Green, Paula L., Global Finance
In the wake of the near-collapse of AIG, many companies are taking a much closer look at the health of their own insurers.
Corporate risk officers are asking more questions, checking more documents, diversifying their book of insurers and even retaining more risk to avoid the specter of placing their liabilities with an insurer that goes belly up in today's precarious economic climate. And while the commercial insurance operations of no major property /casualty insurer has gone under or dipped into the financial rescue program run by the US government, risk managers are scrutinizing the finances of insurance carriers around the globe.
"Risk managers are absolutely worried," says Wayne Salen, director of risk management at Labor Finders International in Palm Beach, Florida. With more than three decades of experience in risk management, Salen says the financial woes at AIG's financial products unit have created uncertainty for risk managers even though its commerciai insurance unit remains solvent. "There 's a concern that there could be another festering sore out there that could impact a component [of an insurer] we haven't looked at. AIG's insurance unit is still solid, but that doesn't mean the holding company couldn't drag everything down " he says. For that reason, Salen examines the financiáis of the operating units of any carrier he uses or considers using and does not rely solely on the ratings issued by rating agencies for a carrier's holding company.
Lance Ewing, vice president, risk management, at Harrah's Entertainment in Las Vegas, Nevada, says risk officers should look beyond the financial ratings assigned to an insurer and pore over its entire book of business. That means looking at the industries an insurer is underwriting, its geographic areas of coverage and the market share it holds in a particular line of business. "You have to be asking the right questions," adds Ewing. "And these are all salient questions."
Gordon Adams, senior vice president and director, risk management, at privately held housing construction company SunCal Companies, says that one way he finds protection is by buying coverage from an insurer that is larger in size than SunCal. In addition to monitoring the reports put out by the major rating agencies, he and other risk officers are intensifying their review of news stories and the numerous reports issued by regulators, independent analysts and the major brokers.
Insurance broker Marsh, for example, has a market information group that closely follows the financial condition of insurers. It issues continual updates, including email alerts, on developments affecting carriers, and its start" talks regularly with clients by telephone. Group members were part of so-called town hai] meetings held around the world with corporate clients and insurers after the financial crisis deepened last fall. "They've gone from being back-room folks to front and center stage. ..rock stars right now." says Howard Whitmore, a managing director and global leader of the multinational practice at Marsh in New York City.
In response, insurers have intensified their own communications activities and are even sending their top financial officers out on the road to soothe their clients' anxieties. FM Global, for example, has upped the number of presentations it makes to risk officers. "Normally we make five to 10 presentations over a 12-month period. Now we're doing double that in half the time," says William Mekrut, vice president and treasurer at the Johnston, Rhode Island, global property insurer, which does business in about 130 countries. He says risk managers want to know about the insurer's investments, the adequacy of its reserves, the strength of its cash position and ability to raise cash, the strength of its reinsurance program, and its debt on the books. "They want to know about not just the abundance of debt, but the terms and conditions of paying it down. …