Renewal strategies in a changed insurance world: Four risk managers from diverse industries talk about the state of the insurance market and their strategies during the current renewal process

Renewal strategies in a changed insurance world: Four risk managers from diverse industries talk about the state of the insurance market and their strategies during the current renewal process – Cover Story

In interviews with four risk managers from diverse industries, the picture that emerged is one of flexibility, creativity, and patience. And, of a lot of negotiating.

While insurers are reevaluating the costs of covering risks, companies are also reassessing how they define their risks.

At USAA, the tragic events of September 11 turned the risk management team’s thoughts toward redefining catastrophe to include terrorist attacks in addition to the more common property and casualty risks faced by a diversified financial services company. They also had to decide how to deal with risks that were once barely contemplated as possible, let along probable.

“You make decisions based on what’s relevant and what’s not,” reports Chris Mandel, vice president of enterprise risk management for USAA, an insurance and financial services association for military personnel based in San Antonio, Texas. “After 9/11, what I thought was unthinkable is now possible and relevant to risk decision-making.”

For example, the hijacking paradigm accepted by most people, underwriters included, has been changed forever, he says. “It used to be that planes were hijacked for a purpose–ransom, release of prisoners. Before, nobody was crashing planes into buildings. There was nothing of this magnitude,” says Mandel, who also is first vice president of the Risk and Insurance Management Society (RIMS) in New York.

Preparing for the Worst

Although renewals for GES Exposition Service’s insurance programs aren’t up until July 2002, Lance Ewing, senior director of risk management for the Las Vegas-based firm, says his company started talking about the renewals in July 2001.

“We had begun preparing our CFO, CEO, and board members that the marketplace was changing,” he says. “At that time, we said we would see possible increases of 25 percent to 30 percent. Then, September 11 happened, and we had to go back and reassess.”

Ewing says his company has been focusing on hard questions: Do they want to raise their self-insured retention? Do they want to rent a captive? How can they improve their loss control?

“We’re well-prepared for the renewals, because we began the underwriting process a little earlier than we would have ordinarily,” says Ewing, who also is vice president of education at RIMS. “Nobody wants to have their back against the wall. We could still take it out to the market and do fairly well in the marketplace. I would rather keep that mindset.”

“Historically, we’ve always had retentions that made sense based on the market’s price for the risk/premium trade-off consideration,” says Mandel. “We used to have lines of business with relatively low deductibles because they were affordable and financially efficient. We raised the retention to one that was financially efficient for the enterprise, absorbing more risk within reason and buying transfer outside of those bounds.

“I’m not saying that we didn’t make these decisions using sound economics before, but the equation has now changed with the market, especially post 9/11,” he continues. “We now decide what we can and can’t live with. I’ve spent much more time than in the past with our CEO and CFO on reaching a consensus about the risk/premium trade-off and also on blending three siloed programs into one, adding a fourth line. We saw a substantial increase in premium, but we had more coverage and a more efficient program design at the end.”

That approach grew out of USAA’s emerging enterprise risk management (ERM) philosophy. The company is putting together an ERM committee. “We’ll educate managers in thinking about risk in a more disciplined way,” says Mandel. “Our operational and financial risk management processes are well-defined. The opportunity lies in the business risks, reputation risks, litigation risks, and business growth risks such as the risk of not hiring and training the right people. These are all things that we do well, but which need a consistent approach to assessment and measurement. That’s what the ERM process will bring to the table to benefit our members.”

“Our philosophy as a corporation is that we buy lots of insurance when it’s inexpensive and we buy lots when it’s not,” says Randy Thurman, director of risk management for Gaylord Entertainment. The Nashville, Tenn., company runs hospitality and attractions such as the Grand Ole Opry and the Gaylord Opryland Resort & Convention Centers, as well as music, media and entertainment businesses. “We’re happy to take risks. Our program (is about) counterbalancing them.”

Changing Lines

Getting down to the fine details of each line of insurance, the strategies each company used to deal with the proposed increases were very similar: negotiate, increase retention, reduce or eliminate coverage, improve loss control, and look for creative ways to spread the risk over multiple insurers.

At USAA, the company put together a blended program of insurance, including errors and omissions coverage, directors’ and officers’ cover, employment practices liability–a new line for the company–and fiduciary liability, with one overall limit.

“We negotiated,” Mandel says. “It helped to say we were not going to just accept the increases. We took the bull by the horns and presented the strategies to (the top executives). It took a lot more insurers to pull this program together. This one has 12 insurers and before we’d used five. We went in $5-$10-$15 million chunks for $100 million (in coverage). We used any underwriter of quality from the U.S. and Bermuda to get to (that amount). London was a possibility, but we had concerns about Lloyd’s. We now buy (one-third of our) catastrophic loss protection from London, one-third from Bermuda, and one-third from domestic underwriters (to total) $200 million. We’re assembling a program on half a billion.”

At Gaylord Entertainment, their fiduciary liability deductibles ranged from $25,000 to $100,000. “And we still had a 42 percent increase in cost,” reported Thurman.

The terrorist attack hit one area–aviation–especially hard. In October, risk managers around the country received cancellations of their terrorism and war risk coverage in their aviation insurance.

USAA’s program wasn’t due for renewal until March 2002. “We paid 65 percent incremental premium to buy back the liability portion of the exclusion,” said Mandel.

Gaylord Entertainment’s aviation liability program was renewed in January. “If we had accepted it as is, there would have been a 50 percent overall cost increase,” says Thurman. “We reduced liability, bodily injury, and property from $350 million to $150 million to mitigate and we still saw a 13 percent increase.”

For excess workers’ comp, Thurman of Gaylord Entertainment reports his company increased retention from $300,000 to $350,000. “By factoring in that increase, we were able to place coverage with only a 24 percent increase in cost.”

With a casualty renewal of March 1 for workers’ compensation, general and auto liability, USAA expected to see a 30 percent to 50 percent increase in overall premiums. To help mitigate this increase, the company decided, after a feasibility study, to nonsubscribe to the Texas workers’ compensation market–USAA has two-thirds of its workers in San Antonio–and instead provide onthe-job protection under an ERISA program.

“We’re replicating enhanced benefits to employees; they’ll see doctors we have confidence in. There’s a lot of workers’ comp fraud in Texas.”

There have also been rumors that some workers’ compensation underwriters will not write locations with more than 1,000 employees, says Mandel. “I’m thinking that’s everyone in the Fortune 1000. So are you telling me that there’s going to be no workers’ comp market?” But he says he doesn’t believe these rumors.

It’s no surprise that the property insurance market will be especially hard hit by a changed insurance landscape.

Debra Rodgers, director of risk management for Saint-Gobain’s North American operations, based in Valley Forge, Pa., has been watching renewals at other companies, in anticipation of her March and April renewals.

“The property renewals (for other companies) in October and November were very difficult because they were immediately after September 11,” says Rodgers, whose company manufactures glass, high-performance materials, and housing products (such as Certainteed roofing supplies).

“December 31st was difficult because property insurers were renewing their reinsurance treaties and they hadn’t determined how much they would be, so they had a harder time estimating their premiums.”

With a property renewal coming in June, Mandel says he hopes the company’s clean loss history will prevent it from seeing any dramatic increases. But, he’s realistic.

“Even companies with clean records are seeing dramatic premium increases,” he says. “The industry has the wherewithal to argue (for the increases). I don’t believe there’s justification for it. Since they can’t collude on price, a lot are out there charging multiples just because they’ll have (a better chance of getting it now).”

By benchmarking, as they did with D&O and E&O, USAA hopes to get the best deal possible.

Mandel says the company will look at the economic breakpoint between risk and premium. “We’ll have a $250,000 deductible here and a $25,000 deductible elsewhere to get to just north of $1 million in deductibles. We’ll look at what the enterprise can absorb as risk,” he says.

“As we spread the risk net across the enterprise, we’re creating mechanisms for business units to buy their risk down internally. They’ll retain more risk, depending on what works for their culture from a finance and accounting standpoint.”

Thurman, like the others, says he expects to get a one-year renewal, since multiyear renewals are not available anywhere.

Captivated

Some companies are turning to captive insurance companies. But while captives may be attractive, they are not a quick fix. The problem is not just the money initially needed to fund a captive, there is the issue of whether a captive complements a company’s current and past processes.

“The soft market set people up to not track the losses (in their risk-transfer insurance program),” says Ewing. “Many may not be able to jump from being fully insured to a captive program. A rent-a-captive is a toe in the water, but you still need to have your house in order. A smart rent-a-captive manager will not let a company that has had a ton of losses jump into bed with them.”

“There’s been a tremendous surge in the establishment of captives and that’s been true in every domicile,” says Rodgers of Saint-Gobain. Her company decided to create a captive as part of its longer-term strategy.

Relationships

Since all bets are off, some risk managers are calling in their markers with brokers and underwriters to get a more favorable hearing.

“Now is the time that your relationship is really going to test the mettle,” says Ewing. “This fall, I took my broker golfing and I paid because I want to foster that relationship. I sent him Christmas gifts.”

“We also dropped a carrier because the underwriter wouldn’t come out to see how we operate,” he adds. “How can insurers underwrite if they don’t come out to see us?”

“Get personally face-to-face with insurers involved,” agrees Thurman. “Now is the time that you should call in past relationships to differentiate yourself from the pile of other risks.”

Ewing sees a particularly tough road ahead for some risk managers who only had operated in the soft market. “A few risk managers took credit for driving down premiums. Now that premiums are going up, who gets blamed?”

Crystal Ball

Rodgers of Saint-Gobain believes the contract language excluding terrorism and war risk will be around “as long as our memories. But, I think memories will be short and we’ll start to see changes. It will really depend on the amount of repetition of these kinds of horrific events. Hopefully, the situation in the world will calm down and go back to normal.”

There seems to be a light at the end of a hard market tunnel, says Thurman. “The new players in the marketplace make me think this is a short-term, 8 month to 12 month aberration in the marketplace,” he says. “There’ll be a great deal more competition by the second or third quarter of 2003, but we won’t see much change in this calendar year.”

Mandel says he thinks that the market will calm-down in a couple of years, especially since there’s more capital available in Bermuda. “From 2002 to 2003 will be great for insurers,” he said.

Maura C. Ciccarelli can be reached at mccicc@home.com.

COPYRIGHT 2002 Axon Group

COPYRIGHT 2002 Gale Group