Hardening Market Forces Risk-Transfer Reassessment

New York

Risk managers in this hard market must get back to basics and make up their minds about whether they are a short or long-term buyer of insurance for particular exposures, one leading carrier here warned.

Kurt Falk, key account manager for oil and petrochemical exposures at Swiss Re New Markets Corp. in New York, made his comments in a recent talk at the monthly seminar sponsored by the Risk and Insurance Management Society's New York Chapter.

History, he said, has shown that the hard insurance market trend will reverse itself. "In the long-term view, prices will average out," Mr. Falk said.

However, for the short-term, risk managers should "look at their overall risk landscape and assess which risks are insurable and which are non-insurable," he explained.

The insurable risks, he said, should be analyzed to decide how much to retain, how much to transfer, and how much to finance.

Regarding those exposures deemed to be non-insurable, he said, "you can see if some of the alternative solutions in the market would help in managing those risks."

He explained that alternative solutions include contingent capital, finite-risk facilities, credit solutions and catastrophe bonds.

Mr. Falk said risk managers and treasurers are working more and more closely together and have similar goals because whether risk is traditional or financial, "its all risk."

"They are basically talking about the same thing: How do I manage the risk for my company? Do I transfer it, do I finance it or retain it?" he said.

The chief financial officer or treasurer, he explained, looks at hedging and credit lines to manage their risks, while the risk manager looks at transferring or retaining more tangible exposures. "But if you throw it all into a basket, in the end it comes to the same thing: How is our company exposed to these risks that we have identified?" he said.

As to how long the current hard market will last, he said, capital coming into the insurance industry could influence a shortening of the cycle, depending on how much new money is raised.

"Weve seen $15 billion-to-$20 billion" in new capital enter the industry to replace at least some of the capacity lost in the Sept. 11 terrorist attacks, he explained. "But we believe that is still only a percentage of the capital that was destroyed in the previous years. So we will have to see what the influence of this new capital will be," he said.

He continued that "if there is more capital to come, we can envision a shortening of the cycle."

A pessimist among insurers, he said, would argue that "the [current] cycle started in 1996, for the soft part, and its now towards the end [of a complete five-to-seven year cycle]. We only have one year left to recover" before prices fall.

An optimist, on the other hand, would say that, "its only the start of a new cycle, so we still have some time to recover ground" lost in the last soft market, Mr. Falk said.

He added that the hard market "really got going in 2001. So if 2001 was the first year of the hard cycle, we are now in the second year, which gives us a bit more time."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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