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Opportunities lie ahead.

As we enter 1991, uncertainty has heightened our fears and tensions.

The outlook for the national and global economies and the prospects for world peace remain dim. The risks we face continue to grow.

For risk managers and their companies, the threats lurk everywhere. In an attempt to relieve some of their fears and tensions, Risk Management recently asked three industry experts -a risk manager, the president of an insurance brokerage and a senior executive of an insurance company to make some predictions about the period ahead.

Good risk management requires identifying emerging trends early enough to skirt potential hazards. What will be the opportunities for risk managers in the 1990s?

One opportunity for 1991 is workers' compensation, currently the second largest cost to most businesses after wages. Compensation-related medical costs, now accounting for 40 percent of the total program, have been increasing faster than general medical costs. In many states, costs have further increased because insurance buyers have to subsidize the adverse loss experience of state assigned-risk pools. Now that state regulations disallowing high retentions are giving way, retrospective rating and dividend plans can be used to complement current cost-saving techniques.

This new option for funding workers' compensation reflects an important trend toward self-insurance in many industry lines. Self-insurance in its various forms has become an attractive option for many buyers, even in a soft insurance market. And as a major force in the marketplace, it has helped reshape the risk management discipline.

In recent years risk management has changed in several ways. On the one hand, the development of new technologies, professions and markets has created new sources of risk. At the same time the development of risk management as a concept has permitted pricing and terms. Once fully under way, "EC 1992" could bring many interesting changes to international Continued on page 32 programs, such as: continued corporate consolidation, which will create larger entities capable of assuming higher retentions;

* growth of global policies to serve major multinationals. Today's forerunners are panEuropean policies like Sun Alliance's Eurosure, being marketed by four Lloyd's brokers, Zurich's Europolicy and Winterthur's Eurowin;

* growth in captive formation in Dublin, Luxembourg and other havens. Of the 3,000 captives worldwide, Sweden is the leader in Europe, with some 100 captives, while captives are just beginning to take hold in the United Kingdom and France;

* stronger in-house loss control programs;

* enhanced communications technology permitting direct and immediate contact between buyers and brokers;

* an expanded role for the private sector in complementing state-run social welfare programs (ranging from pensions to medical coverage to workers' compensation); and

* increased sales of group policies through the workplace.

Deeper penetration of the U.S. market by European and other foreign insurers will also be to the buyer's advantage. For example, Germany's Allianz already owns a U.S. insurance company in California licensed to operate in all 50 states. Now its merger with Fireman's Fund gives it a major presence in the U.S. market, which should translate into stiffer competition for U.S. corporations to manage all kinds of risks better. New resources available to corporate risk managers include a growing array of alternative risk funding mechanisms; techniques to structure the costs of premiums, financial losses and legal settlements; and multiline coverages that wrap around both insurance policies and self-insurance programs, aggregating costs and claims.

To help buyers take advantage of these options, brokers have become more than insurance salespeople: They have also become risk management consultants, loss control experts, captive managers and claims specialists. At the same time insureds and insurers are also adapting to a fast-changing business climate.

The current transformation at Lloyd's, the world's oldest insurance market, mirrors this change and augurs well for insurance buyers. As the walls between marine and non-marine syndicates come down, capacity is shifting to where there is greater demand. In other modernizing moves, Looyd's is computerizing its broker-producer networks and, in recognition of the emerging global insurance market, it will pursue new business in the United States and Continental Europe. Lloyd's will also make a foray into personal lines such as auto and life insurance.

Change in the European market should bring further advantages to buyers. At this point the impact of free trade in insurance services has barely been felt in the EC. But as newly admitted or expanding international insurers compete for market share with local providers, buyers can look forward to generally better insurers on their home turf and, of course, more options for corporate risk managers.

By contrast, many U.S. insurers do not seem to be in a hurry to set up shop abroad. In the East European countries, more than 4,000 EastWest joint business ventures have been started. But less than 400 involve U.S. partners, and with a few exceptions, U.S. underwriters have also kept their distance. Instead, they seem more interested in their domestic market share, which may be a short-sighted view in a marketplace that is globalizing rapidly.

Concern about entering unfamiliar foreign markets may partly explain U.S. insurers' reluctance to expand abroad. But to those insurers who have been slow to position themselves in Europe, I would advise: "You can't beat 'em without joinin' 'em, so join 'em."

Recent developments are clearly giving risk managers more options, but challenges to effective risk management remain. One such challenge is the evolution of the U.S. tort system. The proliferation of long-tail risks, especially relating to environmental, AIDS and product liability exposures, continues to justify concern. Many of these exposures are uninsurable under the current legal system.

Too often, U.S. courts have been used to pick the "deep pockets" of U.S. manufacturing and service industries without regard for fairness, and without making any real progress in achieving mandatory social ends, such as a clean environment. And as Europe considers adopting the tort doctrines of strict joint and several liability in its pollution directive, companies operating in Europe can legitimately worry about the added costs this would entail.

There is reason for hope, however. Although such liability has existed in Europe for products since 1985, no significant increase in lawsuits or awards can be traced to the product liability directives. The relatively modest increase in suits seems to reflect the wider availability of product liability policies rather than the largess of European courts. Indeed, European courts tend to apply these tort principles very narrowly and with great care.

In addition, several components of the American legal system are absent or relatively minor in Europe. In the EC there are no punitive damages or contingency fees (although both of these are now being talked about in the United Kingdom); no jury awards except in Ireland; and no retroactive liability.

Recently, German insurers have been able to pay AIDS claims involving contaminated plasma manufactured by the U.S. subsidiaries of German firms. This was accomplished without going past the primary layers. And French firms, subject to unlimited liability when testing new drugs, can still get policies to cover their exposures. Thus, it would seem uninsurable U.S. risks are not inherently uninsurable.

In Congress, some effort to inject federal oversight into the regulation of insurer solvency will be made in 1991-which may be a constructive step if done correctly. Unfortunately, solvency regulation, while important, is not enough. Certainly, the industry needs to be rid of its few crooks and incompetents, but just as importantly, it must be allowed to carry out the valuable social function it was designed to perform: to insure.

On a final note, there has been a good deal of interest in the economic impact of the Persian Gulf crisis. One lesson to be learned from recent events is that developments in the insurance arena are not easy to foresee. While logic suggests that the war risk and marine markets should tighten as a result of the tensions, as of this writing, the opposite is true: Insurance is available and premium costs have actually dropped. But the dislocations caused by an outbreak of war would almost certainly dwarf insurance issues.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:91: Where Are We Headed?; risk management
Author:Olsen, David A.
Publication:Risk Management
Date:Jan 1, 1991
Words:1342
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