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Total Cost of Risk Drops for Third Straight Year, RIMS Finds

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Despite the challenges of a slowed economy in an election year, a shifting risk landscape as a result of technological advances, and a slow to negative growth rate in some sectors, 2016 saw the total cost of risk (TCOR) decline for the third consecutive year, according to the 2017 RIMS Benchmark Survey.

Even in the face of such uncertainties, the TCOR per $1,000 of revenue continued to drop, ending at $10.07 in 2016. The main drivers were declines in all lines excluding fidelity, surety and crime costs, according to the report. TCOR is defined in the survey as the cost of insurance, plus the costs of the losses retained and the administrative costs of the risk management department.

The survey encompasses industry data from 759 organizations and contains policy-level information from 10 coverage groups, subdivided into 90 lines of business.

Uncertainty around policies in the new presidential administration will continue to dominate in 2017, as the nation’s trade policy, regulatory reform and tax system could see changes, RIMS reported. The new political regime is also expected to reduce regulatory oversight at the state, federal and international levels.

Key findings from this year’s RIMS Benchmark Survey include:

  • Technological advances have caused a seismic shift in the risk landscape, creating new types of claims and forcing insurers to consider new products and solutions for customers.
  • Insurers ended 2016 with average capital and surplus at the highest level in 10 years. However, excess capacity is undermining profitability, as seen by falling net income and return on average equity.
  • The personal insurance space is in the midst of a consumer-centric revolution, offering customers new transaction platforms, better metrics and more flexible pricing and coverage options. Commercial insurance is expected to adopt a similar focus, transforming the way business is transacted.
  • Predicted rate increases for cyber, E&O and workers compensation failed to materialize across the board. Projections for 2017 are more moderate, with property and most liability lines flat to down 10%.
  • Emerging trends in the 2017 risk landscape include the tech revolution, security issues, natural catastrophes and political upheaval.

“The RIMS Benchmark Survey chronicles the evolution of corporate risk management costs over time. This year’s edition highlights how risk managers have effectively managed costs in a time of evolving risks and demands, enabling them to do more with less,” said Jim Blinn, executive vice president of client solutions at Advisen.

After 3 Years of Increases, Total Cost of Risk Down 1%

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Buyers of commercial insurance, who have seen relatively stable to slightly increasing rates over the past three years, reported paying 1% less to cover their total cost of risk than in 2013, according to the 2015 RIMS Benchmark Survey.

“The 2014 survey results reflect the overall stability of the U.

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S. property/casualty market. One notable driver is the increasing role of alternative capital in assisting reinsurers to deal with economic uncertainties. A related factor is the rising importance of predictive models among insurers, not only in the area of property, but also for cyber and casualty,” Jim Blinn, executive vice president and global product manager at Advisen, said in a statement.

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Looking ahead to the second half of 2015, Blinn said commercial property/casualty insurers are beginning to see a softening market. “We are looking at a period of rate decreases in insurance premiums owing to rising competition in the market and more than enough available capacity.”

The survey, which encompasses industry data for more than 52,000 insurance programs from over 1,400 organizations, found that risk managers and underwriters have identified climate change as one of this decade’s defining issues. “It continues to be a cause of concern among companies and organizations as evidence linking it to flood and other natural disasters continue to mount. Already, regulators such as the U.S. Environmental Protection Agency (EPA) are sounding the alarm for the high economic cost of climate change,” according to the study.

Key findings in 2015 include:

  • Slight decrease in TCOR following three years of increases.
  • Average TCOR fell 1% from $10.90 per $1,000 of revenue in 2013 to $10.80 in 2014.
  • Management liability, workers compensation, liability, and property costs declined.
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  • Risk management administration costs dropped 5% as costs for both outside services and risk management departments declined.

Buyers Dealing with Rise in Total Cost of Risk

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Keeping insurance costs down is a priority for risk managers, but with the total cost of risk up 5% since last year, according to the newly released RIMS Benchmark Survey, this task has become increasingly difficult. One risk manager at a live web event last week said he is looking closely for coverage overlaps in his international operations.

A key finding of the 2013 RIMS Benchmark Survey, released this month, was that the average total cost of risk (TCOR) for all companies increased 5%, from $10.19 per ,000 of revenue to $10.70 per $1,000 of revenue – the result of hard market conditions.

The drivers of these increases were global catastrophes, including the tsunami/earthquake in Japan, flooding in Australia and Thailand, and earthquakes in New Zealand and Turkey – which impacted property rates, explained Wesley DuPont, executive vice president and general counsel at Allied World.

On the casualty side, “There has been an uptick in loss severity,” DuPont said. “Claims that had previously settled for less than $5 million were settling for more than $5 million.”

Danny Holtsclaw, director of risk and insurance for the Wildlife Conservation Society, said he is working to keep the cost of risk down by examining duplication of coverage globally. “There has to be an internal review on the risk manager’s side to make sure we don’t have overlapping coverage and if we do, we try to minimize that as much as possible,” he said.

He is also “getting back to the basics of loss control,” by doing “what we do best internally to mitigate the risks we have.” But at the same time, “as our premiums and our cost of risk are growing, we’re looking to our risk partners – not only our carriers, but also our brokers.”

Despite all efforts to evaluate exposures for accuracy, however, at renewal time underwriters are requesting “better data.” Meanwhile, Holtsclaw said, “I’m giving the best data I have, but it’s still not enough.”

What’s more, at midyear renewals, “if you’re adding particular exposures, there seems to be more supervisory underwriting review,” he said, adding that “Sometimes a handshake is not necessarily a handshake – you have to wait for validation to come back. I’m seeing that for the first time in the last year.

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Bobby Bowden, executive vice president, marketing and communications with Allied World said that risk managers can get a better response from insurers by having thorough knowledge of their business and industry. “To come in and know your business inside-out gives us a better understanding,” he said. Better understanding allows the underwriter to price properly, “and ultimately the best deal is the result of that communication,” he added.

What Holtsclaw looks for from carriers is, “for those experts to become an added extension of my team, to help implement our risk management goals.

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” Because at the end of the day, “I’m having to do more with less and I’m trying to take advantage of those resources.”

Companies with advanced enterprise risk programs are proving to have an advantage, said Carol Fox, director for strategic and enterprise risk practice for RIMS. “We found a correlation in a study we did a number of years ago, that companies with better ERM programs had better credit ratings.

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So it’s not just the insurance piece, but making the organization more efficient overall and protecting the value of the organization.”

The State of the Insurance Market

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Yesterday, a meeting of minds discussed the state of the insurance market and the RIMS Benchmark Survey in a webinar that was broadcast live from the RIMS offices in Manhattan. The panel of experts included:

  • Jim Blinn, principal at Advisen (moderator)
  • Richard W. Sarnie, vice president of risk management for The Great Atlantic & Pacific Tea Company
  • Carol Fox, director of strategic and enterprise risk practice for RIMS
  • Pamela Ferrandino, executive vice president, national practice leader casualty, placement and senior director for Willis North America

Presented as insider views and opinions from behind-the-scenes, the webinar allowed the audience of buyers and brokers to gain a perspective that is intentionally broad and could influence how they adjust their risk appetite for the second half of 2012.

Jim Blinn: What is driving the increase in total cost of risk (TCOR)?

Rich Sarnie: I expand the TCOR beyond just the insurable cost. Look at things like the cost of capital. We also look at our safety expenditures. What I try to do is use the benchmark data as a starting point, but then add to it.

Blinn: In 2011, a record year for catastrophes, how have they had an impact on risk management and the types of questions you see underwriters asking?

RS: They’re really drilling down on our supply chain. Risk managers really need to be in tune with operations — where you’re getting your products and how you’re going to get it to marketplace, and if there’s a supply chain interruption, how are you going to deal with that?

What challenges do you see and how do you explain them to senior management and the board?

Carol Fox: I have an embarrassing example in regards to that. We had budgeted for a four-time increase and we missed it. My recommendation is to communicate with underwriters and brokers about cycles. If they aren’t communicating throughout the year, you really don’t get an opportunity to forecast things.

RS: This is what we get paid to do. Anyone can purchase cheap insurance. We have to say ‘listen, this is where pricing is going’ and if it comes to a certain point, you don’t buy it. This is were you really show your value to senior management. Again, it goes back to TCOR. Buying insurance is just one tool of many, it’s not the only one.

Pamela Ferrandino: I think it’s also a responsibility of the broker to communicate with you well in advance about a renewal.

As concerns risk, what are the biggest issues for senior management?

RS: Senior management is now much more focused on risk management. But their biggest concern is not insurance or insurable risks, it’s other risks, such as availability of affordable finance, supply chain, reputation, social media. you should have tools to address those risks. Those are the things senior management cares about the most.

Are there similar concerns at the board level?

CF: They’re most concerned about strategic risks. The other thing we’re hearing is that they’re getting a lot of data, but not a lot of information. To Rich’s point, the board is not necessarily focusing on insurance, but the question really is, what are the deviations? It all ties back to the risk appetite of an organization and its tolerances.

The workers comp industry has been under stress. How have comp carriers responded and how has this affected your clients?

PF: We have an aging workforce and that has presented a problem in the workers comp market.

What about reputation risk? cyber issues?

Carol: Organizations that actually rate reputation impact separately from any other impact they may have have a better handle on their risks. Reputation is always going to be important. From an emerging risk perspective, the biggest concern is not being prepared. Organizations may identify an emerging risk but they’re doing it in a very siloed way.