Through the lens sharply: insurance, reinsurance and brokerage community professionals highlight the differences in how they approach risk

Risk & Insurance,  April 1, 2004  by Thomas J. Slattery

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Insurance companies, reinsurance companies and insurance brokerages make their living sorting out the risk profiles of others--analyzing them, minimizing them and financing them. But what of their own risks? Are they atypical? If so, what are they and how do these industry players manage them? What questions do they ask themselves? And to what degree, if any, does their expertise make them better at this game when it comes down to managing risk in their own enterprises.

In preparing the insurance Industry Risk Report, Risk & Insurance posed these questions and more to a primary insurer, a reinsurer and two brokers, as well as to an industry analyst.

For the most part, the industry players find little difference, if any, between their own risk profiles and those of the publics they serve.

The analyst sees the industry's own risks as significantly different and a good deal more difficult to handle than those of other businesses. He's unimpressed with the industry's capability or willingness to deal in sophisticated fashion with its own risk management (see accompanying story).

Risk: Through the Eyes of a Reinsurer

Andreas Beerli, CEO of the Americas Division of Swiss Reinsurance Co., is one who believes that risk in an insurance/reinsurance enterprise is "fundamentally different" from risk in most other enterprises, at least in this respect: For insurers and reinsurers, risk transfer is a product. "Accepting and diversifying risk is the central activity of a reinsurer," Beerli says. "Risk is our business," while for others risk is an "unwanted byproduct" to be managed and transferred.

In addition to insurance risks, Beerli points to credit risks and financial market risks as inherent to a reinsurance portfolio. "As a professional risk taker," he says, "Swiss Re consciously assumes these risks. It attaches high priority to understanding, steering and controlling its exposure to risk in order to keep its risks well diversified, to avoid undesired accumulation of exposure to either an individual risk or some highly dependent risk factors and to avoid exposure to undesired risk."

Then, too, there are the operational risks associated with the reinsurer's own operation, as opposed to the operational risk it assumes from others in reinsurance contracts.

One of these, says Beerli, is the "unprecedented public and regulatory scrutiny" the reinsurance business is under today. "These challenges add to the strategic relevance of pro-active issue management efforts," he says.

Swiss Re's response is a formal process which identifies, analyzes and communicates topics of strategic relevance. Current "top topics" include liability regimes, nanotechnology, mortality trends, natural catastrophes, terrorism and mad cow disease.

How does the company manage and mitigate its risks?

"Swiss Re systematically screens evolving risks and assesses their impact on insurance," says Beerli. "Based on this, appropriate measures are taken ahead of time, that is before the risk is manifest in the form of unexpected claims."

Doing this has been a part of Swiss Re's operations for a long time, he says, pointing to its "Nat Cat" research unit, which was set up in the late 1970s to study of climate change and its impact on reinsurance--a project undertaken during the 1980s.

The company also places strong emphasis on risk selection and risk steering, which "mainly means solid underwriting," says Beerli.

Overall, he says, "Swiss Re has a sophisticated risk management process, and organizational units dedicated to risk research and risk management. In addition, we use detailed, proprietary quantitative models to calculate capital allocated to the various risk categories."

Risk: Through the Eyes of a Behemoth

Merritt W. Fabel is director of corporate risk management and insurance at the giant American International Group. To Fabel, the defining point between AIG's risk profile and those of others is not narrowly drawn.

"First, we're not a pure insurance company," he says. "We're a financial services company. That includes property-casualty insurance, life insurance, accident and health insurance, and annuities. On the financial services side, it includes a host of activities, like consumer finance and lending, the leasing of commercial aircraft and automobiles and real estate investments. And all of these activities are done on a global basis."

So, to Fabel, what makes AIG different is that any one of these functions would be a big company in its own right, whether domestic or foreign. "But we're global, in 130 countries," he says.

Generally speaking, he says his biggest risk management challenges are the traditional issues of communications, data gathering, and, if there is a loss, regardless of it scope and size, business continuity.

"The thing is to immediately identify the active risks of loss." That is, those risks which tend to be in every operation--like commercial liability, auto liability, property insurance and other risks that have an impact on your personnel, he says. "Then you focus as best you can on the passive risks, the ones that are less obvious, where you have to look into the operation to identify them. Where you have to take a second and harder look."