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Who would have thought AIG, the mightiest of the mighty amongst insurers would have fallen so far? And not many saw it coming though some of us half expected that their creative innovation around products and solutions would eventually land them in trouble. Well known for solving the unsolvable or insuring things others wouldn't touch, AIG was the one place to go to solve our toughest problems. Ah, the underbelly of innovation!

Regulators have long demanded "safe, conservative" investments as the first line of defense for insurer financial strength. Bonds were the be-all and end-all of such assurance for policyholders and for a long time this strategy worked well. Even now, in the wake of the current carnage, bonds have proven to be much safer than equities and thus have preserved capital. But something much deeper has undermined this once sound formula for buyer protection.

And what of the value of brokers who purported to offer whole departments devoted to "watching" and "warning" about threats to the core product offering upon which they rely? Where this existed, its value is suspect. Who among us had our brokers present a contingency plan soon enough to avoid a loss?

It was never quick enough and seldom effective enough to satisfy the CFO, except where expectations were lower than they should have been. It frequently left us bare and exposed to criticism. Unable to get ahead of the panic that often ensues from such vulnerability, risk managers found themselves at risk. Where were the controls to mitigate the exposure? When was the last time they were assessed? Did any of us have a remediation plan in place that worked to avoid a loss?

Once again, the familiar world of the once well understood is changing before our eyes. Rating agencies and brokers aside, we clearly need our own methods for assuring management that the risk they thought they transferred, wasn't. While we don't want or need to become duplicative to these sources of assurance, key metrics to track in real time how strong insurers remain is called for. There may be no perfect set, but a clear real-time way to assess the balance sheet and income statement strength would be valuable.

A contingency plan process would also help if used effectively. Admittedly, it's not necessarily wise to move business around on the pretense of possible failure of a current provider. The fact is, few markets will give buyers the time of day unless they're convinced you'll move the business.

But what then if you would? How much assurance can you muster that having moved the line, you won't find yourself with a new partner suddenly sliding toward a similar precipice? Regardless, what does make sense is to have a series of relationships always germinating that could at least pave the way toward alternative solutions that might just be needed in a truly bad scenario. Do you know who your alternate markets would be for each critical program? If not, time to start building some new relationships, quickly.

CHRIS MANDEL is the enterprise risk manager for a leading financial institution and a former president of the Risk and Insurance Management Society.

December 1, 2009

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