ARKWRIGHT: CHEAP INSURANCE CREATES DILEMMA

MILAN, Italy-Is risk management necessary when insurance is cheap?

Wolfgang Friedel, senior vp of strategic development at Arkwright Mutual Insurance Co. in Waltham, Mass., and Ronald Berg, managing director of United Risk Management Consultants, Unirisk AB in Arlandastad, Sweden, debated this question at the 1997 Arkwright Global Symposium on Risk Management in Milan, Italy, last month.

Forgoing risk management practices because of the availability of low-cost insurance is a short-sighted approach that puts a company at risk, according to Mr. Friedel.

Mr. Berg said that while it shouldn't be an "either/or" situation, buying low-cost insurance at a time of tight budgets can free a company to take advantage of other opportunities.

Mr. Friedel said using insurance as the sole means of loss protection assumes that loss is acceptable and that insurance will fix everything.

"If you believe that, you are headed for a dangerous false sense of security," Mr. Friedel said.

Today's world is marked by instant communication, environmental sensitivity and "journalistic avarice," he said. "It's a bad combination if you happen to have a loss that impacts on your community."

Organizations face numerous uninsurable exposures, such as loss of market share or reputation, Mr. Friedel pointed out.

"As hard as most companies work to be good corporate citizens, reputations can be severely and sometimes permanently damaged by a loss," he said. Cheap insurance can't help that, he added.

Even the broadest business interruption policy can't help when the pace of business and change are rapid and competitors jump in to seize business when a loss slows a company. "Your loss is your competition's opportunity," Mr. Friedel said.

Insurance also can't prevent the loss of key employees who refuse to wait until the business is back up and running, or lost productivity that results from morale problems, Mr. Friedel said. "And it can't prevent your company's management from being diverted from important tasks, such as planning the future, to help recoup following a loss," said Mr. Friedel.

"In short, in more ways than one, many companies today cannot afford a loss, regardless of their insurance coverage."

Companies have seen their risk profiles change over recent years as they have been involved in mergers and acquisitions, just-in-time delivery systems and technological developments. he said.

"In the effort to become lean and mean, many companies have unwittingly eliminated back-up facilities and operations, leaving entire multinational production lines dependent on a single key process," said Mr. Friedel. "Insurance does not identify such exposures and, if they remain unseen, they remain uncovered." Risk management can identify and quantify these potential disaster areas.

By depending on low-cost insurance, the organization is discouraged from practicing loss prevention techniques, he said.

In addition to uninsurable exposures, potential reliability problems with low-cost insurers is another reason not to depend solely on insurance for loss protection, Mr. Friedel said. He pointed out that some insurers may not be around when a claim arises.

"Responsible companies can only afford to cut prices to a certain point if they are to preserve their financial stability and ability to meet their obligations in the event of a major catastrophe," he said, and will be less and less inclined to accept what he called "substandard" risks. So by using low-cost insurance, an organization is ignoring the longer-term implications of risk, he concluded.

In response to Mr. Friedel's position that insurance alone cannot protect a company, Unirisk's Mr. Berg said the issue is more a case of taking advantage of the generous insurance pricing environment and using insurers' added services, which increasingly are unbundled from their traditional insurance products.

And more and more niche players are entering the fray to provide specialized services. "In fact, it's a great time to buy insurance. . .and supplement it with whatever services your company may need," he said.

Taking the argument a step further, Mr. Berg identified low-cost insurance as "just what the doctor ordered" for a number of organizations. He gave the example of a young and struggling company, or any company that had "fallen on hard times" and that would need to cover the basics "as expeditiously as possible." Low-cost insurance could save a corporation's life, he said.

And it's a real time-saver, he added. "The availability of coverage at a good price saves me an awful lot of time and trouble."

Mr. Berg said he did not think premiums eventually will increase. After all, more than eight years into the soft market, rates have continued to drop, he noted.

"The advent of electronic commerce has touched the insurance world, and the capital markets are sniffing around our borders," he said.

Risk managers can shine in these conditions, said Mr. Berg. They are able to produce savings by buying low-cost insurance in these days of budget-tightening, he explained. That can allow organizations to "expand their efforts in other critical areas," such as research and product development.

On a more cynical note, Mr. Berg pointed out that an organization's attitude can define its approach to low-cost insurance. Low-cost insurance is more attractive to the organization that does not care about its employees or anything but the bottom line.

Mr. Friedel repudiated many of Mr. Berg's assertions. "Any company without a vision. . .without a long-term strategy, in all likelihood will not exist" in the future, he said. Insurance is a commodity, he added, and very few insurance companies look at themselves as risk management organizations. Instead, they regard their products as financial. "He who can bring capital to the marketplace at the lowest cost wins the game," said Mr. Friedel.

Mr. Berg said that, for many years, the insurance industry had the upper hand, dictating conditions and prices. Now the tide has turned, and the influx of capital means that new insurers underwrite more than half the business written each year, he asserted. Plus, the unbundling of services typically has brought down expense ratios by between 12% and 18%.

Mr. Friedel remained unconvinced and said he was waiting to see

the first lawsuit brought against a chief executive because he "didn't take the proper risk management attitude."