Terrorism and interest rate risk are among the biggest risks that insurers face, according to leading life insurance CEOs.
Because risks are potentially “bigger and more frequent,” a new approach to risk is needed, these executives told attendees at the Global Financial Leadership Forum, whose theme was “Managing Risk in a Risky World.” The forum is organized by the American Council of Life Insurers, Washington, in partnership with EDS, Plano, Texas.
A “perfect storm” of realized risk including 9/11, a caving of the equity markets in July 2002, credit losses, litigation from issues including asbestos, a severe hurricane season and the possibility of a flu pandemic is causing The Hartford Financial Services Group, Hartford, Conn., to view risk in terms of enterprise risk management rather than in terms of individual risk ‘silos,’ said Ramani Ayer, chairman and CEO.
Enterprise risk management looks at the cross-correlation of risk, he continued. Because these “risks are getting bigger and more significant,” they resulted in a review of how risk should be considered, he added.
Terrorism is a real exposure, Ayer explained, because the extent of the potential damage it could cause is magnified by the size of the event. It is estimated that 9/11 caused $7 in economic benefit loss for every dollar of actual loss, he said, and it is estimated that a dirty bomb could cause $97 billion in economic loss and a nuclear plant terrorist attack, $160 billion.
For this reason, the extension of the Terrorism Risk Insurance Act is important, he noted. “The insurance industry simply cannot absorb the events that are contemplated today,” he added. “And, my deepest concern is that group life might not be included.”
He said the sense he got when he visited Washington recently was that there was not a strong will to include group life in TRIA. He urged life companies to take the issue seriously.
Sy Sternberg, chairman and CEO of New York Life Insurance Company, said a rapid jump in interest rates is the risk his company is most concerned about.
The reason, he explained, is not only the potential impact on issues that directly impact insurers such as disintermediation, the potential movement of money to products that offer better interest rates.
But more generally, he explained, the concern rests on the potential impact on the economy at large. For instance, Sternberg talked about the impact of rising rates on variable rate mortgages and the ability of home owners to make continued payments if rates jump 3%, as well as companies that have credit based on the London Inter Bank Offering Rate. “What does this do to business risks in the U.S.?” he asked.
Another risk New York Life is monitoring, Sternberg said, is the potential for an avian flu pandemic. The company maintains a risk matrix, he said, on which it is considering raising its classification for this particular risk from a green to a yellow. On New York Life’s matrix, that would fall between a low level blue and a higher level orange and red that would require more immediate attention.
Sternberg said the possibility of a flu outbreak creates both a mortality risk and a business continuation risk. Because of New York Life’s $12 billion in surplus, Sternberg said he is confident his company could meet any mortality risk. But he added that it is also important that there are emergency plans in place to ensure the smooth running of core business activities in case a pandemic does become a reality.
Yet another risk that Sternberg discussed was currency risk, which impacts insurers with operations in many countries.
Sternberg said the devaluation of Argentina’s currency impacted New York Life along with many other multinational companies. The experience resulted in the establishment of risk management checks such as hedging programs, he said. But, he added, because a risk exists or impacts a company that does not mean that opportunities should not be sought. What it means, he continued, is that risk management programs need to be set up.
Another example of risk/opportunity that both Steinberg and Ayer discussed was how longevity risk can create an opportunity to provide retirement income products.
The potential for an avian flu pandemic is another area of concern