Risk manager challenge - dealing with rising insurance rates

Rising insurance rates are causing tough communication challenges, according to a panel of senior risk managers at the annual Brokerslink conference.

As the market hardens and prices creep up, the risk management industry is faced with explaining these jumps to the c-suite, many of whom don’t understand the cyclical nature of insurance rates.

The panel was made up of Jorge Luzzi, the executive president of Risk Consulting Group, Marco Salsi, corporate director of administration and insurance at Alicorp, Rodrigo Avila, insurance and risk manager at Suzano and Adam Clifford, division president for continental Europe at Chubb.

The panellists were there to speak to an audience of insurance brokers about the challenges facing risk managers, top of which was higher prices.

Avila explained: ”We understand the cycles of soft and hard rates, but as risk managers it’s hard, because normally you have a budget [to stick to].

“Last year was really bad in terms of nat cats and the reflection in the rates is happening, especially in Brazil where we are seeing increases of more than 20 per cent in the rates. This is too much for us. When we show this to the board of the company it’s very difficult to explain.”

Clifford countered that the insurance market has have several tough years, and that rates have risen to deal with previous underpricing.

He said: ”We’ve had challenges in a number of lines for going on eight years, and we’ve been making very small corrective actions on those portflios. It’s a simple equation over what is your combined operating ratio.

“There is a need for rate corrections, our CEO has been saying that for quite a while as have others. There’s going to be some tough conversations going into January 2019.”

The risk managers countered that while rate rises might make perfect sense in terms of insurance pricing cycles, the difficulty came when trying to explain this to CFOs and eventually boards, especially in scenarios where there have been few claims.

Salsi said: ”For me and my colleagues, in this moment it is a very big challenge to communicate to the top management of the company about the new situation. It is not clearly understood by the people in the top level.

“The explation cannot be as easy as ”the market is getting hard because it’s getting hard”, we need to have more conversation with the top management about what is a combined ratio, what is the profit of insurers because it’s not very easy to explain.”

The solution, the risk managers explained, is for brokers and insurers to help them explain why rates are moving and to communicate better about why their prices have shifted.

Avila said: ”We need statistics on what is happening in the market. In Brazil it is hard to get result from insurers, we need information, reports from the companies. Provide us with more information on what is happening, segmented by industry. This is one way you could help us.”

“It is important we receive people from the biggest insurance companies. The leaders need to come to Braxil and explain to our board what is happening with the market, because it is realy difficult for us to present to the board.”

Luzzi added: ”The brokers can help the risk managers a lot with explaining these changes. The explanation to the CFO is tough. They ask: “Did we claim, no! Did we do something wrong? No. Then why has the rate changed?” Having contact with the broker, insurer, risk managers and and the c-suite could be one of the solutions.”

This is particularly true where organisations have been working to improve the quality of their risks. For many, who have been carrying out loss prevention measures, a corresponding rate rise is clearly a kick in the teeth.

Avila said: ”In transport, when I invest in protection I have reduction in rates, in property I invest a lot in protection and make no claims whatsover and the rates are etill rising. In property and casualty we have global rates, but how do I explain that to the managers?”

The issue is exacerbated by several years of soft market conditions. Risk managers have been returning to the board year after year with lower prices for insurance. Suddenly, those prices are rising sharply and senior executives want to know why,

And for any managers who have joined within the last ten years, they have only ever experienced favourable conditions. When things have gone well, and you’ve got a rate reduction, few c-suite executives are interested in the intricacies of insurance pricing, cyclical markets and combined ratios. But then when things go poorly there’s an education gap and risk managers face challenges about why the game has suddenly changed.

Of course, this presents an opportunity for risk managers - after all, it’s easy to be heroic in good market conditions. But the overwhelming message from the panel is that they want more support from brokers and insurers to achieve this, whether it’s meeting with boards, providing better information and education or helping to navigate the challenges of rate rises.