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S&P Exec: Risk Management 'A Survival Skill' For Insurers

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S&P Exec: Risk Management A Survival Skill For Insurers


New York

“Risk management is one of the credit skill sets that the industry is going to need. It is a survival skill,” Mark Puccia, managing director of the financial services ratings group at Standard & Poors Corp., New York, stated during the rating agencys annual conference here.

A number of speakers at the meeting indicated the insurance industry is just starting to get a handle on the issue.

And, none too soon, these speakers said. Complex products, thin profit margins, low interest rates, and, thus, paltry returns on investments, are just a few of the risks facing insurers, attendees were told.

“Companies will need well managed and understood risks,” said Puccia. They need that understanding, he explained, so that they wont, for instance, find out a products risk after they have sold that product.

Among the risks discussed was the impact of guarantees in variable annuities.

In order to understand risk, insurers need more clarity on financial goals and capital structure, aggressive management that can either operate on the edge or conservatively, and accountability and controls, said Puccia. Companies also need to determine whether risk management is a factor in determining executive compensation, he added.

Puccia posed the issue to two insurance executives: Tom Moloney, senior executive vice president and chief financial officer with John Hancock Financial Services Inc., Boston; and Jerry de St. Paer, executive vice president and chief financial officer with XL Capital Ltd., Hamilton, Bermuda.

When asked how strong the risk management function is, Moloney said that until recently, Hancock had handled it at the local level, either through investment or product management. “There was not an overarching framework,” he said.

Recently, however, the company undertook an inventory of all the risks it faced, Moloney said.

Hancock also hired a chief risk officer from the banking industry, he added. The first risk management presentation to the audit committee should occur in September, according to Moloney.

XLs de Paer said his company recently announced the appointment of a chief risk officer. The banking industry seemed to have lots of experience in the risk management area, he added.

In addition, according to de Paer, this year, executives in his company will have a 20% judgment factor in their salaries based on the performance of risk-adjusted return. “Grab someone by the wallet and the heart and the mind will follow,” he said.

Reproduced from National Underwriter Edition, June 16, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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