October 26th, 2010

The Evolving Risk Manager and Portfolio Management

Posted at 5:00 AM ET

tedeschi_john_gcciJohn Tedeschi, Chief of Catastrophe Modeling

Most insurance professionals begin their careers in this industry in a straightforward way, happening upon an opportunity completely by accident, no matter if the entry is through underwriting, reinsurance or perhaps even probabilistic modeling. Actuaries, who had their well-thought plan firmly before them as the natural outcome from years of exams are the exception.

If one came to join the insurance sector in the last 10 to 15 years, the evolving pace in the industry may have brought some unanticipated excitement to what was otherwise considered a dull industry.

Insurance operations in the new millennium have brought widespread advancements in the use of consumer data and the use of advanced technology for underwriting, distribution and claims, as well as leaps in capital and catastrophe modeling. And yet, even with these advancements, the need for clear solutions for resolving current challenges arising from a variety of sources still exists. A host of issues may stem from the realms of regulation, investments, business expansion and profitability.

Consider the uncertainty of how state and, possibly federal regulations, may impact the industry and how insurers may need to adapt in the coming years. How will the industry evolve as regulators challenge underwriting advancements that arise from predictive modeling? How will insurers manage the uncertain potential of courts that may grant coverage where coverage was not thought to exist? How might Solvency II impact the U.S. market when it arrives on our shores? Will insurance continue to be regulated by the states?

Furthermore, property writers staying apace with the dramatic changes in property catastrophe modeling over the last several years have a dynamic exercise before them. Their portfolios (on a modeled basis) were never quite what they thought they were only months earlier. The oligopoly that exists of catastrophe modeling vendors has led to few options from which to obtain any diversity of thought or approach. The only upside is that everyone else is in the same position. Management of a book of business from multiple standards, of which catastrophe risk is often a prominent player, equates to an intellectual chess game. Risk managers must formulate expansion (and contraction) plans that utilize the power of catastrophe models (not ignoring their shortcomings) in order to engineer not only a financially robust portfolio over time but also a robust modeled portfolio.

As the economy continues to stall, how then do we make changes to best survive or even thrive in current market conditions and propel our firms forward when opportunities exist? Those companies that expand into currently profit-troubled lines now with a clear strategy for selected geographies may be in the right place at the right time when the line recovers. For example, establishing the right product mix and distribution network in homeowners insurance now, when the housing market is in turmoil, could be the right move.

Maintaining an ongoing commercial portfolio has long been a challenge, even as commercial rates faltered in the last several years and may still be at levels too low to convince most insurers that the business will be profitable over the long term. Here too, a strategy for choosing the right type of risks in better performing geographies at the price that both the market and the insurer can bear is a sound approach. These actions, paired with a focused reinsurance strategy and balance of occupancies and product types, further assures viability of the approach.

The insurance industry’s most promising opportunity in these times is the use of creativity to innovate, seek strategic alliances and embrace new thinking. As insurers harness the intellectual horsepower of trusted advisors to collaborate on the way forward, we have the potential to bring positive thinking and useful approaches for the most advantageous use of capital, sustainable and expandable business plans, effective reinsurance and financial hedging strategies, and other benefits of a superior performing portfolio.

As industry challenges converge to add new dimension to what it means to be a risk manager and do it well, perhaps the insurance industry is more interesting than we gave it credit for initially. It turns out it is a bit like keeping aircraft aloft and moving forward while maintaining a smooth ride under constantly changing conditions.

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