Marsh: Economic Woes Threaten Financial Institutions’ Insurance Market

The global credit crunch is raising doubts about the viability of the insurance sector’s offerings to financial institutions, according to a senior London-based executive of Marsh Ltd.

“The challenge right now, with the market entering a more challenging period, is around whether those products and services which have been developed can be sustained,” said Charles Beresford-Davies, managing director of the U.K. Financial Institutions Industry Practice at Marsh. Beresford-Davies made his comments in an interview after a briefing at the broker’s London offices.

If banks lose faith in the insurance market, Beresford-Davies warned, “there’s a real danger that [they] may look elsewhere or retain risk in house.” It is up to insurers, he added, to provide products that will remain relevant to this market.

Marsh, Beresford-Davies said, hopes the insurance market will "still be able to respond to what banks are looking to buy and how they buy it. We are working very hard to ensure that that remains the case."

Beresford-Davies sees a segmentation emerging in the financial services market. In addition to the big banks, he said, there are a number of “sectors within the financial service industry, all at different speeds, all at different levels of sophistication and all of whom may be treated differently by the marketplace.”

Some of Marsh’s larger and more sophisticated financial services sector clients have invested time into understanding the connections between risk management and the insurance market, Beresford-Davies said. This, he added, has led to the tailoring of products and services to the risk profiles of organizations.

“It certainly is a hot issue,” Beresford-Davies said. “For us, of course, it’s a hot issue every day.”

The credit crunch and the banking crisis have contributed to the emergence of “unprecedented times both for our clients and the marketplace,” Beresford-Davies said.

He also pointed to the prospect of mergers within the financial services sector. At the same time, he said, some banks have decided not to seek government money. “We’ve had some shareholder disquiet around those deals,” Beresford-Davies said.

In advising a financial institution, Beresford-Davies said Marsh seeks to gain a full understanding of such factors as the client’s expectations of the marketplace, its relationship with the regulator and its attitudes toward risk transfer and retention.

“We have to understand what their objectives are,” Beresford-Davies said. “There are many and varied and complex issues that are going into an insurance transaction.”

The regulators have an important, and continuing, role in this arena, Beresford-Davies said. “The regulators have been a key partner in developing what has been achieved over the last couple of years in relation to that linkage between insurance and risk management frameworks,” he said.

Marsh, Beresford-Davies said, is aware that the risk of fraud increases in a more difficult economy.

“Given our broad international client base, we’ve seen an uptick in significant frauds," he said, noting that breaches have occurred within and part from events related to the subprime crisis. He cited domestic mortgage fraud in the United Kingdom and the United States.

Beresford-Davies also discerns a heightened role of the risk manager, traditionally the purchaser of insurance for corporations. Gone are the days, he suggested, when insurance for a large financial institutions was bought by someone in a “lower middle-management level sitting in a corner.”

Today, he suggested, “banks are looking for serious risk professionals, with a broader range of disciplines, particularly in the area of operational risk. They’re expecting them to be more nimble, insurance being just one of their objectives.” These specialists, Beresford-Davies said, will need expertise in such areas as risk financing.

Marsh Ltd. is part of Marsh and McLennan Cos., which is the second-largest broker in the world based on 2007 brokerage revenues, according to the Best’s Review ranking of global brokers.

[An audio interview with Beresford-Davies will be available soon at bestdayaudio.com.]

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)