"My view is," says Bill McGannon, "I think it's absolutely necessary to get to know who the devil your reinsurers are."
McGannon got his first big break at getting to know his reinsurers when he was risk manager at a major Canadian energy company, from which he retired in 1998 after a tenure that spanned more than two decades. A president of a property/casualty insurer who attended McGannon's church invited him to a luncheon. There, the president introduced the "bear cub" of a risk manager, as McGannon calls his younger self, to a reinsurance exec, who then invited the bear cub to Zurich, Switzerland.
But as fortuitous was the risk manager's choice of churches, McGannon also worked hard to cultivate reinsurance contacts.
"The other breakthrough I got," he explains, "was going to (Risk and Insurance Management Society Inc.) conferences and seeking out these guys (reinsurers) . . . and getting them alone and talking to them and having breakfast with them."
He'd ask his broker to set up these meetings. When his broker said such things weren't possible, McGannon would threaten to set up the meeting himself. Next thing McGannon knew, the broker would have a time set for eggs and coffee.
If this meeting went well--and not all did--the next steps might progress like so: McGannon would press for a longer meeting where he'd "bring his slides," to familiarize the reinsurer with his risk. If that went well, the risk manager would inquire into what markets the reinsurer worked with. Then he'd go home and break the news to his broker that if that reinsurer's favorite primary carrier wasn't already on McGannon's program, they should be, with the understanding that the carrier would then lay off some of his risk on the reinsurer.
McGannon, who now runs Risky Business, a consultancy for small and midsize companies, says it was crucial to have this face-to-face with the reinsurer. "He got to know my risk," he says, "so that when our company hit his radar screen, he wasn't scratching his head saying, 'I wonder what these guys are doing?'"
Later in his career, McGannon invited a number of reinsurers to his head office, along with primaries and brokers.
"I made damn well sure that the people who came were the people who got the best business," he adds. One reinsurer refused to attend a meeting because, it said, McGannon was "trying to destroy the traditional relationships."
"Way to go. You got it!" he says now, and probably would say then, to their faces.
Mind you, McGannon dealt directly with the reinsurers on his carriers' treaties and facultative business. He wasn't working through a captive. The reinsurers that he cultivated grasped the risks they were being handed and had the technical experience to ask the tough questions. By the time he left his company in 1998, he was buying $1 billion in property coverage, and at one point, he was spending as much as $24 million, until he started taking a "mega" deductible of $100 million, cutting his premiums just about in half.
Risk managers today, who are in shoes as big as McGannon's, won't consider for the most part meeting face-to-face with their carrier's insurance companies. They view reinsurance as off-limits.
"I'm paying for it," says Thomas Hanson, director of risk management for telecom giant Alltel Corp., about reinsurance, "but I don't have much say in what's going on, or the costs, or anything else."
Beaumont Vance, senior risk manager at Sun Microsystems Inc., expresses the same piqued but frustrated interest. "People are concerned with it," he says, "but can't really get to the inner circle to really know what's going on there and what's really driving these guys or what's happening."
Risk managers know, though, exactly how it affects them. As Pete Fahrenthold, managing director of risk management at Continental Airlines, explains, "It affects every risk manager, whether they are using a captive or not, because increases in reinsurance costs for insurers are passed on in the premiums paid by insurance purchasers, and because the availability of reinsurance will impact the availability of coverage."
But, seemingly, risk managers take their price increase and just say, figuratively, "Thank you, sir, may I have another."
STEP 1: SOLVING SOLVENCY
Experts in the reinsurance industry suggest that this doesn't have to be the case. They proffer a simple way for risk managers to empower themselves: Know which reinsurers are tied to their program via treaties or facultative deals, how much they're in for and how solid they are.
According to Kathleen Carroll, senior vice president at reinsurance broker Guy Carpenter & Co., it comes down to security. And security can be found in the names and numbers of reinsurance recoverables in the Schedule F of insurers' financial statements.
For risk managers interviewed for this piece, though, they found comfort simply by getting paper from highly rated carriers.
That assumes ratings agencies have it right. "The problem is," says Barry Leigh Weissman, reinsurance lawyer, partner at Sonnenschein Nath & Rosenthal, "nobody's got it right yet."
He cites companies that have gone into liquidation recently that were highly rated up until they capsized. "So a high rating is a tool, but that's all it is. It's not perfect. And by actually looking at different companies," he says, "and looking at the reinsurance, you'll get a much better picture."
For instance: "If you had an insurer and 90 percent of its reinsurance is recoverable from Tibet Re," Carroll says, "well, maybe you start to worry about that company." Whereas, if a carrier reinsures with the likes of Swiss Re and Munich Re--big names with surpluses in the big-digit billions--"it would give you some comfort," she says.
Risk managers could also uncover whether their carrier's reinsurance program has consisted of the same companies year after year, says Peter Rizacos, U.S. head of reinsurer SCOR's Business Solutions Unit. That could indicate that reinsurers won't cut and run after a catastrophic loss.
Some of this is not new to risk managers. Hanson of Alltel recalls a renewal from last year where one carrier took more of the risks itself, whereas another carrier "reinsured the heck out of everything." Hanson went with the former because the insurer seemed like the better choice for a "long-term partner."
Still, getting Sherlock Holmes on the relationships between primaries and their reinsurers isn't something that most risk managers seem to do, or even think necessary.
"To me, it seems that for most risk managers, they don't want to know how the watch works. They just want to know what time it is," says Rick Vassar, corporate risk manager for building-services provider Valcourt Building Services.
On investigating insurer financial statements, Vance says, "I've certainly never done that, I've never heard of anyone doing that, and I've never had anybody ask me to do it, so I think that's probably going a step too far, frankly, for most people."
Risk managers know that their bosses, usually financial folks, want simple answers to: "Do we have coverage? How much did it cost?"
But if risk managers are wondering about solvency issues, says Weissman, they ought to at least ask their brokers to focus a magnifying glass on reinsurance information.
STEP 2: CUTTING THROUGH
Risk managers can benefit from investigating a carrier's reinsurance background because they can act if it makes them uncomfortable. The drastic choice would be to give a solvency-suspect carrier the "let's just be friends" speech, parting ways without burning bridges, of course.
Big companies also have another approach at their disposal. They can negotiate cut-through clauses or assumption of liability endorsements into their programs. A cut-through requires, in the event of a carrier's insolvency and an indemnity, that the reinsurer give to the insured what it otherwise would have paid to the carrier. With the ALE, the reinsurer is required to "essentially step into the shoes of the now insolvent ceding company," Carroll says.
"If I had to choose between the two, and I was a risk manager," she adds, "I'd want the ALE--assumption of liability--because I'd want somebody to step in there and actually adjust the claim, provide me with a defense, and I don't want to have to make payment to the claimant until any of that happens."
ALEs don't come easy. Most risk managers, says Carroll, are not in a bargaining position to get them.
But ALEs and cut-throughs could be considered an essential for a Fortune 500 insured. In most states, Carroll says, any insured with net worth greater than $25 million is precluded from the liquidator's standard guarantee fund.
"If the insurer for a Fortune 500 company became insolvent, that Fortune 500 company is eating it because the reinsurance would be payable, in those cases, to the liquidator," Carroll explains.
These clauses are possible too. If a company has a massive and/or exotic risk, for instance, they may carry the weight to pull off the negotiations.
"If you're dealing with a very large commercial risk--say, a very large chemical plant--you know, hundreds of millions of dollars of exposure," says Christopher B. Kende, chair of law firm Cozen O'Connor's Reinsurance Practice Group, "that might be something that a risk manager would want to think about."
Risk managers could also have leverage, according to Carroll, if the insurer just got downgraded or is looking to sell renewal rights. In both cases, the insurers could be eager to keep the business.
STEP 3: THE INNER CIRCLE
Negotiation isn't limited to ALEs. Henry Good, who was director of insurance for 16 years at chemical maker Rohm and Haas, recalls, "On all the programs I ever put together, there was an absolute prohibition from any insurer bringing in facultative insurance without my special approval of the exception and the identification of the other insurer."
Captives are also another obvious way to have more contact with, and control over, reinsurers.
"It almost seems like, why do I want to insure with an insurance carrier if they're just going to reinsure the entire book or take a very, very small piece of their own loss?" says Hanson. "So it's making having your own insurance captive look a heck of a lot more feasible."
According to Greg Lang, senior vice president of Munich-American RiskPartners, not many markets reinsure captives direct, but some do. In some cases, captives can act as a reinsurer for a primary and then cede the risk to a retrocessionaire.
Lang says that in the case of Munich-American RiskPartners, a division of American Re-Insurance Co., they're willing to open their doors to the right risk manager.
"To get access to our product, you have to be a risk taker at the table. All of our clients take some form of underwriting risk," he says. "Our preference is to meet with the insured on a direct basis," he adds, "and we work best with brokers and markets that allow us to do so. Nobody tells a story better than that corporate risk manager."
In fact, he says, it might be a "red flag" if insureds don't talk direct.
Rizacos at SCOR says he has also met with risk managers looking for advice on their risks.
"We can offer some feedback relative to deductibles or perhaps other terms and conditions on the program that we feel are generally accepted or somewhat normal for their type of risk and we've seen in other parts of the world," he says.
Of course, risk managers may not be able to turn into McGannons overnight. It took McGannon seven or eight years to build a reputation and make direct inroads into the reinsurance world.
"This is a people business, and there is an awful lot of trust that goes along with that," he says. "And if you build that up over years, then eventually you can get into the reinsurance market where they'll sit down with you."
MATTHEW BRODSKY is associate editor of Risk & Insurance®.
September 1, 2006
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