Cycles. (End Analysis)

Article excerpt

While it must be remembered that risk managers represent approximately 15 percent of the consumers of the insurance product in North America, they have a disproportionate influence, by virtue of the dollars they control, on how decisions in the insurance industry are made. It is these risk managers that pressure underwriters to price their product below cost. In doing so, risk managers recognize that, if actuaries are correct in their calculations, the insurance company will ultimately make some money on investments. One must applaud risk managers for being very tough consumers, but also recognize that, in making such demands on insurers, risk managers are doing what is in the best interest of their employers--if only in the short term. Regardless, their demands have far-reaching impact on not only the commercial insurance segment of the business but the entire industry.

The risk managers' and their broker partners' success in requiring underwriter consideration of investment returns in risk pricing also leads, in some cases, to the downfall of insurers. Ultimately, the impact of loss of underwriting integrity, an unprofitable book of business, and poor financial results have translated over the longer term to unindemnified losses, retention of unanticipated risks by corporations, highly volatile expense fluctuations, and a lack of consistency in risk management programs. Conclusion: As a result, the cyclical nature of the insurance industry is exacerbated, the cycles become deeper and more pronounced, the volatility of pricing corrections becomes greater, risk managers' jobs are less secure, and the broker's risk of client loss is more probable.

Some might find it odd that expense control and reduction, the very factors perceived to be the prime flat of the risk manager and leading to the largest bonus in the short run, can lead to job termination at the opposite end of the cycle. In reality, this is nothing more than the age-old shortsightedness of sacrificing long-term results for short-term gain. This is always a difficult balancing act.

Should one blame the risk manager for attempting to get the best deal? Should one blame the insurance company for being competitive and trying to retain its book of business, or from considering investment income when setting price guidelines? …


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