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Market transition offers risk options: RIMS/Advisen panel

Risk managers offer fresh views on total cost of risk, opportunity

Market transition and a rising total cost of risk may create pitfalls for risk managers, but there’s a bright side: it also lets them reevaluate ways to maximize risk benefits, according to panelists at a July 27 RIMS/Advisen session.

As management’s view of risk turns to broader outcomes, risk managers have the chance to bolster the bottom line and make total cost of risk a key metric company-wide, experts concluded during the “RIMS Benchmark Book—Live Event” webinar. The Q&A event followed 2012 Risk and Insurance Management Society (RIMS) Benchmark Survey results that showed a 1.7% increase in total cost of risk over the past year.

Read: Calculating Total Cost of Risk

“They’re starting to think about risk  [differently],” said Carol Fox, director, strategic and enterprise risk practice at RIMS. “It’s something they’re willing to take on their balance sheet.”

Risk as value

Insurance is still an important piece of the risk transfer puzzle, but the current market has put more emphasis on strong risk capabilities, according to the panelists. With that, more organizations are a starting to see risk strategies as a way to add to enterprise value, said Fox.

In some cases, that means challenging the value of insurance. More risk managers are looking to exploit the risk, noted Richard Sarnie, vice president of risk management at the Great Atlantic Tea Company Inc. “Now, they’re asking, ‘why buy insurance?’ ”

Read: ClearRisk launches smartphone app

On contracts where his own company is asked to take on more risk, Sarnie said, his view is:  “Are we charging for this?’  Well, we should be.  Let’s take it on and charge for it and improve our top line.” By capitalizing on the opportunity, he says, “risk is not a bad four letter word.”

Staying ahead of the curve

Still, panelists agreed that market swings could be difficult to forecast and budget. “When you get those broadside surprises, it’s hard to explain market volatility [to a board of directors] noted Fox.

Sudden shifts can be eased with added support from brokers. Closer ties, frequent briefings on rate and market trends—well in advance of renewal– give risk managers “the insight to plan your process,” she said.

But risk managers shouldn’t lean too heavily on brokers—volatile markets are the time for risk managers to demonstrate their own value. “You can’t let your broker be [the only one] out there,” noted Sarnie. “You have to be out there 11 months before renewal.”

That kind of work will let risk managers showcase their mettle, he said. “Anyone can purchase cheap insurance,” he said. “It goes back to total cost of risk. Insurance is just one tool. Our time to shine is when the market is in transition.”

A better benchmark

Risk managers can also use total cost of risk as a key metric, but first must boost understanding of its value across their organizations, the panelists said.  A first step: changing terminology, said Sarnie. “You need to get out of insurance language mode so that people who are managing the stores understand what success and failure is and can impact that.”

The definition should also expand to encompass all risks and costs associated with risks—not just the insurable ones,” he said.

Read: our new publication on risk, Corporate Risk Canada

Fox pointed to a company’s aging workforce as one such risk. “How do you measure the ability to transfer knowledge?” she asked. “That’s not to say that what we’re measuring is less relevant. The benchmark is still relevant, it’s just not broad enough.”

With a broader definition, risk managers can then measure their total cost of risk against a competitor’s, added Sarnie.

Recast your risk

Although the panelists noted relative rate stability, they had mixed views on whether underwriters were showing flexibility. Some are showing greater specialization—“no-one wants to say, ‘everyone gets a 10% rate increase,” said, Pamela Ferrandino, executive vice president, National Practice Leader, Casualty, and senior director at Willis North America.

The rate rally seen in the first quarter will likely continue throughout 2012, she said, noting a “tighter construction” of pricing within certain markets, like construction, where “outcomes on renewal are usually beneficial for the client.”

The economic conditions and volatility in some markets also give clients the opportunity to “recast” their risks, she said. She urged risk managers to communicate with brokers on a regular basis.

“Show them what you’ve done to make your risk better and fresher,” she said. “Those risk managers who’ve invested in pre-loss work will be rewarded with stable pricing.”