what you'll see us do is identifying strategic partners around the world," said Mr. Smith.

"For a non-U.S. company, we're an almost ideal partner, because we're very good at work comp, which non-U.S. companies don't understand, and we're very good at highly protected risks, which non-U.S. companies don't understand, so our ability to service U.S. business for foreign insurers is probably better than anybody else's," he said. "At this time, it is not really our intent to become an on-the-ground, direct-market major player outside North America."

Regardless of where its operations might be, Kemper will rely on technology to meet the demands of its customers, he said.

"A great deal of how we are able to drive down our loss costs today better than the next guy is driven by technology, but that technology is very, very expensive. So we're having to learn how to manage technology as well as we manage other parts of our enterprise," Mr. Smith said.

The competitive nature of the current market is unlikely to change significantly in the foreseeable future, said Mr. Mathis, who added though that "you never say never in this business."

He said while there may be some price recovery in some lines of business, "generally speaking, companies need to recognize that they are going to have to be more focused, and they're going to have to be more productive and operate in a more efficient way."

For Kemper, the challenge is how to achieve productivity without damaging the insurer's service reputation, he said.

Kemper, and the insurance industry as a whole, also face challenges in the public arena, said Messrs. Smith and Mathis. This is particularly in regard to the U.S. Comptroller of the Currency's moves to give banks a freer hand in the business of insurance, said Mr. Smith.

The opening of a federal door to insurance for banks raises again the question of solvency regulation, said Mr. Smith. He said insurers must address how to create a kind of solvency regulation as "vibrant" as that which exists in the banking industry.

"I wouldn't want insurers and their policyholders to in essence be second-class citizens because of the perception. I think part of what's going to happen here is some major insurers, especially diversified insurers, are going to say, 'Well, if banks are in insurance, we're going to enter banking because we can do it as well as they can,' and they probably can. And that's probably good for the customer, but under today's environment, you're going to have firewalls, and the far better-protected side of the equation will be the bank side."

Mr. Mathis said he thinks the answer to those questions can be better provided by state rather than federal regulation.

"I personally don't put myself in the camp that dual regulation, even at some limited level, for this industry makes sense at all. From our perspective, responsible state regulation works. I think it's totally within the capability of the state commissioners to arrive at solvency standards that are uniform throughout each state. I personally would rather see it go that way than to see the industry to get involved and have to deal with a federal regulator."

Looking toward the next century, Mr. Mathis said he views the consolidation among primary brokers as a "an opportunity for a company like ours." He said he doesn't see the moves toward consolidation raising a question of increased broker leverage on insurers.

Instead, "it means less people that we have to call to get a shot at major opportunities," he said.

Mr. Smith said he doesn't think there is that much consolidation going on among primary insurers, and expects that regional and what he called "super-regional" insurers will be major players in the marketplace.

No matter what happens, Mr. Smith is optimistic about his new job and company.

"We've got a great franchise, and what I'd like to see in 10 years is that the brand is even more prominent than it is today, and I think we've got a tremendous opportunity to do that."