Disaster, economy impacting risk management
The economic storm isnÂ’t the only disaster facing the insurance and risk management industries.
Hurricanes and the housing market, as well as the rising costs of goods and health care, also are taking a toll on the insurance industry, which some may expect to serve as a safety net during tough times, experts say.
As the economy squeezes everyone, from the insurance companies to business holders to employees, itÂ’s also an opportunity for business leaders to reassess their risk management strategies and refine plans to deal with risk, said Charlie Reynolds, executive vice president and managing director of HUB International here in Fort Worth.
“I think you’ll find that in most instances people take a good look at their income statement and that line that says insurance and employee benefits, they say, ‘That’s a big number and how can we better manage?’” he said.
Some businesses may be rattled by whatÂ’s happening on Wall Street and in their local economies and attempt to take on more or different insurance coverage in an attempt to better prepare themselves for any catastrophes, but Reynolds said coverage just for the sake of coverage isnÂ’t always beneficial.
“Companies would be better served to look at strategy than buying something that covers areas you don’t have any real risk in,” he said.
The insurance industry itself seems confused about the current economic crisis, said Enya He, assistant professor in risk management and insurance at the College of Business at the University of North Texas. Leaders of large insurance companies are facing huge challenges when it comes to accurately calculating risk and how to price insurance products, she said, and this is part of what has lead to the tenuous position of companies like AIG.
“The nature of those products, I think, is beyond the understanding of many in the industry and that’s why we got into trouble in the first place,” Enya He said.
According to the Insurance Information Institute, the property/casualty insurance industryÂ’s profits for the first half of 2008 decreased nearly two-thirds from the first half of 2007. Three major factors were singled out for the poor performance: the impact of the housing and credit crisis on mortgage and financial guarantee insurers and the spillover into the overall industry; the current soft market conditions in the industry, which Enya He said has been going on since about 2005; and the increase in catastrophe losses, like those from Hurricane Ike.
In late September, the Insurance Information Institute projected that Hurricane Ike could become the fourth most expensive hurricane in history, with insured losses of about $9.8 billion. Hurricane Katrina was the most expensive hurricane, with insured losses of $43.6 billion, but Enya He said natural disasters of the past several years have been a definite hit to the insurance industry. Of the top four most expensive hurricanes, three have been since 2005; Hurricane Wilma is the third most expensive, and Hurricane Andrew is the second most expensive.
Reynolds said employers may look at changing employee benefits in favor of more high-deductible plans or asking employees to contribute more toward their benefits. ThereÂ’s been increasing interest in health savings accounts or consumer-driven health care plans, which puts more responsibility on the employees to find health care thatÂ’s competitively priced, he said.
While the insurance company and everyone with insurance will be facing an uphill battle over the next several years, Enya He said, she does believe the industry is nearing the end of its soft cycle. Reynolds said insurance worries should prompt business owners to look at effective long-term strategies, since any strategy that survives in bad times will serve well in good times.
“It’s not always a matter of price, it’s a matter of management,” Reynolds said.
