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

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.

And the 2017 RIMS Awards Go to…

PHILADELPHIA—At today’s RIMS 2017 Awards Luncheon, the society issued its top honors for achievement in the risk management and insurance industry.

Scott B. Clark, area senior vice president and enterprise risk management consultant at Arthur J. Gallagher & Co., received the society’s most prestigious honor, the Harry and Dorothy Goodell Award. Named after RIMS’ first president, the award recognizes outstanding service and achievement in furthering the goals of the society and the discipline of risk management.

Richard Hackenburg and Glen Frederick were this year’s inductees into the Risk Management Hall of Fame, presented in conjunction with AIG.

In his 45-year risk management career, including leadership roles at Willis and XL Insurance, Hackenberg’s received the 1993 Goodell Award and served as president of RIMS in 1985 and later as chairman of the Spencer Educational Foundation, where he remains a director emeritus.

Frederick, former director of risk management client services with the government of British Columbia, received the Goodell Award in 2011 and, the same year, the Donald M. Stuart award for outstanding contribution to the risk management profession in Canada. He served as chair of the RIMS Canada Council in 2006 and co-chair of the RIMS Canada Conference in 2003. Frederick’s 30-year career also included leading implementation of the enterprise risk management strategy for the Vancouver organizing committee (VANOC) and the International Olympic Committee (IOC) to manage risks associated with the 2010 Olympic Games—the first to use an ERM strategy, which is now required for all Olympic games.

“Industry heroes like Richard Hackenburg and Glen Frederick were selfless, giving back to the risk management community and paving the way for future practitioners,” said RIMS CEO Mary Roth. “It is an honor to join AIG in inducting these risk management stalwarts into the Risk Management Hall of Fame.”

The RIMS Rising Star Award, issued to risk management professionals who are under 35 or have less than seven years of experience in the industry, was given to William Lehman. An insurance specialist at Cook Group Incorporated, Lehman was recognized for demonstrating exceptional initiative, volunteerism, professional development, achievement, and leadership potential.

Debra Samuel, manager of insurance and risk management at Arconic Inc., was recognized for exceptional service to strengthen and support the strategic initiatives of RIMS with the RIMS Ambassadors Group award. This year’s Cristy Award for the highest marks on the three Associate of Risk Management exams went to Michael Ratto, risk procurement manager at Kraemer North America.

Can ORSA Work For All Businesses?

In addition to impacting the way countless organizations conduct business, the 2008 financial crisis was an awakening for regulators charged with reviewing and setting the rules that shape the way organizations assume risk. Insurance, perhaps the riskiest business of them all, did not go unscathed.

Not only are insurers responsible for managing their own internal risks, but careful calculations and guidelines are built into their business models to ensure that the risks fall within set parameters. Regulators will argue, however, that this wasn’t always the case.

Own Risk Solvency Assessment (ORSA) was adopted and now serves as an internal process for insurers to assess their risk management processes and make sure that, under severe scenarios, they remains solvent.

U.S. insurers required to perform an ORSA must file a confidential summary report with their lead state’s department of insurance.  The assessment aims to demonstrate and document the insurer’s ability to:

  • Withstand financial and economic stress with a quantitative and qualitative assessment of exposures
  • Effectively apply enterprise risk management (ERM) to support decisions
  • Provide insights and assurance to external stakeholders

While ORSA is requirement for insurers, a new study by RIMS and the Property Casualty Insurers Association, Communicating the Value of Enterprise Risk Management: The Benefits of Developing an Own Risk and Solvency Assessment Report, maintains that ORSA can be used for all organizations looking to strengthen their ERM function.

According to the report:

Whether or not required by regulation or standard-setting bodies, documenting the following internal practices is a worthwhile endeavor for any company in any sector to utilize in their goal to preserve and create value:

  • Enterprise risk management capabilities

  • A solid understanding of the risks that can occur at catastrophic levels related to the chosen strategy

  • Validation that the entity has adequately considered such risks and has plans in place to address those risks and remain viable.

The connection between the ORSA regulation imposed on insurers and the development of an ERM program within an organization outside of the insurance industry is apparent.

ORSA and ERM both require the organization to strengthen communication between business functions. Breaking down those silos are key to uncovering business risk, but perhaps more importantly, is the interconnectedness of those risks.

Secondly, similar to ERM in non-insurance companies, ORSA requires risk management to document its findings, processes and strategies. Such documentation allows for the process of managing risks to be effectively communicated to operations, senior leadership, regulators and stakeholders. Additionally, documentation enhances monitoring efforts, the ability to make changes to the program and is a benefit that allows ERM to reach a “repeatable” maturity level as defined by the RIMS Risk Maturity Model.

Developing an ERM program has become a priority for many organizations as senior leaders recognize the value of having their entire organization thinking, talking and incorporating risk management into their work. Examining and implementing ORSA strategies can be an effective way for risk professionals to get their ERM program off the ground and operational.