Magazine article Risk Management

Funding Difficult Risks

Magazine article Risk Management

Funding Difficult Risks

Article excerpt

You must take the position that there is an uninsured loss somewhere in your company, said Roy T. Johnson, senior vice president of Johnson & Higgins of Pennsylvania Inc. "This creates the mindset to seek out a potential surprise."

According to Mr. Johnson, uninsured exposures develop through societal change. "Global changes are bound to cause added exposures to risks in the 1990s," he said. These risks, he said, stem from pollution, substance abuse, AIDS, political restructuring, financial stability of the insurance industry and tort reform.

Carl B. Seaholm, corporate risk manager for J.C. Penney Co. Inc., differentiates between intentional and unintentional uninsurable risks. Companies often assume intentionally uninsurable risks because the frequency and/or severity of their losses are usually within their ability to absorb. In other cases, the cost of losses can be charged to the facilities that incurred them or reporting losses would necessitate exposing confidential information. With the exception of catastrophic losses, he explained, "swapping dollars" with an insurance company will ultimately result in more cost than self-insuring. According to Mr. Seaholm, to plan for these intentionally uninsurable losses, the risk manager must conduct a policy review to ascertain what is and what is not covered, keep current with policy language, new markets and underwriting philosophies, address identified exposures as to whether the risk is acceptable and develop a self-insurance plan.

Unintentionally uninsured risks stem from pollution, nuclear accidents, errors and omissions, risk manager ignorance, unclear or inconsistent policy language, missing layers in coverage, deficient loss prevention and insurance company insolvency, according to Mr. Seaholm. To plan for these losses, he said, risk managers must develop a loss response manual that includes loss reporting procedures, alternate sites for conducting the impinged activity, personnel responsibilities, guidelines for reducing operations to salvage some production and instructions for reviewing contracts.

Once losses have been minimized, the risk manager must devise a recovery plan, said Mr. Seaholm. Ask yourself, he suggested, if the loss can be absorbed out of current earnings or if a special loss fund, loan agreement or line of credit is needed. Should assets or subsidiaries be sold? Should post-loss insurance be purchased? Should the company consider structured settlements? In addition, he said, recommend to management changes in or cessation of "troublesome" operations based on pre-loss planning observations and/or post-loss experience. "This is not a popular position to take with senior management," he said, "but if your recommendations are constructive, it can help the bottom line."

Uninsurable losses often arise from managing an overseas property/casualty insurance program, according to Edward M. Fitzgerald, foreign manager for the corporate insurance operation for General Electric Co. "You shouldn't approach the handling of international property and casualty insurance coverages with a U.S. risk analysis cookbook mentality," he said. "There are definite differences, which reflect the multiplicity of economic, cultural and legal systems found around the world. …

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