Several Trends Influencing Risk Management: Future Success Stories?

By Pelland, Dave | Risk Management, December 1997 | Go to article overview

Several Trends Influencing Risk Management: Future Success Stories?


Pelland, Dave, Risk Management


As trends such as globalization, automation and deregulation change the way corporations operate, emerging exposures and new approaches to financing risk are influencing the way risk managers operate. At the annual MidAtlantic RIMS regional conference, held in Washington, D.C., in late October, several speakers discussed how risk management is evolving and the implications for practitioners.

"Risk management is becoming more important, visible and complex," said John Bugalla, managing director of the casualty practice at Willis Corroon's Advanced Risk Management Services unit. "The future of risk management is becoming increasingly dependent on technology and finance, and the dynamics are changing rapidly."

Mr. Bugalla explained that the financial elements of risk management are expanding in several ways. A larger number of companies are using an integrated approach to risk that attempts to address operating, financial and traditional hazard exposures. In addition, capital market techniques are likely to play a larger role in risk financing.

"Risk reduces the value of a firm to its shareholders," Mr. Bugalla said. "Whether a firm bears risk or transfers it, risk has a cost, and a firm's risk management effort is increasingly being judged by its ability to manage capital efficiently."

In the short term, the emphasis on the efficient use of capital is driving two trends. The first is the popularity of guaranteedcost programs that in today's soft market can offer very favorable terms. The second trend is the growing use of all-lines aggregate programs, which can allow companies to consolidate separate forms of coverage into a multiyear program.

Taking a longer view, Mr. Bugalla said that the convergence of insurance and capital markets, although in its infancy now, has tremendous potential to change the practice of risk management. Convergence offers companies access to greater amounts of capital and allows them to address traditionally uninsurable exposures and structure programs with lower transactional costs. Taken together, financial market techniques may present a more efficient way to finance a broader spectrum of risk than property/casualty policies ever could.

"Chief financial officers have a number of problems with insurance," Mr. Bugalla said. "They have to worry about insolvency and coverage disputes, but a catastrophe bond is very easy to collect on. People on Wall Street, who already have relationships with CFOs, are convincing them that this trend is real. …

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