Magazine article Risk Management

Even Experts Make Mistakes

Magazine article Risk Management

Even Experts Make Mistakes

Article excerpt

Only in recent years have risk

managers come to feel at ease when talking to insurers and brokers about risk assessment, which is not surprising because insurers are supposed to be the experts in this area.

That is why one of their representatives recently described past efforts of risk managers to practice open market insurance through captives as the exercise of "innocent capacity." The captives weren't "real" insurers and could not know about risk assessment. They inevitably suffered severe losses from open market trading.

Much has happened since those not-so-distant times to dispel any illusions about the "exclusive" expertise of the professional insurance market. Perhaps nothing in the United Kingdom has so effectively cleared away these perceptions as the recent insights given to insurance buyers about the underwriting methods of a major British insurance company and of a famous Lloyd's underwriter.

First, Royal Insurance Group, which had a healthy solvency margin a few years ago, now has a reduced solvency margin of only 34 percent. The company's pretax loss by the end of the third quarter was about (British lb)2l4 million, compared to roughly E91 million in the same period during the previous year. The net loss was about E256 million, compared to roughly F86 million in the previous year. Anybody can have losses, but these are pretty bad-and what's worse is how they occurred.

Royal, as a professional insurer and an accredited risk assessment expert, is currently losing a disproportionate amount from the mortgage guarantee business. But property values in the United Kingdom have been falling steadily for years; this has been coupled with high interest rates, rising unemployment figures and curtailed wage increases for those who are still working. But Royal's risk assessment experts-its underwriters did not seem to notice any connection between these economic factors and the mortgage guarantee underwriting risks they were taking on; they cornered a 20 percent market share at rates which, now that claims are rising at an alarming rate, are suddenly being increased to 55 percent. Needless to say, new business is getting a sour response, tighter underwriting agreements are being sought and improved claims handling methods are being introduced. Professional "innocent capacity" is learning sophistication the hard way! …

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