Comfort zone: risk managers seek TRIA renewal and disclosure of broker compensation.

As thousands of risk managers meet in Philadelphia for their annual conference beginning April 17, they will spend the better part of five days absorbing information in workshops, listening to keynote speeches from industry executives, and mingling with peers at a parade of social events. But beyond all that, two topics promise to dominate the 2005 gathering of the Risk and Insurance Management Society: the 3-year-old Terrorism Risk Insurance Act, or TRIA, which is set to expire at the end of 2005, and the heightened regulatory scrutiny of broker contingent commissions.

In terms of TRIA, risk managers such as Christopher Yaure of GE Insurance Solutions, Kansas City, Mo., are concerned that Congress' failure so far to extend the federal terrorism backstop could prove devastating to property insurers in the event of another major terrorist attack.

"With a terrorism event of $10 billion or larger, we think that there are limits on the total amount of surplus available in the commercial property/casualty industry, and we need that surplus to honor our other obligations," Yaure said. "A mega-catastrophe is just beyond the scope of the ability of our industry, in total, to handle."

He has round that the public tends to view TRIA as someone else's issue, reasoning that if they are not in a major urban area, the law will have no impact on them. "Yet, because insurers are national and global, a terrorism loss, even if it is likely to happen someplace else, will have a worldwide impact on the insurance industry," Yaure said.

He also is concerned that the expiration of TRIA would produce shortages of capacity for all-risk workers' compensation coverage. "An insurer can't simply avoid the high-risk part of a state because states have assigned risk pools," he said. "So even if you're writing in a non-urban or low-risk area of a state, through an assignment pool you could end up being pulled into providing coverage in an area that you consider to be extremely high risk."

TRIA addresses acts of terrorism by or on behalf of foreign persons or organizations. If it is renewed, Yaure would like to see its scope expanded to include acts of domestic terrorism along the lines of the Oklahoma City bombing or attacks by members of such homegrown groups as the Animal Liberation Front and the Earth Liberation Front. "While these groups haven't engaged in anything near the size and scale of Oklahoma City or the World Trade Center, they certainly have demonstrated a willingness to conduct violent acts," he said.

Living Without TRIA

Andy Kuchar, risk manager for iStar Financial, Alpharetta, Ga., said that he is not convinced that the insurance marketplace is even close to being prepared to insure terrorism risk without a federal backstop. "My fear is that chaos will ensue on Jan. 1, 2006, if Congress doesn't act to extend the law," he said in an e-mail.

The stable reinsurance marketplace that policymakers were looking toward when they worked out the time frame for TRIA may not exist as yet, said Nancy Chambers, president of RIMS and risk manager for the Waterloo Region Municipalities Insurance Pool in Ontario, Canada. Therefore, RIMS is urging Congress to act on a short-term solution of extending TRIA for two more years "until we can make sure that there is stability in the marketplace for our members," she said.

Federal Reserve Chairman Alan Greenspan acknowledged as much himself when he told a U.S. House of Representatives committee in February that the reinsurance market has yet to demonstrate it can offer significant coverage of a catastrophic terrorist attack.

"... You cannot have a voluntary market system and the creation of markets, especially insurance markets, in a society subject to unanticipated violence," Greenspan told the House Financial Services Committee. As a result, he said, "some level of federal involvement in terrorism insurance may continue to be warranted," as an efficient pricing mechanism for terrorism risk.

The private market is unwilling to provide the cover and the exposure, agreed attorney Christopher B. Kende, a member of law firm Cozen O'Connor who advises insurers and reinsurers on TRIA. "It's a national security issue; it's a critical issue for commerce in general to have that backstop of a statutory scheme," he said.

Kende rejects the assertion by TRIA's critics that its demise would make people more conscientious about taking security measures to prevent terrorist attacks. "You could reasonably argue that where you do have preventative situations--pollution, for example, or some other kind of toxic tort--that if you have quality control, you might be able to reduce the risk," he said. "But I think the terrorism situation is so unpredictable and so impossible to control and prevent, that that argument is fundamentally flawed in this type of situation."

In January, the Congressional Budget Office said that TRIA had served its purpose of expanding terrorism coverage and that its expiration might actually be good tar the economy. Kende disputes that, saying nonrenewal is bound to hurt the insurance, banking and real estate industries, and therefore, the overall economy. "Either people will just forego terrorism cover and, if there is another event, there will be bankruptcies and terrible losses," he said. "Or, if they do get the cover in the private market, the premiums are going to be so expensive that the cost will be passed on to the consumer, making everything more expensive." Either way, consumers will pay, but they will pay less as taxpayers funding a federal backstop, Kende said.

The Senate Banking Committee was to hold a hearing on TRIA's fate on March 3 but that meeting was postponed.

Compensation Concerns

As for the much-publicized topic of contingent compensation agreements, the RIMS conference will offer risk managers a two-part session to review the types and amounts of contingency Ices involved in placement service agreements and to examine legal and ethical issues in evaluating broker services. Each state is seeking to install regulations to mandate transparency in broker compensation practices.

Contingent commissions are tees paid by an insurance company to a broker based on a share of the profits it earns on the clients the broker places with that carrier. Placement fees are paid when a broker places a specific volume of insurance with a particular insurance company or agrees that it will place insurance with only a limited number of carriers.

Contingency fees involved in placement service agreements erupted into a major issue in October 2004, with New York state Attorney General Eliot Spitzer's lawsuit against the world's largest broker, Marsh & McLennan Cos. Spitzer accused Marsh of bid-rigging and other fraudulent acts. The case was settled in February 2005, as Marsh established an $850 million restitution fired. California and Connecticut officials have instigated similar investigations. So far, 10 insurance industry employees--three of them from Marsh--have pleaded guilty in connection with Spitzer's investigation.

Earlier this year, brokers Willis Group Holdings Ltd., Arthur J. Gallagher & Co. and Aon Corp. announced that they had given up profit- and volume-based contingent commission income.

In May 2004, RIMS released the results of an Advisen Ltd. survey of commercial insurance buyers showing that more than two-thirds of the respondents believed commission arrangements between insurance brokers and insurance carriers were a conflict of interest and only 20% were satisfied with disclosures at that time.

After forming a special task force to look into the matter, RIMS issued a position statement in August 2004, declaring that all broker compensation arrangements should be disclosed prior to the placement of business and annually by line of coverage. Groups such as the National Association of Insurance Commissioners and the National Conference of Insurance Legislators also have sought to address broker-compensation issues.

But these issues still worry Paul Stasz, vice president, risk management for Edison Schools Inc., New York. "My concerns for the next several years are that contingency fees will continue to be paid and that they will be used by a shrinking pool of brokers and insurers," he said in an e-mail. "Despite the recent disclosure of widespread 'kickbacks' among brokers and insurers, and efforts to eliminate the practice, it will likely continue, although in more subtle and insidious ways."

The industry prides itself on open competition, fidelity and honesty. Therefore, there is compelling rationale for continued litigation to drive out anti-competitive activities, Stasz said.

"With the consolidation of the brokerage business into several mega-brokers, and combined with a shrinking pool of insurers, the situation is ripe for us buyers to pay these unwarranted costs, because we will have lost any effective economic control of the markets and access to them," he said.

Agent J. David Ferris, president of PW. Wood & Son, Ithaca, N.Y., teaches a risk management course for the Independent Insurance Agents & Brokers of New York Inc. and works as a risk management consultant. In his view, broker fees and contingency commissions have become very distracting for the industry.

"Certainly what these people did was wrong, but there are better ways of handling it," Ferris said. "It's been blown out of proportion. There are thousands of people in this business who are very honorable."

Friends who are risk managers have told him of their concern about these developments, Ferris said. "They've told me that it has definitely damaged their relationships with brokers and it's created an atmosphere of distrust," he said.

Key Points

* The expiring Terrorism Risk Insurance Act and the scrutiny of broker contingent commissions are two topics likely to dominate the 2005 Risk and Insurance Management Society conference April 17-21 in Philadelphia.

* Risk managers are concerned that failure to extend TRIA could prove devastating to property insurers in the event of another major terrorist attack.

* Some think that the much publicized investigations into broker fees and contingency commissions have become very distracting for the industry.

A Variety of Views

The issues that absorb the 8,900 risk management professionals represented by the Risk and Insurance Management Society can be very specific, depending upon the businesses they work for and the way their jobs are structured. Some risk managers are full time; others combine that role with another corporate function, such as treasurer, said Nancy Chambers, RIMS president.

"We represent such varying groups of risk managers," she said. "They require a wide variety of information and have a wide variety of needs."

Besides the fate of the Terrorism Risk Insurance Act and the controversy over broker contingent commissions, here's a sampling of some of the other issues that are preoccupying some RIMS members these days:

* Andy Kuchar, risk manager for iStar Financial, Alpharetta, Ga., said in an e-mail that he is concerned about whether the personal payment provisions of the recent Enron and WorldCom settlements are isolated incidents or the beginning of a trend in directors and officers litigation. "While D&O insurance prices seem to have moderated in 2004, personal payments by outside directors add a different dynamic to the claims process and greater overall uncertainty," he said. "I think it's likely that uncertainty will cause D&O prices to restart their upward climb again."

* K.C Kidder, corporate risk manager at Wells Fargo & Co., expressed concern about market integrity as softening has occurred rapidly, with little time for insurers to experience sustained profitability. "As a result of that, we could see significant spikes again," she said. "While I understand there are peaks and valleys in just about everything, this occurs significantly more so in our industry. When insurers rely too heavily on investment income rather than underwriting profitability, profits can't be sustained. When the rates start to drop, there are big losses and rates spike back up. It just seems far more dramatic than it needs to be." When the market spikes, it makes it more difficult for corporate insurance purchasers like Kidder to provide their organizations with steady, stable periodic charges to income, she said.

* Greg Dodd, risk manager for Perot Systems Corp., Piano, Texas, said he isn't worried about the financial health of the property/casualty industry or that it will be unable to meet the obligations it has to him or other policyholders. But he is concerned that the industry is failing to take steps that he, as a risk manager, would like it to pursue regarding growth, increased productivity and enhanced service.

"They always talk about wanting to have stable long-term relationships with clients and to minimize fluctuations in market cycles," Dodd said. "But I don't see that they're doing anything to tangibly change the forces that cause those market cycles or make any type of changes in the formal relationships with their customers." For example, insurers for years now have been willing to issue only 12-month policies in almost every case. "If you're only willing to formalize a relationship with a client for no more than 12 months, you're intrinsically willing to make only short term relationships," he said.

Dodd said he's never advocated that underwriters be involved in multiyear fixed-rate nonauditable insurance policies because it's not smart underwriting. "But to say, 'No, we're going to do this 12 months and not try to formalize anything and turn it into a longer term relationship' is at odds with what they say they want to do," he said.

He's also troubled that the insurance industry is not putting enough emphasis on recruiting young people. "They don't seem to be pulling in good people and giving them the incentives and the training to keep them at the learning and training levels. That's the future of the industry, really," Dodd said.

Going Global

The RIMS 2005 Conference and Exhibition beginning April 17 in Philadelphia will feature sessions in Japanese and Spanish sponsored by RIMS chapters from Japan and Mexico.

Risk managers attending the Spanish sessions will be able to hear industry experts from Latin America discuss the political, financial and operational risks of doing new business in Latin America's emerging insurance market. They'll also learn what risk management is like for a Latin American company operating in the United States.

At the Japanese sessions, industry experts from Japan will comment on the risk management programs that have been implemented in that country.

These are just two examples of how RIMS is expanding its reach around the globe, gaining more members and chapters, as well as more resources, said Nancy Chambers, RIMS president and risk manager of the Waterloo Region Municipalities Insurance Pool based in Ontario, Canada.

In that vein, Chambers pointed to other recent accomplishments by the organization:

* Lobbying initiatives have resulted in the passage of laws and regulations on state and national levels. One example: RIMS has joined other industry organizations in pushing for class action reform. On Feb. 18, President Bush signed the Class Action Fairness Act, the first of several major tort-reform measures introduced in the 109th Congress. The law would move virtually all multistate class actions from state courts to the U.S. District Court system.

* An all-time high participation in The RIMS Benchmark Survey, powered by Advisen. The survey gives risk managers, brokers and underwriters an interactive window into the state of the commercial insurance world.

* A partnership with Mercer Consulting to produce the 2004 RIMS/Mercer Risk Management Compensation Survey. This online questionnaire focuses on pay levels for 12 risk management jobs in various industries and helps risk managers find out how their own and their team's compensation stacks up in comparison.