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Hard market horizon debated by RIMS in Florida.

Hard Market Horizon Debated by RIMS in Florida

Avoiding hard market cycles that could be on the horizon in the next decade was just one topic debated at the RIMS Florida 14th Annual Joint Conference in Naples, FL.

According to W. Michael McDonald, group director of corporate risk management for Ryder Systems, Inc., "Everyone should act responsibly to reduce further market cycles--or others will do it for us. I don't want Ralph Nader to determine what my underwriter will charge me. I also don't want to have to vote for it, or have state legislators or attorneys general dictate to me."

However, according to Jeffrey Greenberg, president of National Union Fire Insurance Company of Pittsburgh, PA, the violent and unpredictable change that everyone finds so upsetting about insurance cycles actually stimulates competition. "We've always had insurance cycles," he said. "First of all, it's really hard to define what a stable market really is. To some degree, cycles are healthy."

Mr. Greenberg added that a major contributory element to the existence of cycles is the lack of professionalism in underwriting. Such mechanisms as state guarantee funds, he said, have prolonged aspects of cycles. "They are a bailout and serve to subsidize incompetent underwriting."

Cheri Hawkins, first vice president of RIMS, said the lack of culpability among underwriters is a serious issue. "Brokers use to go to underwriters to negotiate on form and policy," she said. "Then the risk manager would be brought in for his expertise. Now, you have the broker and risk manager on one side of the table, and the underwriter on the other side next to an empty chair reserved for someone from the legal department." Ms. Hawkins maintained that underwriters have, in fact, been undercut in recent years by legal staffs. As an example, she referred to the "don't blame me, talk to our legal department" pass-the-buck attitude that often seems to prevail.

Mr. Greenberg sees a wholesale myopia about insurance accounting systems as another factor that contributes to the cycle syndrome. "It occurs inside the industry among buyers and brokers and outside the industry among critics and observers. It's pervasive," he said. "Many owners of insurance companies aren't really in the insurance business themselves. They just see a good investment and their companies as `cash cows.'"

According to Mr. Greenberg, quality of a company's earnings and not just their size should be reviewed. "That will give a better sense of whether management is keeping pace with innovation or just maintaining the streak," he explained.

"If you focus principally on price, then you are playing the cycle," Mr. Greenberg said. To rise above and not be caught in it's vortex, Mr. Greenberg advocates a thorough knowledge of the track record of company executives and managers. "You should also assess your underwriters, find out what the company strength is, its commitment in certain lines and its consistency," he said. He added that future problems should be the focus when dealing with a hard market.

Other ways to ride out a hard market cycle were offered by James A. McCormick, president and chief operating officer of Alexander & Alexander. He included:

* Looking at the market's current financial leverage. Are the loss reserves adequate?

* Determining if you need alternative insurance mechanisms and if they are viable.

* Establishing careful plans for alternatives if you decide to go with them.

* Keeping senior management well-informed on how the insurance marketplace works.

* Evaluating your property/loss control programs.

* Rating your broker's capabilities as per your own needs.

The 1990s and Beyond

As far as what the next decade holds, Mr. McCormick predicted that alternative funding vehicles are here to stay. "We've projected that one-third of $250 billion of expenditures will go to alternative insurance," he said. "Some of that may return to the commercial market, but much will remain in the alternative market."

In addition, Mr. McCormick said that along with death and taxes, expanded environmental liability will certainly be an issue in the 1990s. "Cleanup costs are projected at $700 billion with over 30,000 sites that need to be addressed," he said.

Two more issues that will certainly emerge are the collectability of reinsurance recoverables and the phenomena of globalization. "Globalization is much more than just learning a new language and exposure to a new culture," Mr. McCormick said. "The key is to think in ways that take into consideration international differences and methods to get around them. Risk managers must be highly informed and flexible in getting coverage for exposures, and that means they may have to bend on price."
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Title Annotation:Risk and Insurance Management Society
Author:Johnson, Tom
Publication:Risk Management
Date:Sep 1, 1989
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