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Expense reduction tops list.

This year expense reduction, more than any other issue, will be on the lips of insurance professionals. Companies are doing everything possible to trim expenses and reduce overhead. This includes service providers, such as insurance companies and brokers, as well as the companies that employ risk managers.

The ramifications of expense reductions, however, are not all positive. If the risk management function within a company is not positioned correctly with senior management, pressure for staff cutbacks and premium reductions-instead of effective risk management-will result. The same is true for service providers. Expenses may be reduced to the same level as in the last soft market, which resulted in a lack of service by insurers and brokers.

Another topic which will continue to receive attention is the solvency of large stock insurance companies. The financial health of these companies has been exacerbated by risky investment decisions, inadequate reserves and changes which force the companies to pay claims they never anticipated.

The need for expense reductions and concerns about insolvencies stem from a negative economy. This national state of paralysis has and will continue to influence the industry and overall business climate. We have already witnessed the devaluation of real estate and common stocks. This directly affects the capacity and surplus of insurers; however, with interest rates higher, the impact is partially offset.

Probably more important are the changes in Eastern European and worldwide demand for capital. Will the capital requirements draw on available investment funds from the insurance industry, thus resulting in a capacity crunch? This could happen. It is connected to complex economic forces, including the U.S. savings and loan mess and the possibility of a recession.

With "EC 1992" approaching, another volcano is waiting to erupt in the Persian Gulf. We have already seen some of its effects on the insurance industry in the form of increased marine, political and war risk rates for shipments in this zone. Furthermore, coverage is not available for embargo states such as Iraq. If war breaks out, coverage availability will decline and rates will increase or writings will cease.

But unlike the Persian Gulf crisis, 1992 provides incentive to try new ideas, especially in the area of risk management services provided to medium- to large-sized organizations. Specifically, the European Community wants to move away from monitoring detailed issues like forms structure for the companies providing insurance services to large organizations. The EC merely wants to be assured that an insurance company has the financial strength to pay its losses. Consequently, flexibility will be emphasized in the development and distribution of insurance products and services to European-headquartered companies.

The EC is pushing for similar concessions in the United States. This issue was discussed at the General Agreement on Tariffs and Trade talks last month. If implemented, it would have broken down the current 50 systems of state regulations. Because of the tremendous pressure on American banks to compete in Europe, they tried but were unsuccessful in persuading the government to establish, at least, the large risk rules. If they had been adopted, the insurance industry would have been freed from the complicated and restrictive regulatory initiatives that are mostly designed for personal lines, but apply to all categories of admitted insurance in the United States.

Lloyd's is not ignoring 1992 either. Currently, London is attempting to update its business methods to 21st century standards. They are reaching out to Continental Europe by dropping the configurations which prohibited many syndicates from writing certain categories of business.

Initially, these changes will prolong the competitiveness of the marketplace and will create considerable amounts of innocent capacity. Unfortunately, the short-term buyers who are not managing risk but buying insurance will benefit. It does not bode well for the future profitability of the insurance industry, especially for companies that focus on large, more complicated multinational organizations.

Concern is also being raised as more and more American companies are being purchased by European companies. Specifically, in the insurance industry people are questioning what will happen with increased foreign ownership of American insurance companies. In the short term, these acquisitions should add new life and capacity to the American marketplace and extend the soft market. But when the market turns around, the American companies may lose ground to the newly acquired foreign subsidiaries if they do not become more focused on specific market segments. Too many domestically owned insurers try to do all things for all market segments.

American companies need to design more innovative, flexible methods and cast away the existing "take-it-or-leave-it" attitude with customers. If they do, they have the opportunity to facilitate change and become major competitors in the worldwide marketplace.

Most American insurance consumers, on the other hand, care more about the rates an insurer charges than whether or not it is a global organization. The turmoil created by state regulation of automobile insurance has heightened the likelihood that Congress will pass legislation affecting the insurance industry. When people have had enough, they will turn to the federal government to take over the responsibility.

But the most important development in federal regulation is the change recommended by the EC to separate personal from commercial lines. Rules such as those prescribed in California's Proposition 101 are immaterial to the services provided to companies managed by risk managers. The same is true of the proposals by New Jersey Gov. James Florio and others.

As evidenced in personal and liability coverages, our society has become increasingly resistant to accepting risk. Consumer groups and others continue to demand products and services that are close to risk free and fail proof. Increasingly, people are demanding financial compensation when injured by products, even when improper use has been proven. In other words, the concept of responsibility has changed for the individual and the organization as society redefines the meaning of risk.

Finally, the meaning of risk has been broadened by the use of the term by banking, environmental risk management and other industries. Because of this, the term "risk" no longer corresponds to its definition in risk management textbooks. To clarify its meaning, new definitions, most likely industry-specific, will have to be developed.

With these societal changes domestically and internationally, there are opportunities for new products and services. There will be additional coverages and broader insurance contracts whenever adequate premium can be generated to transfer the risk. Also apparent is the need for longer-term contracts and less quoting of insurance, coupled with the decline of brokering and an increased focus on services. In short, if you do not add value, you simply will no longer exist.

The real need is for a greater focus on risk assessment and for insurance providers to supply risk managers with better information to more effectively manage risk. During the last decade considerable attention was given to risk financing. The globalization of risk and the complications of operating worldwide will return the focus to managing and assessing risk, including environmental hazards.

The concept of "think global/act local" will lead to more centralized management of risk control and transfer for multinational organizations. Because of this, more risk managers will be using captive insurers, company-owned captive brokers and global insurance programs. It seems as though the common thread running through these issues is change. The industry is changing its ways to be more efficient, effective and focused on customers' needs.

But there are also destructive forces at work in the industry. The industry still cannot stand prosperity and relies on pricing policies that do not assure an adequate return on investment and capital used. It is predicted that these forces will continue, and could even worsen in the short term. This will certainly strangle the industry's capacity and reduce its effectiveness in meeting the needs of risk managers.

However, producers and risk managers can work together to transform a cyclical, unpredictable and self-destructive system, which generates inadequate returns on investments and questionable service, into one that works well for all parties involved.
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Title Annotation:91: Where Are We Headed?; insurance companies and reinsurance
Author:Kaiser, Tom
Publication:Risk Management
Date:Jan 1, 1991
Previous Article:Players must band together.
Next Article:Injury prevention vs. patient communications.

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