Integrated Risk

More and more companies are putting their property and liability eggs into fewer baskets.

At many companies, risk managers often find that they spend more time pushing paper than they do actually managing risk. It is not unusual for a large, multinational business to have several dozen policies, each of which is handled through a separate insurance provider and has a renewal date different from the rest. Until recently, Palo Alto, Calif.-based Sun Microsystems Inc. had approximately 40 separate policies, with more than 15 carriers. "It seemed like we were always in the renewal process," says Carol Harrington, director of risk management. "It was very time-consuming--meeting with each one of the underwriters, gathering information according to the needs of each insurance company, and passing it on and negotiating." To help streamline the process and bring costs down, Sun worked with Cigna Risk Solutions and X.L. Risk Solutions, along with Swiss Re, to create an integrated insurance program that covers the company's traditional property and liability policies. The program runs for three years, rather than the traditional one-year term. Like Sun, a growing number of firms are creating single insurance policies that are designed to cover a number of risks. The policy period often is extended to several years in order to prevent a never-ending renewal process. Such programs have been given various names, including integrated risk, concentric risk, holistic, and multiline/multiyear programs. Whatever their title, the programs recognize that "risk is risk and loss is loss, and thus packaging the coverages together makes enormous sense," says Dennis Kane, president of special-risk facilities with Philadelphia-based Cigna Property & Casualty Insurance Co. Integrated-risk programs are not new. Some insurers and corporate purchasers experimented with the idea in the early 1980s, often with less-than-successful results. "The concepts and theories were fundamentally sound, but things fell apart in execution," Kane says. Many of the earlier integrated policies depended on more than a dozen insurers and reinsurers, any of whom could opt out and cause the rest of the program to break apart. In addition, some insurance providers were not organized internally to properly handle the programs. Today, the insurers providing integrated coverage appear prepared to deal with the issues unique to such programs. At the same time, corporate purchasers of insurance have intensified their demands for a simpler, more cost-effective way to manage risk. As a result, many in the industry say that integrated programs are here to stay, although it may take a decade or more for them to thoroughly infiltrate the market. While integrated programs are enjoying renewed popularity, not everyone is convinced that they will deliver all they claim. "It's one of those things that sounds good at first cut, but when you start thinking about it, it's not as easy as it sounds," says Keith Crocker, professor of risk management and insurance with the University of Michigan Business School. He expresses some doubt that integrated programs truly reduce the work. "You still have to examine the different parts and untack each portion to understand the effect of each," he says. "Putting it together in one document will not necessarily make it easier." Even proponents of integrated policies agree that managing numerous risks under one contract is complicated. Between 12 and 18 months of review, analysis, and internal communication often precede a move to an integrated policy. Because the impact of an integrated program can be far-reaching, involving other corporate functions in the process is critical. For example, the treasury, accounting, legal, operations, and risk-management departments all were involved when Minneapolis-based Honeywell Inc. moved from a traditional to an integrated-risk program. An integrated program "cannot be left entirely up to the traditional risk-management function," says Larry Stranghoener, chief financial officer with the $7.3 billion manufacturer of building, industrial, and aviation controls. "An integrated program is something that has legs that extend into other areas of finance." Jim Ostrom, vice president of St. Paul Fire and Marine Insurance Co., says that because the policies are so new and untested, all parties involved, including the claims manager, should thoroughly understand the agreements. George N. Allport, a vice president with Chubb & Son Inc., a Warren, N.J.-based insurance company, points out that the policy wording can become extremely complex and care needs to be taken to ensure that the agreement will be clear to those who may need to interpret it years into the future. Although integrated programs are not simple, once they are up and running, companies can realize significant administrative efficiencies. Because the number of insurance carriers and brokers is dramatically reduced and the terms usually are for longer than one year, risk managers free up time that had been spent pushing paper on renewals. Gerald Ciardelli, risk manager with Minneapolis-based Jostens Inc., a producer of such recognition products as class rings and trophies, says his company was able to slash 19 one-year policies to three longer-term policies. "We used to spend a lot of time on renewal activities, which don't add a lot of value," he says. Reducing the number of insurance carriers also can prevent struggles over which one is responsible when a claim is filed. Several years ago, Huntsman Chemical Corp.'s Port Arthur, Tex., ethylene plant experienced an interruption in power. When the $5 billion Salt Lake City-based petrochemical manufacturer looked to its insurance carriers, both the boiler/machinery and property insurer claimed that the other had responsibility, says Lee Skidmore, assistant treasurer/risk management. More than two years of negotiation have not produced a full resolution of the issue. A recurrence is less likely with Huntsman's integrated policy, which went into effect in 1996, says Skidmore. "With an integrated plan, I deal with a limited number of insurance underwriters, instead of approximately 40 on our old plan." Although streamlined administrative processes are valuable, most often it is expected cost savings that compel a company to consider an integrated program. Skidmore says Huntsman is saving 30% on premiums, while Harrington estimates that Sun Microsystems will save 20%. To significantly reduce costs, many firms couple their move to an integrated program with a reevaluation of the amount of risk that they retain internally. "That's typically the trend," says Cindy Keaveney, vice president, St. Paul Fire and Marine. "If you're going to go into this and it's going to be worth your while, you want to look at it on a multiyear basis [and] consider a higher retention. You really will carve costs out of the system." Jostens implemented an integrated program in October 1997. At the same time, management standardized all deductibles at $500,000. Previously, the company's deductibles ranged from $25,000 to $1 million. Ciardelli says an analysis of Jostens' loss record over the last 20 years revealed that 99% of its losses were less than $50,000, with the largest being less than $600,000. "When we compared the premiums we paid to the claims we had, we found that we had enriched a lot of insurance companies," he says. Savings also result when coverage is stretched over several years, rather than just one. Union Carbide Corp.'s integrated program provides $200 million in coverage over a three-year period, with a limit of $100 million in any one year. Most of the company's risk exposures are included. A traditional program likely would have a company purchase $100 million in coverage for each of the three years, says Richard Inserra, assistant treasurer with the Danbury, Conn., chemical giant who headed the implementation of the program. "The probabilities of needing $100 million in coverage each year for three years running are infinitesimal." Under the new program, Inserra anticipates saving $12 million. In addition, when policies are combined so that management can look at one deductible figure, it is easier to quantify a firm's overall cost of risk. "Our driver is to get the aggregate down year after year, so that we have less of a total cost of risk," says Tom Seuntjens from Honeywell's treasury-management area. "We can see it and therefore emphasize it and, I think, do a better job of managing the total cost of risk." Even as they are blending different exposures within one policy, some companies also are thinking about including risks traditionally not covered by insurance. Examples include foreign-exchange and interest-rate risk. "As long as you can measure the risk, you can bring it to the underwriter and ask to include it," says Brian Kawamoto, a San Francisco-based managing director with AON Worldwide Resources, which is headquartered in Chicago. Honeywell is thought to be one of the first to include nontraditional exposures; the company is starting with foreign-currency risk. "We began to realize that there was no reason we couldn't treat that risk as similar to any of the other risks that we seek insurance for," Stranghoener says. (It should be noted that some companies are hesitating to use insurance to cover nontraditional risks, as there is some uncertainty over the direction of accounting regulations for such policies.) An integrated-risk program is not a one-size-fits-all solution. To date, it has been used primarily by very large companies. Jostens, with 1996 revenues of $709 million, is kind of an anomaly, says Ciardelli. That may change, as insurers look at ways to make the program work for the middle market. In addition, even companies that move to an integrated approach often find that they retain a few policies outside the program. Regardless of how popular integrated programs become, interest in them has prompted a new way of looking at risk that is good for corporations, says Mitch Cole, a director with the consulting firm Watson Wyatt Worldwide, which is headquartered in Bethesda, Md. "These contracts force a new philosophical way of looking at risk," says Cole, who works from Watson's New York office. "They force an understanding that risk is not compartmentalized."

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