RIMS Conference 2002
Are we listening to each other? I often wonder. I’ve just returned from April’s annual conference of the Risk & Insurance Management Society (RIMS) in New Orleans. One of the featured events was a three hour “Risk Management Forum,” billed as an opportunity for insurance brokers, insurers, and risk managers to hear each other. In the first hour a panel of four brokers, from Aon, Arthur J. Gallagher, Marsh and Willis gave an overview of current insurance market conditions. One said the “hard” market would continue for at least two to three years, especially since the non-life insurers would be cash-flow negative in 2002, despite their radical rate increases. Another repeated the mantra of “9/11, Enron, and Andersen” as primary contributors to the situation. A third suggested that it is a time of “strategic opportunity” for risk managers. After relatively tame questions from the audience, they were replaced with a panel of three insurers (ACE, AIG, and FM Global). Again more moaning about accumulated losses (a combined loss and expense ratio for the US non-life business in 2001 of 118%!), the continuing problem of aggregation, made manifest by the World Trade Center disaster, and the global nature of the current price run-up. They acknowledged that considerable new capital is rushing in (estimated by Tillinghast-Towers Perrin to be as much as US$27 billion). Questions and comments from the audience cited enormous price increases, often over 100%. An Australian reader reported to me a professional indemnity liability premium increase from A$50k to A$750k for A$10 million of cover! Despite this demonstrated discontinuity, one CEO had the temerity to proclaim that “insurance remains a very efficient mechanism for risk transfer” and that “we are the only ones who take your risk!” What does he think shareholders, banks, and capital markets are doing? In response to one question from a risk manager as to why the industry is chronically unable to deliver renewal quotations and policies on time and accurately, one CEO, Shivan Subramaniam, of FM Global, was candid enough to say “Shame on us,” but none of the three suggested any changes.
The final hour featured the heralded commentary by risk managers. This, unfortunately, was a fizzle. While I heard expressions of annoyance, frustration, misunderstanding and even outrage, no one offered any concrete solutions. Yes, the insurance industry leaders did seem to be “out of touch,” as one risk manager expressed it, but no one said “I’m not going to take it anymore, and here’s what I’m doing!”
The worst part of this session was a failure to listen. Of the four broker executives, only one stayed for the insurer panel and none of them were present for the risk managers’ discussion. Two of the three insurer executives left after their session. Only one, the CEO of FM Global, participated for all three hours! Even the President of RIMS, the featured leader for the third hour, wasn’t present for the first two hours! It was a studied exercise in mutual disregard.
As they say, “other than that, Mrs. Lincoln, how did you enjoy the play?” The 2002 RIMS Conference was, as usual, a superbly organized trade show focused on the hundreds of exhibit booths at the huge Moriel Convention Center on the Mississippi River. A venue of this size is required to hold the 5,300 registrants (up from 4,400 last year) and another 5,000 exhibiters. In the 130 workshops, the emphasis was on tactical problems and solutions in claims management, insurance procurement and loss control (over 60% of the meetings). As with prior RIMS conferences, most of the speakers represented vendor organizations (72.4% ¾184 of the total of 254 speakers). This is a chronic complaint of mine: why can’t the members of RIMS speak for themselves? Why do they continue to listen to insurance brokers, insurers, claims administrators, lawyers, and consultants? In contrast, at this year’s GARP (Global Association of Risk Professionals) annual meeting in New York, 66% pf the speakers were organization managers and only 27% were vendors, almost the reverse of the situation at RIMS.
In addition to the regular sessions, many industry groups held meetings that allowed greater interaction among practicing risk managers. I sat in on one for nonprofit groups, led by Arthur Blinci, of the Seventh Day Adventists. Although sparsely attended (only 17 were present at the start), it featured two first-rate presentations by San Diego, CA and White Plains, NY lawyers on the problems of violence in schools and protocols for the prevention and detection of child abuse.
Four years ago, in the November 1998 issue of RMR (The Good, The Bad, and The Ugly), I reported the comments of a panel of insurance executives (from XL, AXA, Lloyds and Chubb) at the annual conference of the Canadian Risk & Insurance Management Society. One of the four, Dean O’Hare of Chubb, held a news conference in New Orleans, so I asked the same question that I posed to him both four years earlier and last year. My query: can the non-life insurance industry survive with an expense ratio that hovers near 30% and what are you doing to try and reduce it? In 1998 Mr. O’Hare said that Chubb was targeting a 25% reduction. The executives from Lloyds and AXA offered similar responses, but XL’s CEO suggested that it should be reduced to “single digits” to enable the industry to respond to new competition. He went so far as to recommend that insurers eliminate commissions entirely, encouraging clients to pay fees to advisors and intermediaries. Last year Mr. O’Hare reported that Chubb was planning a 7% reduction over 3-5 years. He called a “single digits” target ratio “pie in the sky.” This year he responded that Chubb had actually reduced the non-commission portion of its expense ratio by 20% (now 14% according to his figures), but he continued to maintain that commission rates should be excluded from the calculation. He suggested that the radical increase in premium rates should force a further fall in Chubb’s expense ratio in 2002 and 2003. He had no comment on shifting intermediaries to fees.
Two recent events may scuttle the intransigence of the non-life insurance business on the issue of commissions. First, most of the major US airlines eliminated commissions to independent travel agencies, an aggressive step made more palatable in the post- September 11 economic tail-spin. The agencies now charge their customers fees. I’ve heard little outcry from the traveling public. Second, the aftermath of Enron, Global Crossing and other once-high-flying stocks exposed the blatant conflicts in interest of the investment firms. Their analysts touted the stocks of these companies as their bankers charged them enormous fees for investment banking work. The public now demands full disclosure of these entangling economic webs, if not separation of analysis and sales. Will these two changes affect the commercial insurance business? Has the time come for buyers to insist on both full disclosure of all advisor income and fees as the only source of intermediary income?
Unfortunately, insurance company CEOs, such as Mr. O’Hare, find themselves in an unenviable, no-win position. If they do not materially reduce expense ratios, they risk their commercial customers moving to alternative methods of risk financing, from internal reserves and captive insurers, to long-term loans, pools, group captives and capital market bonds. If they unilaterally reduce commissions, they risk a radical drop in business as the large insurance brokers shift premiums to other insurers. We apparently need a radical market shock to change this system.
Finally, I listened to the past and current presidents of RIMS (David Mair, of the US Olympic Committee and Chris Mandel, of USAA) describe their successes and objectives. Mr. Mair called his year of stewardship a “home run” based on the heightened position of the Society in the public press and in Washington. RIMS negotiated an agreement with OSHA (Occupational Safety & Health Agency), supported the efforts of the insurance industry for government financing for future terrorism losses, and is close to announcing a funding partnership with the AIA (American Insurance Alliance¾representing insurance companies) and the CIAB (Council of Insurance Agents and Brokers¾representing intermediaries) in support of its new “Quality Improvement Process.” Yet I heard nothing about any planned outreach to the other major organizations representing the risk management discipline. RIMS reports 4,500 corporate members, while GARP lists 21,000 and the Institute of Internal Auditors 32,000 worldwide. An ex-president of the Society for Risk Analysis serves in Executive branch of government. David Mair pronounced “We represent risk management,” but the numbers, actions, and political influence of GARP, IIA and SRA suggest otherwise. Are the leaders of RIMS basking in Panglossian optimism during a period of increasing uncertainty about the future for their members? Chief Risk Officers are the new leaders of enterprise risk management programs. What chance do insurance risk managers have of rising to this position? I know of only two, yet others have the potential. What is RIMS doing to provide the required knowledge and skills? At the press conference I attended, I heard only initiatives that reaffirmed its close connection with and reliance on insurance companies and insurance brokers, those enormous albatrosses hanging from the insurance risk managers’ necks.
Isn’t it time for RIMS to listen to what is going on in the broad world of risk management?
Copyright H. Felix Kloman and Seawrack Press, Inc.
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