Marsh Report Shows Continued Demand for Terrorism Coverage

by Nathan Bacchus on May 13, 2013 · 0 comments

As the current Terrorism Risk Insurance Act (TRIA) moves closer to its scheduled expiration date of December 31, 2014, the debate is heating up over whether the federal backstop remains necessary and whether the market demand for terrorism coverage still exists. According to the Marsh 2013 Terrorism Risk Insurance Report, released April 30, demand for coverage has remained both steady and strong. These results only reinforce the need for a long-term extension of the terrorism backstop.

During the first full year of TRIA, only 27% of organizations obtained terrorism coverage as the market was still adjusting to the TRIA program and the fallout from the 9/11 attacks. Since that time, take-up rates have grown steadily. By 2005 the take-up rate for terrorism insurance was 58%. Today the rate is more than 60%—where it has been since 2009. The take-up rates are highest among companies with total insured value (TIV) over $500 million, but even those companies with less than $100 million in TIV obtained terrorism insurance at a 59% rate in 2012.

Take-up rates did vary amongst different industry sectors. Companies within the media, education, financial institutions, health care or nonprofit sectors obtained terrorism coverage at a rate above 70% during 2012, with the media sector leading the way with an 81% take-up rate. The food and beverage, manufacturing, chemical and energy and mining and sectors were at the low end with take-up rates of 50% or lower.

With regard to region, companies located in the Northeast were most likely to obtain terrorism insurance with a take-up rate of 77% in 2012. This is to be expected given the concentration of large metro areas with high population density. However, other regions are showing a strong need for coverage as well. Companies located in the South, West and Midwest regions obtained coverage at the rates of 63%, 53%, and 58% respectively in 2012. The threat of terrorism is not just a Northeast problem, and companies in regions with a less-perceived threat of terrorism are showing recognition of that fact.

If TRIA is allowed to expire, these numbers could change drastically as capacity would be significantly decreased. Without TRIA, insurers would no longer be required to offer terrorism coverage. The Marsh report shows that terrorism pricing, as a part of property premiums, has remained within the 3-5% range since 2010. Premiums would likely rise, however, without TRIA, and the certainty it provides insurers essentially subsidizes current rates. Additionally, companies with a high exposure concentration in central business districts or major metropolitan areas would likely not be able to purchase the necessary amount of coverage, forcing them to self-insure all or part of their terrorism risks.

The Marsh report covers many other issues surrounding the terrorism market that are not discussed here, including: considerations in using captives for terrorism coverage; the terrorism reinsurance market; the standalone terrorism market; and implications on workers compensation and general liability coverage if TRIA were allowed to expire.

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What Makes a Great Risk Manager: Q&A With Michael Lopez of Booz Allen Hamilton

by Emily Holbrook on May 10, 2013 · 1 comment

This Tuesday, May 14, marks the second annual World Risk Day—a global forum for those in the industry to discuss trends, challenges and best practices in risk management. One of the many speakers lined up for the event is Michael Lopez, senior associate at Booz Allen Hamilton. To get his take on the role of the modern risk manager, we asked him a few questions.

Risk Management Monitor: Has the idea of the role of risk manager been lost? How so?

Michael Lopez: I don’t think so at all. If anything, I think we’re seeing a new appreciation for the profession. Historically focused in insurance and finance, risk is taking on a broader definition, from homeland security to business operations to social issues. If anything, we might be seeing the scope increase too broadly and thus we’ve got some confusion about what a risk manager is and what they do.

In a general sense, we’re all risk managers. We are all constantly evaluating risk and making decisions as a result. Most of us don’t even know we’re doing it. Because of that, some business or organizational leaders don’t think they need a risk manager because they do it themselves. Alternatively, some leaders outsource the role all together. Reality, of course, is always somewhere in between. With enough training and confidence, risk managers can exploit this ambiguity by creating their own role and demonstrating value in ways that are unique to, and appreciated by, the organization. Personally, I’ve never wanted a job that is too strictly defined. I believe the expansion of risk-related roles is opening up new opportunities in a very positive way.

RMM: Why is the role of a risk manager unique?

ML: What I personally like about risk is the intersection between the quantitative and the qualitative. Risk is an art and a science and I believe the truly great risk managers have both. I’ve seen many solid, quantitatively-oriented risk managers that are critical to a business or an organization. I’ve also seen risk managers that are charming and able to tailor communication in very influential ways. But I would say that those risk managers that rise to even greater levels of influence and impact in an organization are the ones that combine a quantitative orientation with an appreciation for the soft skill required to proliferate risk in an organization. Monte Carlo simulations, for example, can be a valuable decision making tool, but if senior management doesn’t know how to use it, it’s meaningless. Likewise, a persuasive communication style is valuable, but if you’re not able to interpret risk data, you’re little more than an interesting conversation partner. There’s a balance between these skills that I believe makes a risk manager truly unique.

RMM: What is the one key attribute of a great risk manager?

ML: Without question—perseverance. Risk management can be a challenging profession. It’s not for those that take failure personally or get discouraged easily. It requires a thick skin. It requires courage to sometimes tell a senior leader what they don’t want to hear. At some point, this role will require you to make a call; to get out from behind the data, from underneath the analysis, and make a decision. A great risk manager has the ability to overcome resistance and not let failure reduce their enthusiasm for continuing to push the program or project forward.

RMM: Have you seen the risk manager’s role move from strictly analytics to a more strategic thinking role?

ML: I think the expansion of the role presents both opportunities for future risk managers but also presents some challenges. With the expansion and variety of opinion on the value of risk, I believe we’re witnessing a challenge with the risk managers themselves. I’ve noticed many strong, junior risk managers question the overall direction of the profession. They often ask, “Can I ever be more than just a risk manager?” The answer of course should be yes. Unfortunately, we’ve either stereotyped the risk manager one level up the back office, green-eye shade role, or communicated an artificial ceiling between risk managers and more senior level roles.

I do believe that the chief risk officer position has helped with this to some degree, but I think we as leaders in the profession, need to do better at helping younger risk managers see the potential and the future possibilities. We need to let them know that being analytical is the price of entry of the profession, but leadership positions require that they bring this blend of art and science to the organization. I’ve often said that risk is the ultimate back stage pass in an organization. As the risk manager, I should be able to peek into any aspect of an organization or business. But the narrow focus of the historical role doesn’t really empower the modern risk manager to strive for greater.

RMM: Are the traits that make a successful risk manager and successful leader vastly different?

ML: They are, in fact, quite similar. As noted in a paper I authored two years ago, there are several characteristics of successful risk managers that are also traits of strong leaders: Flexibility, influence, communication and perseverance. These are all required of leaders and required in spades of risk managers. There are several outstanding studies on leadership, and while it’s easy to find any number of perspectives that support or refute the overlap of risk manager and leader qualities, I like to think of it as the most basic level.

Leadership, in my opinion, can be defined by answering the following question: Do people follow you? People follow you because they comprehend and believe in shared ideals, goals, values or purposes that you communicate. In order to be a successful risk manager, you must get people to follow you. Plain and simple. They must believe risk has value. They must see that value. And they must proliferate that view throughout the organization.

(To register for Michael Lopez’s session during World Risk Day, click here)

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Hurricane Sandy Six Months Later—By the Numbers

by Emily Holbrook on May 8, 2013 · 0 comments

Six months later, the cleanup from Hurricane Sandy is still a work in progress. The Storm that caused some $50 billion in damage and killed 159 people has not been forgotten by those along the east coast. The following is a snapshot of Hurricane Sandy by the numbers.

From the Property Casualty Insurers of America:

The following is a list of allocated funds by the Department of Interior. The complete list of approved projects can be viewed here.

  • $42.35 million: The amount New Jersey will receive from the Department of Interior. The funds will be used to repair and rebuild parks, refuges and other federal assets damaged by the storm
  • $104.9 million: A portion of this amount will go to New Jersey for multistate projects.
  • $2.85 million: The amount allocated to New Jersey by the Bureau of Safety and Environmental Enforcement to make repairs to the Ohmsett oils pill research facility in Leonardo, New Jersey.

For a look at how the property/casualty industry was affected by Sandy, we turn to the Insurance Information Institute for this chart illustrating the p/c industry net income for fourth quarters from 2007-20012.

The National Hurricane Center and the Federal Emergency Management Agency supplied these Hurricane Sandy funding numbers.

  • $1.4 billion: The amount the Small Business Administration has loaned to homeowners, renters and businesses in New York. New Jersey received $731 million.
  • $3.4 billion: The amount the National Flood Insurance Program has paid in New York claims. Another $3.3 billion was paid in the state of New Jersey.
  • $959 million: The amount the Federal Emergency Management Agency paid out for housing assistance in New York. $387.4 in housing grants was given to to New Jersey residents in need.

For a breathtaking photo essay on the effects of Hurricane Sandy, head to Boston.com.

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The Resurgence of Treasury Risk Management

by Jared Wade on May 7, 2013 · 0 comments

Jeff Hearn, managing director of International Finance Facility, talks about the rising interest in treasury risk management training and how companies are shifting their thinking in terms of using hedging strategies to manage treasure risk.

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