Facing premium increases and onerous insurer demands, hard-pressed risk managers
search for coping strategies
By Anna Sharratt
(reprinted with permission, published in
ci – Canadian Insurance Magazine, April 2002)
Last year, Susan Meltzer
thought she had a good thing going. As risk manager for Toronto-based Sunlife Financial
Services Inc., she was in a long-term relationship with her insurance carrier, she had a
good loss history and she was confident that her premium rates would stay low even as the
market began to harden. She was in for a shock.
“We are expecting increases on all lines of coverage.
And we are expecting restrictive wording. I really have problems with ‘we don’t
do this anymore,'” she says, adding that long-term deals are no longer on the table.
Meltzer has been through three hard markets, so she brings
considerable experience to the table. But, in the wake of Sept. 1, the rules are more
one-sided and negotiations have lost their give-and-take. Submissions must be detailed to
an unprecedented degree, premium increases of 300 per cent are common and the reviled terrorism
exclusion abounds. Backed into a corner, risk managers have no choice but to try to take it in stride.
“I can’t afford to be arrogant with my partner,”
concedes Meltzer. “I’ll always be in a position where I need a claim to be paid.”
The current upheaval is forcing risk managers to take a
long, hard look at the way they prioritize risk, how they negotiate contracts and select
carriers, and how they present the bad news to senior managers, who are often still in the
dark about the ongoing market hysteria.
Most of all, it’s elevating risk management to a new level, forcing entire companies to
re-evaluate threats to the bottom line and join risk managers in developing coping strategies. Contingency
plans are becoming the life preservers firms cling to.
Renewals, beginning last September, were the first sign of things to come. Right after
the attacks of Sept. 11, terrorism coverage was rescinded, no longer available at any price. Then came
astronomical price increases, premium hikes that left many companies underinsured, particularly those with
perceived target risks. Coverage terms narrowed. Large property firms with high-rises were left on the hook
to self-insure. Talk of captives became customary.
The tone of negotiations has largely remained unchanged
since the first treacherous renewals in the fourth quarter of last year. Transportation
and forestry companies as well as public utilities are being confronted with 400-per-cent
increases. Insurers are still apprehensive about reducing coverage prices, even for good
clients with stellar loss histories. And this has created some bad blood in an industry
where many risk managers have fought hard to forge long-term, stable relationships with their carriers.
Placating insurers has become the name of the game, taking
the form of extensive research and heavily padded submissions, frequently requested months
in advance. In some cases, risk managers say they have hired extra staff to facilitate the
process, to ensure that their companies put the best foot forward and present their loss
histories in the best possible light.
According to Karen Mac William, a risk management consultant from Vancouver, insurers
are demanding “complete information on every aspect of your portfolio.
“So you may have a large company that’s got a
couple hundred buildings – they’ve got to get a six-digit postal code for every
building, they want the year it was built, the construction details, the occupancy. They want to
look at each building in the portfolio as if it were an individual building they were underwriting.”
For some, like Allan Smeall, a corporate risk manager for
the City of Winnipeg, the preparation has paid off.” “Property went up 25 per
cent but, from what I understand, that was pretty reasonable compared to most folks.”
He adds that commercial general liability coverage rose 40 per cent — a modest increase
in light of some of the coverage horror stories circulating in risk management circles.
What’s clear is that there are no guarantees, as Ed
Martingano, risk manager for Oxford Properties Group, points out.
“Insurers are getting bombarded with far more proposals than they’re accustomed
to,” he says. “They’re not going to respond to your proposal – they’re just going to say
‘forget it, I’m too busy. We’ll have to let it go.'”
Mac William concurs. “I was talking to one insurer and
he felt that right now, 50 per cent of the submissions they receive are not being looked at.”
It’s a catch-22. One reason why insurers are not responding
to many submissions, albeit well prepared, is because they’re receiving them from
clients who are shopping around for quotes,”attempting to land the best prices for
their risks. More clients mean more submissions. In the end, many of those shoppers are
left with fewer quotes and less choice than they initially envisioned.
In this difficult market, where coverage is scarce and
costly, risk managers agree that steps must be taken to keep options open. For one,
minimum insurance needs must be established. And while there is debate over the validity
of maintaining a long-term relationship with a carrier, most risk managers agree that a
solid portfolio is the best bet in securing coverage.
They also stress the benefits of managing risk internally
by developing emergency management plans and educating senior management about the
challenges and premium increases ahead. When all else fails, there are alternative
financing options to consider, such as captives, pools and reciprocals.
To begin with, risk managers say, an assessment of a
company’s needs must be done to determine what coverage is absolutely necessary.
“The first thing is, in the short term, make sure that
your program, once it’s changed, still provides your minimums — your
must-haves,” advises Martingano. “The first thing you need to do is establish
the floor for your program.” He adds that prioritizing needs is important in a market
that no longer offers “Cadillac” programs.
The next step is to tackle the market. Loyalty to one
insurer, now primarily a thing of the past, is still espoused by some. Supporters of this
view say that staying with one company can mean lower rates and preferential treatment at
a time when premium increases are the norm.
Lloyd Hackett, director of legislative, risk management and
public affairs for RIMS, says “it’s something to be considered instead of
hopping around from one carrier to the next. [Shopping] could work against you over time.”
No one is more disappointed than Meltzer, who was dismayed to find she had no deal —
no preferential treatment” — despite a long-standing relationship with her insurer.
“We went to insurers and said we’re willing to
put our money where our mouth is. We’re willing to sign three-year deals to stay out
of the marketplace. But now that the tides have turned, the first thing they take away are
the long-term deals for everybody.”
Meltzer says that while precautionary measures are
understandable in light of the current situation, employing one-size-fits-all policies is
not the answer. “They should delineate between some of their clients and be prepared
to perhaps be a little reasonable for certain clients who have stuck by them.”
Martingano is of another mind entirely. He says shopping
around is crucial at a time when there is less capacity being offered in the market.
“It’s mandatory,” he argues. “Your existing markets are putting up
much less capacity. Plus, the scope of changes is so broad that there’s not much
consistency among insurers” — you have to shop around.”
Shopping around is just one option. Managing risk through
audits and interval risk assessments is another strategy. Smeall says that the City of
Winnipeg recently undertook a SWOT” — strength, weaknesses, opportunities and
threats — analysis that”focused on potential threats.
“We’ve taken steps,” he explains.
“We’ve got a really good and well-developed business planning process in the
city and what we’re doing now is introducing a risk framework into that and trying to make
a place for risk management in the entire area of strategic business planning.”
Smeall says that one of the initiatives that has come out
of the city-wide assessment has been to implement a risk management software program that
allows staff to monitor insurance contracts, legal litigation files and worker’s comp
document. The goal is to boost efficiency and reduce the costs of risks.
“What it does, it basically enables you to better
manage your losses, the adjusting and so forth,” he says. “We’ll be able to
keep better track of our own insurance programs plus all the various contracts we have.”
Getting everyone involved in risk management, whether
through software or through an emergency strategy, is key, agrees MacWilliam. She says
that firms are too focused on pressing government for a federally-backed terrorism pool,
instead of drawing up contingency plans.
“I’m certainly an advocate of lobbying the
government for a terrorism pool, and I certainly support that,” she says. “But I
think it is a more effective use of people’s time to focus on their own organization and
In addition to making risk control a priority, it’s important to keep senior management
abreast of changes in the marketplace through constant communication, says MacWilliam.
“Despite that we see images of Sept. 11 every day, I
don’t necessarily think the CEOs of companies are thinking about what that is going to
mean to insurance,” she says, citing the recent example of one senior executive who
couldn’t comprehend how coverage exclusions and price increases could co-exist. He had
thought that both eventualities could not occur simultaneously.
MacWilliam says the best way to minimize a threat is to ensure that communication
is three-way, between senior management, the risk manager and the broker.
“What I’m telling people is keep in touch with your
broker, find out exactly what’s going on in the market — you need to communicate with
people . . . and say here’s what my best guess of what our insurance budget needs to be.”
If insurers’ demands send the insurance budget through
the roof, there are other financing options risk managers can consider. While most risk
managers admit they have either raised or are looking at raising their deductibles, others
are evaluating alternate arrangements.
Meltzer, for one, says she will consider self-insurance if
premiums are off the Richter scale, come her renewal in May. Smeall and Martingano have
thought about captives, although they agree that they are a long-term commitment
they’d rather not undertake. MacWilliam, meanwhile, predicts that more people will
look at pools and associations, forming alliances based on similar exposures.
For now, there is no clear timeline as to when the market
will stabilize. Most guess it will be two years before rates level off and coverages are
restored. Even then, conditions will likely have been permanently altered, predicts Smeall.
“Whenever you have market corrections, its produces a
new base point,” he says. ” I think what will happen is [market corrections]
will bump up in a spike and then it will come down — but not a whole lot. And you’ll
have a new base line . . . it will be higher.”
For now, risk managers are largely left with little choice
but to bite the bullet and pay large premiums, anxiously awaiting their next renewal
seasons, rife with exclusions, long waiting times and perturbed CFOs.
One thing all of them agree on is their newly elevated
role. Risk managers’ days as lowly “insurance buyers” are over. “They
don’t call me that anymore,” laughs Smeall.