Valerie Denney recently asked members of the Executive Council of the Risk and Insurance Management Society, Inc. (RIMS) for their perspectives on various topical issues.
The most striking aspect of the responses is that although the risk managers (who have chosen to be anonymous) work in different sectors they share broadly similar views.
Asked how the recent developments in the brokerage community have impacted their relationship with brokers, most agree that there have so far been no major changes, other than some of the people they work with changing affiliations. As one risk manager puts it: "The only change I have noticed is that I am solicited less frequently. Bravo!"
However, another has the following to say: "To date, my company has experienced some favorable outcomes as a result of consolidation of the brokers with which we work. These outcomes have come primarily in expanded services, areas in which the broker was not particularly strong which have been enhanced as a result of acquisition of the other firm. We are, however, quite concerned about some of the longer term effects. As a result of consolidation, greater awareness has come about related to broker compensation, and there are grave concerns about contingent commissions payable to the broker where my arrangement involves a negotiated, capped fee.
"Expansion by brokers into direct consulting and outsourcing is of legitimate concern to risk managers as it places the broker, whose basis previously has been that they work for the company in contrast to an insurer, potentially in direct competition with the risk manager as a service provider for the company. My company has already been contacted in one such incident."
Turning to the question of whether the hard/soft commercial insurance cycle is gone forever, the general consensus is that it will continue, but the cycle intervals will take longer periods of time. Explaining why he believes the cycle is not dead, one of the respondents points out that, "many things are changing in the industry, but the ebb and flow of capital chasing profit continues."
The other question, then, is will the market harden in the near future?
Unlikely, contends one respondent, who remarks that, "abundant capacity, strong worldwide financial markets (even taking the current situation in Asia into consideration), and expanded niche marketing by insurers, among several other factors, suggests that the soft market across most lines of coverage will remain soft, at least in the near term. Further, I believe the expanding growth of the 'alternative market,' which is not so alternative any longer, will lead to a continuation of general soft market conditions as companies make the decisions to carry their own risks, taking some of the high risk or capital coverage out of the traditional markets. It will require some significant volatility in some financial area to cause a marked swing."
Another adds that the next major catastrophe "could harden the market as we know it." Among the examples he cites are "the cigarette situation which could turn in the wrong direction, some cataclysm that destroys a city or an industry, year 2000."
Staying on the subject of insurance, I asked everyone how they see the insurance industry evolving in the future to meet the needs of risk managers. Two messages come across loud and clear: that insurers are expected to continue to improve the use of technology and will become more service oriented rather than product driven.
One respondent has the following to add: "I think that the insurance industry must evolve its commitment to quality service, products and performance. The industry is both roundly and fairly, in my view, criticized for a malaise regarding committing to providing quality. I spoke with a carrier not long ago whose response to a policy issued with many errors materially affecting coverage was, 'Well that happens. We just wait for you to find those and call us. We will fix the problem.' The concern is that 'the problem' is not issuance of incorrect coverage forms, it is the corporate culture which continues to permit attitudes and practices that lead to that position. However, that also requires the commitment of risk managers to demand that quality, and that also has been missing in large measure."
Borderless risk management (in the sense of holistic professional practice) was next up for discussion: how this trend is currently impacting organisations, and whether there are any risks involved. Here are some of the views expressed:
* "I think that 'holistic' risk management is more a theory than a practice. My concern is that this approach would result in a risk manager becoming too broad-based, and therefore unable to adequately cope with even the basic areas of risk management."
* (There has been) "no impact yet. Some day, however, someone (insurance company, bank) will create a product which will protect the bottom line of a company through a vehicle that will be all encompassing; no more property, boiler & machinery, marine cargo, fiduciary, D&O, etc. One contract (presently known as an insurance policy) will cover all eventuality, with a very large annual deductible, very broad terms and very few exclusions."
* "My company has been engaged in 'borderless risk management' for a long time. This has enabled us to focus effectively on all areas of the company, building multi-departmental teams to respond quickly and effectively as specific issues arise, and to achieve an environment in which no aspect of the organisation is considered off-limits. This has also yielded a situation in which we have been able to meld financial and treasury risks with human resources risks with management of traditional risk areas without any single group feeling a need to vie for responsibility in any other group's primary area of responsibility. The commitment of executive management to this process established it with a minimum of risk, perhaps the most significant of which is 'turf protection'."
* "Borderless risk management is bringing the traditional risk management group closer to finance people within our company as insurers are now trying to provide them with products, and the capital markets are trying to provide us with products."
Following on from the last couple of responses, to what extent will the treasury type of risk management function be integrated with traditional management of fortuitous risk? What pressure will this place on the risk manager? Will the treasury department make a pre-emptive strike for the risk manager's job?
"The treasurers have their hands full with all of their other activities," remarks one respondent. "Risk managers will maintain their role, however they will be asked to co-operate more with others handling risks."
"I do not believe the traditional risk management function is in any danger as the disciplines are totally different," remarks another. "While it is true that risk financing may be similar across different treasury functions, the process of risk identification and loss control is a unique skill set to the traditional risk management function."
Another respondent comments that, "ultimately, there is great sense in melding treasury risks with traditional risk management functions. The tools and principles of management of fortuitious risk lend themselves well to the management of treasury risks, though the specific techniques for addressing them will vary. The challenge of the moment is that, at least in broad terms, neither group is effectively prepared to tackle this task. The treasury department staff are not well-groomed to manage traditional risks in all areas, nor are traditional risk managers, in many cases, effectively prepared to manage all elements of treasury risks. This is one of the reasons that risk managers of both today and tomorrow must commit to continuing professional education in the financial risk area.
"I do believe there will be instances in which treasury departments will pre-emptively strike for the risk manager's job, and do so successfully, as treasury is often better understood within a company than risk management. It is, therefore, in addition to learning treasury-related risks, critical that the risk manager ensure that the executive management understand the corporate role of the risk manager. We have to be able to tell our own story effectively to avoid attempts to usurp those efforts."
Asked if they are currently using, or evaluating, any of the new capital market alternative risk financing strategies, the general reply was in the negative.
Finally, asked what skills tomorrow's risk manager will need, as the role develops, and how RIMS can support these important challenges, the following remarks speak for many in the risk management community.
* "Understand the big picture, become more adept by developing interdisciplinary skills and improve dramatically one's two-way communication skills."
* "I believe tomorrow's risk manager will need to have a better knowledge of corporate finance and financial risk management, if only for the purpose of communicating more effectively internally."
* "Because a risk manager deals with all parts of the company with whom he/she is employed, he/she of necessity has to be rather a renaissance person. I think that the main areas that RIMS can provide assistance in are education, networking and interaction with governmental and regulatory bodies."
* "I believe the skills of tomorrow are the required skills of today. Today's challenge is for the risk manager to acquire the necessary knowledge and skill base. That includes at least four critical areas. First, the risk manager must know the language and the business of the finance division and the cfo. Where risk management's success will be interpreted in dollars and cents, the risk manager must be able to communicate in those terms. Second, the risk manager must have an understanding of the law, its impact on his company, and the effect of changes in law, especially of contract law. Third, the risk manager must be an effective communicator. He/she will have to be able to educate and inform those in other areas of the company, and outside the company, what risks the company faces, how to manage them effectively, and why that is important to the company's mission. Finally, the risk manager must be able to think creatively. More and more, we are having to rely on non-traditional solutions to problems. This is often complicated by expansion into areas which have not been traditional core operations, and the risk manager must be able to determine how to address the new risks by new means. RIMS role is to understand these changes and develop professional development courses to these ends. The FRM is an effective first step, but RIMS must understand that not all risk managers will pursue an FRM. Consequently, independent courses must be developed to assist as well."
Valerie Denney, is editor of this publication.