Corporate insurance managers are facing new challenges; the market is hardening in some sectors, while new and hard to quantify risks are emerging. Just in time to assist treasurers in managing this new environment is the new CTC Guide on Insurance from AFP, a publication designed to help navigate the new world of corporate insurance. The guide also includes case studies from treasury executives discussing how they manage insurance risk for their organizations.
Nilly Essaides, author of the guide, said there are several factors driving corporate premiums and deductibles higher, as well as increasing collateral requirements. The most public is of course Hurricane Sandy, which forced insurers to reassess their catastrophic risk models. But persistently low interest rates—and low investment returns as a result—as well as tighter capital regulations under Solvency II and tougher rating agency requirements play an equally important role.
Experts told AFP that insurance rates are up 5-8 percent overall, but certain lines of coverage are seeing higher hikes, like property & casualty, because of losses inflicted by Sandy and its unusually wide path. For example, insurers typically have separate deductibles for wind and flood; Sandy brought them together as the “perfect storm.”
In addition to cost pressures, corporate risk managers are also managing emergent risks, e.g., cyber risk which is at growing rapidly and outside the traditional industries of financial services and retail, Essaides found. “Because technology is embedded into nearly all business processes, companies are realizing that they’re exposed in way they never imagined, and insurers, too, are realizing their exposures are bigger than they thought,” she said. “They are carving out cyber risk specifically, from business interruption or P&C, or Errors and Omissions. The cyber risk is touching everyone, from retailers to manufacturers.”
One company profiled in the CTC Guide, a freight company, reached the conclusion that cyber risk is about more than privacy and credit card or “personally identifiable” information. “It’s about every step of the business process,” Essaides said. Recent news about hacking attacks at the biggest internet companies and Chinese commercial espionage are contributing to the urgency.
As companies tighten their supply chain and increasingly embrace just-in-time tactics, outsourcing and business partners for key services, third-party contingent liability is on the rise as well. “The upshot is that risk now extends far beyond the corporate walls and insurance against those exposures is getting more popular, as are risk mitigating steps during contract negotiations,” Essaides said.
What Essaides found most surprising in her discussions with corporate practitioners was the depth of operational knowledge on the part of risk management practitioners, whether they were in treasury or in a standalone risk management function. “They know exactly what operational processes the company is taking to prevent and reduce risk, they are involved with operational management, and they know the ins and outs of factory processes and loss incidents,” she said. “It’s probably the area where I’ve seen the deepest business knowledge. That’s the way it should be. The purchase of the policy is the last step in the process.”
The CTC Guide on Insurance does deliver some hopeful developments for treasurers in the form of third-party providers whose increasingly advanced systems are helping companies better track and manage their exposures. “What I’ve noticed is that companies are becoming increasingly sophisticated about how they manage insurance,” Essaides said. “It used to be a ‘lifer’ assignment that was really disconnected from other forms of risk management. Insurance is becoming a rotational role for finance professionals, bringing a new level of risk acumen and sophistication to the table.”
Download the CTC Guide on Insurance here.