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Winds of change blown by politics, not nature

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Risk managers in the new year are contemplating the potential good and bad fallout from what they consider to be last year's most important news stories: the 2006 midterm elections and the hurricane season that wasn't.

"The elections change the face of insurance, risk management and benefits for the coming 12 to 24 months," said Lance Ewing, vp-risk management at Memphis, Tenn.-based Harrah's Entertainment Inc.

That is, of course, if Democrats hold their slim majority in the U.S. Senate following the illness of Sen. Tim Johnson, a Democrat from South Dakota. If Mr. Johnson could not complete his term, the state's Republican governor would appoint his replacement. If he appoints a Republican, then the GOP, with tiebreaking votes cast by Vice President Dick Cheney, would regain control of the Senate.

In the U.S. House, however, Democrats still are poised to take control of the chamber.

A quiet hurricane season in 2006 is significant because risk managers with catastrophe exposures hope that means good news when they renew their property accounts this year.

Other developments also important to risk managers include a credit rating agency's modified approach for evaluating financial institutions and a stabilized medical malpractice insurance market.

But the election results--which risk managers spoke about before Sen. Johnson fell ill--and the country's respite from catastrophic windstorms clearly topped risk managers' lists of the top news stories in 2006.

With Democrats possibly taking control of Congress and making significant gubernatorial gains, "the chance of tort reform diminishes, if not completely disappears" because of the party's close ties to the plaintiffs bar, said medical center risk manager Richard P. Kidwell.

Mr. Kidwell, associate counsel and director of risk management for the University of Pittsburgh Medical Center in Pittsburgh, advocates reforms to curtail runaway jury verdicts, eliminate frivolous claims and assure plaintiffs of a bigger piece of their recoveries by reducing their attorneys' contingency fees.

Even absent those reforms, the medical malpractice market began stabilizing in 2006, which was a major development, Mr. Kidwell said. But, he noted, the market stabilized at extremely high rates, and claim costs continue to rise.

A cause that a Democratic Congress would be expected to embrace is reducing the ranks of U.S. residents without health insurance, said James D. Hinton, vp-risk and insurance at Nashville, Tenn.-based HCA Inc., the nation's largest multihospital corporation. Since a significant percentage of the uninsured are employed, Congress' solution could be a challenge for business, according to Mr. Hinton.

A Democrat-controlled Congress also would more likely push harder to move regulation of the insurance industry to the federal government from the states, risk managers said. Insurers and risk managers have debated for years whether such a shift in industry oversight would help or hurt buyers.

Democrats' other anticipated pet projects that are not directly linked to risk management and insurance also would impact risk managers, Mr. Ewing said. For example, if Congress raises the minimum wage, then workers compensation costs would rise, he pointed out.

But some risk managers also expect a few good things from a Democrat-controlled Congress.

For example, unlike Republicans, Democrats are more receptive to allowing the government to flex its buying power muscle with pharmaceutical companies and negotiate lower prescription drug costs for Medicare recipients, Mr. Hinton said.

"That will have an effect on everybody" because health maintenance organizations would begin to demand a similar cost structure, he said. "They can't get to the government's numbers, but they will get as close as they can."

Rising health care costs, particularly a $1 million increase in prescription drug costs, was a major development in 2006 for Joey Page, risk manager for the city of Plano, Texas. Health care benefits are important "to attract and retain good employees," and they factor into the city's workers comp costs, he said.

Another potential benefit of a Democrat-controlled Congress is a permanent solution to terrorism insurance, risk managers said. The federally backed terrorism coverage plan, which Republican-controlled Congresses created and renewed through the Terrorism Risk Insurance Act, will expire at year's end lacking action by Congress.

Democrats, who already have promised quick action on TRIA, "are not expecting the commercial market to carry the burden" for terrorism losses, said John W. Lambdin, assistant treasurer and director of insurance at Weyerhaeuser Co. of Federal Way, Wash.

What many risk managers characterized as "a nonstory"--the unexpectedly inactive 2006 hurricane season--still was a major development.

On the heels of a devastating 2005 season, which drove up insurance premiums and pinched capacity for wind-exposed property, hurricane prognosticators said there was a high likelihood that 2006 hurricane activity would be above normal. No hurricanes, however, made landfall in the United States.

Risk managers said they hope that means the property catastrophe insurance market will soften.

"Hopefully, capacity will be more available, even if it's at a higher price," said Mr. Hinton of HCA, which owns several facilities in wind-exposed regions. "We weren't able to buy all we needed" in 2006, he noted, echoing complaints of many risk managers responsible for property in wind-prone areas.

The calm hurricane season also was the top story for Mark Dama, director of insurance and risk management for the Irving, Texas-based Boy Scouts of America, which owns property in Florida. But Mr. Dama said his broker has advised him to expect neither pricing nor coverage improvements from his incumbent insurer at renewal in 2007.

For risk manager Beaumont Vance, the 2006 hurricane season was important for other reasons.

"All of the hand-wringing" over the hurricane projections "shows a fundamental misunderstanding of statistical analysis," said Mr. Vance, senior enterprise risk manager for Sun Microsystems Inc. of Broomfield, Colo. "If there's a 99% chance you're going to lose at a roulette table, that doesn't mean you're going to lose, or you'll never put your money down."

Because hurricane activity did not match predictions, Mr. Vance said he is concerned that preparedness in the future may suffer when forecasters predict high probabilities of above-normal activity.

But the year's top events for Mr. Vance revolved around enterprise risk management.

One was U.S. Treasury Secretary Henry M. Paulson Jr.'s remarks in November that there should be a less costly and more efficient way to implement the Sarbanes-Oxley Act section that requires management and auditors to assess internal controls. Risk management experts say Sarbanes-Oxley promotes ERM.

Focus on material changes

Mr. Paulson's statement should motivate auditing firms to abandon their "boil-the-ocean" approach to reviewing internal controls and "focus on things that will have a material impact," Mr. Vance said. The current approach has distracted attention from core operations and did not prevent the options backdating scandal, he noted.

The cost/benefit approach that Mr. Paulson suggests for assessing internal controls "is where risk managers come in" as this "momentous and society-shifting" story develops, Mr. Vance said.

The other major development late in 2006 was Standard & Poor's Corp.'s decision to factor into its credit rating analyses of financial institutions the maturity of their ERM processes.

In 2005, S&P began evaluating insurers' ERM processes as part of its evaluation of their financial and credit strength. Now, S&P is exploring whether to adopt the same methodology as part of its credit rating process for the energy sector, said David Ingram, director of ERM in the rating agency's financial services sector.

"I think you'll see true enterprise risk management become a necessity at all companies that care about their credit rating," Mr. Vance said.