What’s Next? Experts In Their Respective Insurance Specialties Shed Light On How Buyers Can Best Navigate Today’s New World Of Risk
Copyright 2009 Gale Group, Inc.All Rights ReservedASAPCopyright 2009 Axon Group <span id="x_hitDiv1">Risk & <span id="x_hitDiv2">Insurance <br> <br> <span id="x_hitDiv3">April 15, 2009 <br> <br> Pg. 22(15) Vol. 20 No. 5 ISSN: 1050-9232 <br> <br> 198471547 <br> <br> 11299 words <br> <br> <br> What's next? Experts in their respective insurance specialties shed light on how buyers can best navigate today's new world of risk. Consider this a survival guide; Cover story; Company overview<br> <br> Brodsky, Matthew <br> <br> <p></p> [ILLUSTRATION OMITTED] <p></p> summary <p></p> * insurance experts weigh in on everything from D&O to underwriting to natural catastrophes. <p></p> * Risk managers reveal secrets of their trade during a morale-sapping recession. <p></p> ********** <p></p> We at Risk & Insurance[R] typically are a cheerful lot. After all,we cover the diverse and dynamic universe of insurance and risk management, spanning carriers and claims, government and law, technology and science, global development and high finance. But lately, the view has gotten dim. Some players in the field, once held in high esteem, are now under fire. Others hold their breath and hope they're not the next victim. Meanwhile, risk managers, corporate and public alike,scrape together increasingly dwindling resources and staff as the main budget priority becomes survival. <p></p> Things aren't looking up anytime soon. Egads, man. What else couldhappen? <p></p> To help us gain as sharp and sober a focus as possible on our world, and what's to come, we decided to recruit some of the leaders in the insurance and risk management field, across as many industries as possible, to dissect what they see as the major challenges in their field and detail what they're doing about them. <p></p> We're talking names you've heard before, like Gregory Case, Mark Lyons, Janice Ochenkowski, Carol Zacharias, as well as names you should know. Their reader-generated content fills the pages to follow. Theauthors include the likes of Victor Parker, who heads risk management for the second largest city in the United States, Los Angeles. <p></p> Parker stares down the possibility of not just a slashed budget, but no budget. Yet he stays positive and provides "13 lucky survival tips" for risk managers on the hot seat. Read Parker's contribution onPage 23. <p></p> As a public risk manager, Parker is not alone. Timothy Mahoney, president of global risk management at Marsh, reports that risk managers at some of the largest corporations are also wrestling with these critical issues, such as how to maximize spending, allocate time and improve efficiency. <p></p> It doesn't help that the insurance market is challenging, with certain lines becoming more complex (and some would say exasperating) toplace. Read more from Mahoney on Page 23. <p></p> In such a market, a flight to quality is clearly in the cards, andalready taking place, on the part of both customers and insurers. Inthe process, insurers must pay particular attention to five criticalrisks, according to Mark Lyons, chairman and CEO of Arch Worldwide Insurance Group. Delve into those in Lyons' piece on Page 24. <p></p> Meanwhile on Page 29, John Glancy, chief underwriting officer for XL Insurance, devotes his piece to one particular insurer concern: making sure underwriters get the proper price for risks in these tough times and not dive for market share above all else. <p></p> Or how about George Stratts, vice president of AIU Holdings' Property Casualty Group, who raises the specter of the next great catastrophe on Page 30. California quake, the next Florida major hurricane, aman-made disaster--you imagine the multibillion-dollar catastrophe, then imagine cash-strapped insurers and reinsurers unable to find infusions of green from the capital markets. <p></p> Back to the buyers of insurance, we have additional commentaries from risk management professionals working in fields from airlines to parcel delivery, from technology to utilities, from hospitality to healthcare. <p></p> Ochenkowski, past-president of the Risk and Insurance Management Society and managing director with Jones LaSalle Inc., provides the view from the real estate industry, the forward-looking view, on Page 28. <p></p> The wave of the future for building owners and managers is here today: green building. As advantageous as sustainable and ecologically sound building practices are, they do bear risks, many as of yet unknown and unaccounted for, she says. <p></p> What is Ochenkowski doing to deal with green risks at Jones LaSalle? How are Lyons, Stratts and Glancy steering their companies on a straight course in spite of the full-blown gale? How does Parker stay so upbeat about risk management despite the downturn? Read on. <p></p> riskandinsurance.com <p></p> * Additional commentary from the industry's leading lights, including thoughts from Karen Clark, Joel Cohen, Jennifer Tomlin, Chris Suchar and Vince Morris. <p></p> Survival Risk: Managing Risk in a Recession. <p></p> The current economic outlook for most of our organizations is bleak, as corporate bailouts have become the norm and economic stimulus is our hope. The outlook for municipalities all across the nation, andespecially in California, is not any different. What the private sector is already dealing with, and has been for years through efficientcost-cutting and being nimble, is what municipalities and other public agencies must now learn to do quickly. After much struggling the state of California recently adopted a budget that addressed a $40 billion deficit. <p></p> At the city of Los Angeles, where I work as risk management director, it is estimated that we will have a budget deficit of $430 million in fiscal year 2009-2010 (starting July 1, 2009) and will fall further in the red to the tune of almost $1 billion for FY 2010-2011. Thecity faces severe challenges from loss of revenues and an underfunded pension system. Next year, we may face laying off as many as 5,000 employees. <p></p> I do not know what risks will look like in our organization in thefuture, and I am not sure what resources I will have to address those risks. Already, other public sector programs are on the chopping block with proposals that cut back risk management to one person, the risk manager. I think we all can say that we have good programs and strategies to handle our most challenging financial and operational risks. But what happens if we do not survive? <p></p> Is risk management an internal cost center that does not provide enough value to taxpayers? After all, we do not patrol or pave our streets. If we cannot keep our parks and libraries open, then what will keep risk management from dosing shop? Our mayor has made it abundantly clear that public safety is a top priority, and those of us not inuniform must all be more creative and reinvent the way we do business. <p></p> Recessionary times bring proposals on a daily basis that offer cost savings and revenue ideas for every city department. My concern is that many of these proposals are not fully vetted, and from a risk perspective we face more challenges to get our voice heard. I also worry about an organization with far fewer employees in operations that promotes a "cutting the corners" approach with risk management not a top priority. How many employees will opt for the workers' compensation line to avoid the unemployment line? <p></p> As risk management, we have to maintain our viability by making our organization successful and continuing to provide cost-effective, quality service to the city. <p></p> That is enough doom and gloom. The environment is what it is, so what are we in risk management going to do about it? What am I going to do about it? I have been through it before in the city of Los Angeles, but it has never been this bleak. Over the years, however, I havedeveloped a healthy awareness about potential downsizing and know the importance of providing value to our organization. For what it's worth and based on my experience, I offer the following 13 lucky survival tips from a municipal risk manager: <p></p> 1. Diversify your funding so you are not dependent on one source. <p></p> 2. Become revenue generating in anyway possible. <p></p> 3. Save money! <p></p> 4. Create organizational excellence and seek awards that publicizethis excellence, both internally and externally. <p></p> 5. Educate continuously and learn from everyone, including colleagues, professional organizations, employees and supervisors. <p></p> 6. Understand your role in your organization and know when to pushthe envelope and when to back off. <p></p> 7. Stay aggressive and be resilient--nothing happens overnight. <p></p> 8. Just say "yes" and avoid the public sector employee motto, "It is not my job." <p></p> 9. Take risks---it is better to have tried, failed and learned from the experience than to be completely risk adverse. <p></p> 10. Don't let the culture of your organization get you down and stop you from making those risk management improvements every day. Helpthem help themselves. <p></p> 11. Politics from time to time will trump logic. When that happens, move on! <p></p> 12. Maintain your positive mojo. <p></p> 13. Have fun! In these tumultuous times it's important to find ways to enjoy and find meaning in one's work. <p></p> [ILLUSTRATION OMITTED] <p></p> While we cannot predict the future, there is one thing that I am reminded of by the famous Gloria Gaynor song. That is, "I've got all my life to live ... got all my love to give, and I'll survive, I will survive, hey, hey." And so will we. <p></p> VICTOR PARKER is risk management director for the city of Los Angeles. <p></p> Answering the Questions of the Day. <p></p> We recently held an annual meeting for the risk management executives of many of our largest global clients. These executives manage risk in a variety of industries and their companies are headquartered in various parts of the word. It's clear from our discussions with them that the risk management process itself remains even more daunting and more challenging than ever before. <p></p> Everyone is under increasing pressure to do more with less. Risk managers now live in a world of heightened scrutiny and sensitivity. Boards pay more attention to risk management and demand more from their risk managers. <p></p> Beyond increased board involvement, general counsels, chief financial officers and auditors have lengthened the agendas for risk managers in this environment. Meanwhile, like all departments, risk managers are under pressure to reduce staff and costs. <p></p> Risk managers are wrestling with critical issues, such as how to maximize spend, allocate time and improve efficiency--all amid an increasingly complex and changing marketplace. While the risk management function plays a critical role in many. enterprises, some global riskmanagers express concern over their organization's overall commitment to risk management in such a difficult economic environment. <p></p> [ILLUSTRATION OMITTED] <p></p> There are specific problems related to the worldwide recession. For example, Kroll International reports that, during an economic downtown, fraud increases. Security concerns become increasingly importantand often require an increased investment in safety and loss control. This dynamic presents difficult choices: How can you cut back on these kinds of prevention expenditures at the same time that even more complex risks begin to emerge? <p></p> Risk managers face fundamental questions that are difficult to answer: <p></p> Risk optimization is a critical component of our clients' strategy. What are appropriate levels of risk transfer, limits of liability and retentions? <p></p> Meanwhile, the challenges confronting a number of insurance markets have made a difficult situation even worse. Placing certain lines of insurance has become more complex. Risk managers want an independent financial analysis of carriers and there is a strong move to diversify insurance portfolios. More due diligence is required. Yet the tightening of the capital markets may prohibit or restrict the entrance of new capacity. <p></p> In this environment, a commitment to innovation by brokers, insurers and risk managers is absolutely critical. And in this economy, with the negative economic trends, there is a need for a greater commitment to the implementation of sound risk management practices across all areas of an enterprise. <p></p> TIMOTHY J. MAHONEY JR. is president, global risk management, at Marsh in New York. <p></p> The 5 Risks of the Financial Apocalypse <p></p> As I look forward, I see five primary risk categories: the risks of insured exposures, of changing insurer risk management, of an irrational marketplace, of the capital markets, and of changing ratings agency and regulatory frameworks. All of these risks are extremely difficult to forecast and to navigate, but some directional observations can certainly be made. <p></p> INSURED EXPOSURES <p></p> The current economic crisis will surely impact our customers with respect to their underlying exposure and their ability to pay insurance premiums. First, if an insured closes some stores and operations or makes difficult staff reduction decisions, then their exposure to workers' compensation, property, and general liability exposures dropsas well. <p></p> [ILLUSTRATION OMITTED] <p></p> Offsetting this, however, is the potential for increased moral hazard losses: soft tissue injuries, fraud, employee dishonesty, cuttingcorners on fleet maintenance and perhaps a reduction in the internalcontrol environment. Arch's approach is to be especially vigilant inour evaluation of individual insureds and various industry sectors as well. <p></p> Secondly, some insureds may go out of business, whereas others will be financially weakened or acquired. Insurers may be put in a difficult squeeze to decide between providing installment support for customers versus taking on unclear additional credit risk exposure. Our units have tightened their credit evaluation procedures and are additionally looking at an insured's financial condition as another piece of their overall risk selection decision. The last thing any insurer wants is to increase their aggregate credit risk through underreportedexposure bases and increased premium audit risk and to push off the need for more collateral into the future when our insureds may be theleast able to obtain it. <p></p> INSURER RISK MANAGEMENT <p></p> Unprecedented upheavals have occurred in the insurance and reinsurance marketplaces. Carriers and reinsurers thought to be virtually invulnerable are either materially impaired and/or face an uncertain future of governmental and regulatory oversight. When insurers make risk management decisions of how much they choose to keep net, one standard mechanism is to use the reinsurance market as a risk-shifting device. Once a carrier makes that decision, the risk immediately shifts from one of underwriting risk to credit risk. A flight to quality is clearly in the cards by both customers and insurers. Short-term viewstoward reinsurance recoverables could surely lead to long-term financial difficulties for a ceding insurer if proper care is not taken before ceding such exposures. Depending on how the reinsurance market stalwarts fare over the next six months, front-end capacity shortages could emerge as insurers become unable to find sufficient reinsurancecapacity or sufficient quality reinsurance capacity. <p></p> IRRATIONAL MARKETPLACE <p></p> As insureds and brokers settle on their opinions of marketplace credit risk, there is an opportunity for business to flood the market. New operations are being created almost weekly as executives leave impaired companies and branch out in new directions. These new entitiesincrease the competition for business and also Hill seek to get a piece of the finite quality reinsurance capacity that exists; likely more so because many of the new operations don't have the capital size of their predecessor organizations. The thought of having an insurance/ reinsurance marketplace that continues down a soft market path is an irrational one. Uncertainties caused by the global economic crisis, extremely low interest rates and unclear underlying insurance exposures increase risk rather than decrease it. We're in the risk business and should know that increased uncertainty should lead to firming prices. Reinsurers will hopefully be judicious in their deployment of capacity so as to not indirectly spawn increased competition at the wrong time in our economic climate. <p></p> CAPITAL MARKETS <p></p> The flexibility of insurers and reinsurers to raise capital has been severely restricted. Debt markets are virtually nonexistent and the equity market has rendered stock to be a much less attractive currency. Reinsurance, however, continues to be an attractive form of alternative capital for the industry. Over the foreseeable future until financial markets stabilize, capital sources for the insurance industry may be more often "internal" via reinsurance transactions rather than "external" via the capital markets. <p></p> CHANGING FRAMEWORKS <p></p> Just as hurricanes Katrina, Rita and Wilma changed the industry's view of inherent natural catastrophe risk and caused material changesin the CAT models, views of capital needs may also likely change as recent seismic financial events are digested. As some stalwarts in the insurance and reinsurance industries are currently distressed, those organizations with the least leverage and minimal past liability issues Hill be most able to respond to changing circumstances. The ratings agencies continue to refine their capital adequacy models and they affect the landscape of competition. <p></p> MARK D. LYONS is chairman & CEO Arch Worldwide Insurance Group. <p></p> [ILLUSTRATION OMITTED] <p></p> Supply Chain: Be Nosy <p></p> One of the major emerging risks for companies operating global supply chains is in the area of supplier management. When you consider the current economic instability and the volatility of the credit markets, perhaps the most important element of risk and the ability to mitigate risk--is the financial soundness of the partners you are dealing with. <p></p> As supplier weakness permeates the marketplace, we're already seeing a rise in supplier bankruptcies. More than 4,000 toy manufacturerswent out of business in China last year. Standard & Poor's reports that the corporate bond default rate, a leading indicator of business bankruptcies, was up 377 percent in January versus the prior year. <p></p> Companies will need to re-evaluate their supply chains to identify, support their key partners and reduce the number of potential "weaklink" suppliers. Companies need to "be nosy" with their suppliers--performing financial audits if they haven't already done so. <p></p> The auditing of suppliers should take place at the base level (credit ratings and basic financial information), and companies should more deeply investigate higher-risk suppliers or those that provide critical materials that would be difficult to replace. Suppliers that are a sole source of materials or components should receive extra scrutiny and companies should consider adding additional suppliers to minimize the chance for disruption. <p></p> [ILLUSTRATION OMITTED] <p></p> New global challenges continue to make supply chain management more complex. In these volatile times, risk management has never been more critical. Continuity of suppliers is critical to success, so monitoring their health should be a primary concern for any business. <p></p> BOB STOFFEL is senior vice president for strategy, engineering andsupply chain at UPS. <p></p> WARNing to Employers! <p></p> Thousands of employers are making layoff decisions almost overnight, driven to this harsh employment action by the economic downturn. Attorneys are getting calls from companies daily, asking the same questions about their risk of a lawsuit: Can we layoff? How do we layoff?How can we minimize risk? How quickly can we do it? <p></p> To start, employers can conduct layoffs. Unless your employees areunionized, or have individual employment agreements providing for a specific term of employment and/or specific reasons for termination, most U.S. workers are employed at will. The rights of unionized employees or employees with individual agreements are governed by the terms of their agreements. <p></p> Conducting a layoff fairly, and minimizing risk, requires planning. How quickly it can be accomplished depends on the number of employees affected. If applicable, ensure federal WARN Act compliance. This law applies to companies with 100 or more full-time employees, usually providing that employees be given 60 days notice of a plant closingor mass layoff. WARN is complicated, but generally, if 50 or more employees at a single location are affected, you should seek legal advice to see if the WARN Act applies. <p></p> Carefully decide who to layoff. Choosing is fraught with problems,and employers need to select employees in a manner that will not increase the likelihood of employment claims. Sometimes, it's as easy asknowing that an entire facility will close and that everyone will belet go. More frequently, employers must be selective. Seniority is the time-honored criteria for deciding who to retain, but it doesn't always yield a workforce that fits the employer's needs. <p></p> Distribute final pay in a timely way and provide payment for accrued vacation or other paid time off, in accordance with your policies and state laws. Provide COBRA notices and information on other benefits conversions, as required. These may seem like small details in thebig picture of what your company is confronting, but they matter to the individual employee. Getting them wrong becomes fodder for employment claims. <p></p> Avoid lawsuits by paying severance and getting a release. To do that, you need to provide laid-off employees with something--severance pay usually--they are not otherwise entitled to. Many employers considering layoffs will design a severance program or an ERISA-governed severance plan and provide severance (usually based on an employee's length of service with the company, sometimes with minimum floors and maximum caps; in other cases, a flat number of weeks of pay per employee). <p></p> To obtain valid releases of claims from employees over age 40, employers must comply with the Older Workers' Benefits Protection Act, which in a layoff mandates that employees who are asked to sign a release be given 45 days to consider it, seven days to revoke it after signing and also be provided with certain information disclosures. Companies that have conducted layoffs and provided severance and releasesin the past should consult with legal counsel to ensure they have the most up-to-date advice on these topics, as the law here is complex. <p></p> [ILLUSTRATION OMITTED] <p></p> Cozen O'Connor labor & employment attorney SARAH KELLY is a formeremployment law counsel for CoreStates Financial Corp. and senior employment counsel for PNC Bank Corp. <p></p> MATTHEW BRODSKY is senior editor/Web editor of Risk & Insurance[R]. He can be reached at <a href="mailto:[email protected]">[email protected]</a> <p></p> Many Binoculars for Multiple Risks <p></p> The current state of the world's economy has created a heightened level of risk for almost all organizations. But due to its structure and the nature of its product, the airline industry earl be particularly susceptible to the effects of an economic downturn. <p></p> First of all, air travel is derived demand, and for the majority of the world's airlines, that demand is based chiefly on the desire for business travel. The airline industry is also very capital-intensive and characterized by high fixed costs. <p></p> High utilization of assets and economies of scale to reduce unit costs are key elements to airline financial success. <p></p> In addition, the inventory an airline produces can't be stored andthe amount of inventory it produces can't be easily reduced. Seats on a flight are perishable assets that "spoil" once the aircraft leaves the gate. Although an airline can remove aircraft from the flight schedule to reduce the capacity being provided, most of the cost associated with those aircraft continue. <p></p> Those fixed costs can be substantial. A typical twin-engine aircraft used for a domestic route is an investment in the vicinity of $50 million and a long-range aircraft for transoceanic service can cost $130 million. Removing an aircraft from service can significantly increase unit costs for operating the remaining aircraft and further undermine profit margins. <p></p> These inherent structural risks are being intensified by the current economic downturn. The reduction in the availability and the increased cost of capital has impacted the ability of airlines to finance needed aircraft replacement and refinance existing obligations. Demand for business travel has gone down due to layoffs in key industries such as financial services and to reductions in travel budgets. Nearly all of the U.S. airlines have responded by grounding aircraft to reduce capacity. <p></p> In the past, airlines outside the United States were expanding andprovided a market for the aircraft removed from the U.S. system. However, the fact that the economic downturn is a worldwide event has greatly reduced the demand for used aircraft and the financing available to purchase them. Fixed costs continue to be incurred while these aircraft sit in desert storage. <p></p> Fuel availability and cost remain a significant risk in spite of the fact that current oil prices are down from their record levels 18 months ago. The reduction in the price of oil has reduced operating costs for the airline industry but it has also reduced the profitability of many of the corporations that purchase business air travel. As a result, airline passenger traffic is down. In addition, fuel pricesare always subject to spikes resulting from a sudden decrease in availability, such as a terrorist attack or a change in the political outlook of a major oil-producing country. <p></p> Greenhouse gas legislation is becoming a reality for airlines operating in Europe, including the U.S. airlines that fly into Europe. The cap-and-trade program being implemented in the EU will begin to impact the airlines in the next two to three years and U.S. legislation is expected in the near future. The budget proposals currently being debated in Congress specifically include revenue from a cap-and-tradesystem beginning in the next three years and there is no reason to assume that airlines Hill be exempted from that requirement. <p></p> How has Continental Airlines responded to this environment? While we use a number of risk mitigation techniques, including traditional approaches like financial hedges for oil and lobbying efforts on issues such as cap-and-trade, our most critical risk mitigation techniqueis the use of an enterprise risk management approach to ensure that we are focused on the right risks. <p></p> [ILLUSTRATION OMITTED] <p></p> [ILLUSTRATION OMITTED] <p></p> Our ERM process ensures that emphasis is placed by the right people on those exposures that represent the greatest threat to the "business" that is Continental Airlines. Managing risk at this level requires the involvement of senior executives and a system to anticipate and analyze business risks. The fact that we have excellent fire protection in the hangars or that we hedge our foreign currency exposures is good but it does not respond to the business exposures. The captainof the Titanic had the most up-to-date fire protection systems available for ocean liners but he did not have enough binoculars. <p></p> PETE FAHRENTHOLD is managing director, risk management, Continental Airlines. <p></p> Electrical Losses in Public Schools: Shocking Statistics <p></p> Public schools are among the largest consumers of energy in the country. According to the U.S. Department of Education's National Center for Educational Statistics, 72 percent of school business officialsbelieve that the rising cost of energy Hill have a significant impact on the amount of funding they can provide for the education of students. <p></p> In our view, high energy costs, combined with funding challenges, are also having an impact on the maintenance of many schools' facilities. It appears that electrical equipment in some public schools is not being maintained to proper standards, which is leading to increased electrical fires. We have seen a 24 percent increase in frequency of electrical losses in public schools since 2006. <p></p> Proper equipment maintenance is not only good risk management but it is also cost-effective and environmentally friendly. Public schools spend $27 billion annually on nontransportation energy costs. With proper maintenance, estimated energy savings would be 5 percent to 15percent, or $1.35 billion to $4 billion, according to the U.S. Department of Energy. This does not factor in the possible savings in lives of children in the public school system or the potential liability that could result from improper maintenance. <p></p> [ILLUSTRATION OMITTED] <p></p> [ILLUSTRATION OMITTED] <p></p> Bringing schools' electrical equipment and machinery up to higher standards may mean an initial upfront investment, but it Hill save money and lives in the long term. It is our hope that the additional money planned for education and infrastructure under President Barack Obama's new budget Hill help address this emerging risk. <p></p> GREG LANG is senior vice president at Munich Re America Specialty Markets. <p></p> Finding the Energy to Stick With Green <p></p> Assessing risks and practicing risk management tops the list of business trends this year and, for risk managers, that is a good thing.The increased importance placed both on risk assessment and risk management puts us front and center with senior management to deliver timely, relevant information in a useful format. Undoubtedly, identifying emerging risks will be part of that challenge. <p></p> I am responsible for risk management for Jones Lang LaSalle, a global real estate services company. With offices in more than 60 countries and a wide range of products and services related to commercial real estate, we have already identified plenty of risks. One of the areas that I see as an emerging risk flows from one of the hottest initiatives in real estate--energy and sustainability, known as the "green" movement. It is important to mention that there are as many aspects to the real estate green movement as glass panes in a high-rise building. For some, it means adding a few plants in a building's lobby. For others, it is Platinum LEEDS certification. But for most of us, it includes everything between. Jones Lang LaSalle does not view energy and sustainability initiatives as a trend but rather as an emergingway of thinking about global property ownership and management. <p></p> [ILLUSTRATION OMITTED] <p></p> When I think about new risks on the horizon, I think about risks related to the energy and sustainability initiatives that are either unknown or unquantified today. For example, simple calibration errors can occur when working with new types of building equipment; the consequence could be a failure of the systems to operate as anticipated, with neither the financial nor resource savings that were expected. Additionally, over time, we may learn about adjustments required or special conditions that were not fully understood when the systems wereinstalled. These could also result in failure to meet expectations that can lead to potential claims. <p></p> There is also a new category of green cleaning products and materials. Potential risks here include misuse of the materials, unintendedconsequences from unanticipated use, and new scientific data emerging about the material or product's components all of which may lead tounexpected risks. The same risk potential is true of building materials, recycling programs, lighting sources--in fact, just about any ofthe new products and/or services that are related to improving energy efficiency and sustainability carry a risk potential. <p></p> Should we avoid these risks and wait a few years before embracing this movement? At Jones Lang LaSalle, the only answer is: "Absolutelynot!" We believe that developing, owning, managing and leasing properties that are respectful of the environment is critical. We are committed to this initiative and are confident that, as those new risks emerge, we will manage them. We believe that traditional risk management practices can be applied to emerging risk successfully. We believethis because, of course, in a perfect Catch-22 situation, failure toimplement the best technology, or to operate a property in an energyefficient manner, is also a new risk on the horizon. <p></p> JANICE OCHENKOWSKI is the past-president of the Risk and InsuranceManagement Society Inc. and is a managing director with Jones LaSalle Inc. <p></p> The Strict. Disciples of Discipline <p></p> Who isn't feeling the pressure of this economy? It is testing businesses in every imaginable way. It may also be taunting businesses toact in ways that go against good judgment and, if not careful, even put future success at risk. To really pass the test and navigate through a turbulent economy, sticking to proven business discipline is more important than ever, especially for the insurance industry. Adhering to strict, disciplined underwriting may be the carriers' ultimate test of survival. <p></p> Business leaders today would have had to be born before 1910 or soto have had to steer a business through economic conditions even remotely similar with what we are dealing with today. Most business leaders are in uncharted waters right now. While nothing compares to the current economy, the insurance industry need not go back too far in its history to be reminded of what happens when it sways a bit from its underwriting commitment. Unfortunately, our memories can be so fleeting at times. <p></p> In the current market, chasing insurance premiums is so tempting. For the industry, maintaining underwriting discipline is critical forlong-term success throughout all insurance market cycles and economic conditions. Insurance companies sell their promise to serve and offer financial support to their clients in the event of a loss. It's a promise to pay a claim. To remain true to their claims-paying promise, carriers need quality underwriting results that produce a profit tocontribute to companies' financial strengths. <p></p> Insurance companies are not going to be rewarded for some of the market-share growth activities that we have seen in the past. Industryanalysts, clients, investors and other stakeholders are looking for responsibility in the market. In today's economy, capital is expensive and limited. In order to use their available resources wisely, insurance carriers need to be selective where they will allocate capital.Risk quality and adequate pricing are driving responsible insurer's underwriting decisions and where they use their capital. <p></p> If we were to walk a mile in risk managers' shoes today, its clearthat deteriorating economic conditions are putting pressure on them in many ways. Balance sheet, staffing and budget restrictions may lead to pressure on maintaining adequate risk management programs. The economy puts pressure on their ability to ensure continued strong quality risk management efforts, perhaps with fewer resources. <p></p> While economic conditions may force clients to buy less insurance and restrict their risk management efforts, there may be no material change in exposure. In fact, in rougher economic times, business exposures can result in much greater risk. Oftentimes, fewer resources--whether it is fewer people to carry out day-to-day operations or less money to devote to training or premium--may result in more exposures. <p></p> So client cost-savings efforts brought on by today's economy require underwriters to take an even more disciplined review of clients' risks and how their exposures might be changing as a result of the economy. <p></p> Economic conditions and current market realities are dictating that businesses re-evaluate how they do business, where they do businessand with whom they do business. Insurance companies are no exception. Risk must be properly priced. <p></p> [ILLUSTRATION OMITTED] <p></p> JOHN GLANCY is chief underwriting officer for XL Insurance. <p></p> And What if the CATs Came Back? <p></p> Capital is now the big and emerging risk in the property insurancemarkets. If a significant event occurs in the near future--on the scale of Hurricane Katrina or a major insured terrorism event similar in scope to the World Trade Center loss--it would be difficult for insurance companies to reload capital to replace the capital expended topay those losses. <p></p> Today, unlike in the past when, after a significant catastrophe loss, capital rushed in from many sources, far fewer capital recapitalization options are available. Accordingly, capacity in the property insurance markets likely would be reduced to the extent that there even might be midterm withdrawals of coverage; there would also likely be renewal problems. <p></p> [ILLUSTRATION OMITTED] <p></p> Given the current state of the capital markets, it's even more important to understand what kind of events could cripple your industry and to know your exposures and the probable maximum loss you could sustain in a catastrophe. Armed with that knowledge, it is critical to know whether your carrier has the track record to match the risks that it is writing with its risk appetite and capacity. Similarly, you need to be aware of your carrier's aggregate exposures to these kinds of events and what its plans are to manage these losses and replenishits capital. <p></p> While important, a financial-strength rating is only one of the considerations. You need to know whether your carrier has a track record that shows it can survive these kinds of CAT events. You should question how much treaty reinsurance stands behind the risk and determine whether it is adequate. Then examine the financial condition of thereinsurers as well. It is not unreasonable for you to subject the reinsurers to the same kind of hard-nosed financial analysis that you apply to your direct insurer(s). <p></p> [ILLUSTRATION OMITTED] <p></p> You need to examine your carrier's record on severe claims and whether they are prepared to handle the different kinds of catastrophic events to which you are exposed, such as high-category hurricanes, terrorism attacks and earthquakes. Know how quickly they are able to respond. This is particularly important with respect to business-interruption losses. Find out whether, in the past, the carrier had adequate adjusting resources and claims personnel to handle these kinds of losses. Know what kind of planning and precautions your carrier suggests that you take to avoid or reduce catastrophic losses. <p></p> Further, you should achieve an acceptable level, of comfort concerning the renewal capacity that your carrier currently offers and whatan event of this nature would mean for your coverage going forward. A simple rule: You also should be confident that your carrier is prepared to handle two catastrophic losses in a single year. <p></p> GEORGE STRATTS is vice president of AIU Holdings' Property Casualty Group and also an executive vice president of Lexington Insurance Co. <p></p> From Fat to Funds <p></p> Specific concerns outside traditional risk management have unique applications to the healthcare industry. <p></p> One is the general lack of understanding of the true cost of care.Faced with surgery, it is harder for consumers to discover which hospital has the best success rates for heart surgery or if it is possible to have knee surgery at a lower cost at one facility or another. <p></p> [ILLUSTRATION OMITTED] <p></p> The situation is complicated by in-and out-of-network issues and where their physician has hospital privileges. Purchasing health insurance is usually a financial decision but when people need care, they are facing medical and emotional issues, especially in an emergency situation. Easy-to-understand cost and performance information would be very beneficial to consumers. <p></p> As a nation, we are getting older, fatter and sicker. Two out of three Americans are overweight, so wellness programs and their continued development are important to health insurance companies. Most carriers offer plans that include wellness consultants to help employer groups manage their costs through employee health surveys, fitness andnutrition programs designed for the entire family. Humana, for example, has developed FreeWheelin', a bike program for employer groups. <p></p> More than 70 percent of today's health costs go toward preventable, chronic disease and wellness programs can have a direct impact on these costs. <p></p> Funding for medical research, clinical programs and new drug development is also a concern. My home state, Kentucky, has one of the highest rates of heart disease in the United States, but there is some exciting new research under way in the world's first clinical trial using adult cardiac stem cells to try to regenerate dead heart muscle. <p></p> Like most states, Kentucky has a budget deficit, so programs like this may be cut back or not available in the future. Many families and funds, which support university and hospital clinical research, were hit hard by the recent investment scandals. <p></p> [ILLUSTRATION OMITTED] <p></p> Healthy and properly executed risk management programs are important in any economy, but this economy presents a big challenge to risk managers to be even more creative in delivering programs and plans that support the organization's business goals. We may not be able to tear down silos on our own but by working strategically across department lines, we earl at least tunnel through them <p></p> CAROLYN SNOW, CPCU, is director, insurance risk management, for Humana Inc. <p></p> Managing Market Risk in a Recession <p></p> As an integrated energy company with generation, transmission and distribution assets, the Public Service Enterprise Group faces a number of financial market risks that are particular to our industry. These are in addition to the market risks faced by all companies--such as loss of shareholder and pension fund value. Generally, these risks are related to the capital intensive financing requirements of our infrastructure, the regulatory environment in which we operate and the nature and volatility of energy commodities. <p></p> First and foremost is the ability to fund major infrastructure projects --building new transmission facilities, upgrading coal-fired generating plants for environmental compliance and investing in renewable generation--all require large amounts of capital. To meet these needs, PSEG is working with regulators in New Jersey to reduce the "regulatory lag"--which is the time between when we spend funds and when we recover these funds from our regulated customers. <p></p> [ILLUSTRATION OMITTED] <p></p> PSEG Power established a retail medium-term note program enabling us to issue bonds directly to investors through a retail distributionnetwork. The program is beneficial especially during a period when credit concerns and capital constraints significantly limit traditional market access. Importantly, we were able to diversify funding by tapping a new "buy and hold" investor base; and at a meaningful cost savings relative to institutional funding alternatives. Additionally, there is substantial flexibility with respect to term, structure and size of offering in this retail product. <p></p> One must also plan for the retirement of these assets and in the case of nuclear plants the ultimate decommissioning of the plants. Since 1988, nuclear plant owners in the U.S. have been required by the Nuclear Regulatory Commission to set aside funds in order to finance the considerable costs of decommissioning--or dismantling--nuclear power plant sites after the reactors have been shut down. In our ease wehave opted to set up an investment trust fund to manage these futurecosts. This essentially becomes a classic asset/liability managementproblem not unlike a pension fund but with more time to recoup before payments need to be made. Needless to say, the state of the currentequity markets has had an impact on the value of these funds, which will have to be managed carefully over the next several years. <p></p> Finally, hedging the fuel costs and output of generation plants toreduce earnings volatility requires collateral management. With commodity prices that have been extremely volatile, this has posed some significant challenges to traditional thinking around stress testing and scenario analysis. We measure and plan for margin requirements in the event of a downgrade to our own credit rating. Over the last several years the challenge has been to maintain sufficient collateral ina rising price environment where the probability of a downgrade event has been low. <p></p> Our new challenge is to maintain sufficient collateral in a low price environment where even though the amount of collateral required may be lower, the risk of a downgrade is higher since earnings may be lower, collateral funding costs are higher and funds are scarce. The trick in both eases is to maximize the utilization of available linesof credit with existing counterparties, maximize offsetting trades that provide a natural set-off of exposure with quality counterpartiesand increase netting through the use of clearing brokers. <p></p> LAURIE BROOKS is vice president, risk management, and chief risk officer with the Public Service Enterprise Group, a New Jersey public utility. <p></p> Changing Partners <p></p> The world economy is shaken, the Atlantic storm season is fast approaching and we're all being asked to do more with less--as these pressures mount, the hospitality risk manager is still left with a few very familiar concerns. Will there be enough property insurance capacity to go around for costal wind, flood and quake exposure in 2009 andbeyond? If so, will its cost be prohibitive and push us into retentions that don't fit our comfort zone for risk tolerance? And the same question holds for market availability of surety capacity. Will the number of sureties or available lines of surety capacity contract as the cost for diminishing capacity continues to rise? These remain the two areas of concern for hospitality risk management accounts in the current credit-crunched, ratings-bashed, volatile insurance market. <p></p> In addition to carrier financial volatility, 2009 has brought withit unprecedented movement amongst senior underwriter officials with both domestic and international impact. These changes have altered the playing field a bit as some carriers have changed their risk tolerance and role positions on certain programs. This has created an opportunity for risk managers to reposition their companies and their risks. New underwriting senior management means new opportunity for risk managers as new business targets are established and everyone is working towards building a sustainable book of business. <p></p> Wyndham Worldwide has greeted these challenges and industry changes by embracing them and by attempting to differentiate itself as a preferred risk management account. Wyndham's response, when many are running for cover, has been to step forward and become more visible andopen to the underwriting community. Wyndham's goal is to provide itspresent and future underwriter partners with unprecedented access toits people and information. In support of this goal, Wyndham recently hosted approximately 50 property insurance carrier and broker representatives at its first ever property insurance symposium. The event,which it hopes to host annually, allowed the attendees to learn moreabout Wyndham's unique property risks and gave its attendees access to Wyndham's senior management. Wyndham also hosts similar semi-annual events in support of its surety program where Wyndham senior management representatives present on topics germane to the company's financial performance. Through these events, Wyndham provides access to underwriters for senior financial and operational representatives at Wyndham in a no-holds-barred, open forum of questions and answers. Bothevents are intended to infuse all participants with the spirit of partnership and a free exchange of information. <p></p> Wyndham believes that its risk story is unique and by providing underwriters with access to the right people and the right information it creates an opportunity for the underwriting process to maximize itself. In addition to managing its information resources, Wyndham maximizes its people resources by partnering with industry experts for specialized brokerage support services. In a world where we are being asked to do more with less, Wyndham tries to use the right resources to gain access to capacity and leverage relationships where possible. As an example, Wyndham's property brokerage team is comprised of representatives from four brokers: two retailers, one wholesaler and one local London broker. Wyndham has found that by allowing these brokersto focus in their area of expertise, it has created an economy of scale and compiled the right team to secure otherwise diminishing capacity for its programs. <p></p> Wyndham's approach has been to embrace the volatility of the present market by continuing to partner with the right companies and providing best-in-class access to its people and information. <p></p> JAMES IERVOLINO is vice president of risk management and insurancefor Wyndham Worldwide Corp. <p></p> A Closer Look at Comp (onents) <p></p> With businesses facing heightened financial concerns, risk managers are under more pressure to reduce their companies' workers' compensation insurance costs. One of the ways this can be achieved is by reducing worker's compensation claims. Understanding the components to aworkers' compensation claim, as well as knowing what drives workers'compensation losses, are two important ways that can help reduce losses. <p></p> Knowing how workers' compensation costs break down and effectivelymanaging those costs through analytic claim metrics will help prevent deterioration of the employers' bottom line. <p></p> There are two cost components of a workers' compensation claim: direct --cost for insurance and deductibles and indirect--cost incurreddue to loss of employee productivity, hiring of temporary workers, and/or training new hires. <p></p> It is important for businesses to identify where, when and how workers are injured in order to focus their prevention efforts towards correcting the issues that cause the injuries. Once the trends are identified and corrected, employers' direct and indirect workers' compensation costs will most likely be reduced. <p></p> One way to identify a business' loss trends is to work with an insurance provider who offers detailed analytical reports created specifically for the business. This information will help identify the business' strengths and weaknesses. <p></p> Zurich offers its customers a complete review of their WC claims by modeling the customers claims data and providing the trends and outcomes in a 'Workers' Compensation Diagnostic Report.' This process allows our customers to see a comprehensive picture of their WC claims history to help them pinpoint issues that could be driving up both their direct and indirect claim costs. <p></p> The following are some types of trends identified in a company-specific workers' comp diagnostic report: <p></p> * Day of the week when most injures occur. <p></p> * Average length of employment of the injured workers. <p></p> * Top five injury types. <p></p> * Top five injured body parts. <p></p> * Lag time between injury and reporting to employer. <p></p> It may not be clear at first how receiving this information can help reduce WC costs, but the insurance provider would walk the risk manager through the data to help him/her decode the information. For example, once the employer has identified the specific day or days of the week when WC injuries occur, the employer earl develop loss prevention programs or change the way operations are completed on any specific day. It is helpful to know the distribution of employees by length of employment to understand where to focus training efforts. Understanding the top five injury types and top five injured body parts will help identify where to focus injury prevention efforts and specificsafety controls that would help reduce injuries. <p></p> Experience has consistently shown that employees that delay reporting an injury tend to have higher claim costs. For example, some companies may notice a trend when employees take one to three days to report a claim versus when they take just one day. This data can show where training or communication improvements on reporting claims may beneeded. <p></p> [ILLUSTRATION OMITTED] <p></p> An increase in exposure to loss can also be created with a reduction in staff. The increase in exposure can result from retained employees filing WC claims fearing they may be the next to go, or by increased workloads, e.g., double shifts. Having the claim metrics that show the makeup of the workforce, including tenure, and WC claims history details like type of injury, day of the week injured and number of days off work can help manage this increased exposure. <p></p> [ILLUSTRATION OMITTED] <p></p> Companies in an effort to reduce costs may also consider reducing safety and loss control measures in the workplace to help address short-term financial crises. A business' choice of short-term cost savings over long-term stability is one of the biggest challenges risk managers may face in the current financial climate. <p></p> JENNIFER TOMILIN, is senior vice president and technical underwriting officer for Zurich North America's Commercial Markets business unit. <p></p> Talent and Customer Service <p></p> In this current economic crisis, it is imperative for brokerage and consulting firms to retain and recruit leading talent. You accomplish this through a basic platform of a common vision, alignment aroundthat vision, collaboration and trust. By committing to building the best, hiring the best and being the best, a firm can be positioned toflourish as opposed to merely sustain. <p></p> Leaders examine all aspects of the organization and track how key contributors are responding to a crisis, reflecting on the past; learning from it, envisioning a new organization when needed and projecting optimism and confidence about the future. Our colleagues who own the key customer relationships serve as the sources for innovation andpossess irreplaceable intellectual property. They are mission-critical; for without them, Aon simply wouldn't be able to navigate the current turmoil, resulting in a potential loss of our competitive advantage. <p></p> Organizations take a chance when they fail to keep the pipeline offuture leaders filled. We know that our high-potential leaders are our future, and invest in them accordingly. Research shows that the effectiveness of management training is enhanced by 50 percent when even a minimal level of personal executive coaching is involved. Even inthese challenging times, it is crucial to maintain this strategic approach. <p></p> If downsizing is required, leaders must be armed with a clear picture of current and future needs via a fact-based assessment of talentlevels. Most organizations today are wisely using a scalpel rather than an axe to downsize, but they must be guided by clear-eyed, fair and accurate talent evaluations. Existing performance appraisals are agood starting point, but can be biased and therefore inadequate for making these decisions. Personal interviews, competency assessments and workforce planning scenario analyses are additional tools to help mitigate the likelihood of costly post-downsizing litigation. <p></p> [ILLUSTRATION OMITTED] <p></p> [ILLUSTRATION OMITTED] <p></p> In today's economy, organizational transformations such as mergers, acquisitions and divestitures will increase as employers seek to cut costs, increase access to capital and streamline products and services. As these changes directly affect personnel, firms must dedicate the proper resources and experts to help with leadership changes, jobredesign, staffing levels and crisis communication. Now is the perfect time to engage in straight talk with front-line management. All too often, even well-meaning firms engage only senior management in deal-related dialogue. Organizations that are successful in retaining employees and keeping them engaged during a transition period are thosewho invest the most time and energy in equipping and engaging front-line managers in carrying the messages about the change in a meaningful and relevant way. <p></p> Given that customers are won or lost every day, it makes sense to continue with those investments that build your service culture. Identify, train, motivate and reward your front-line employees who interact regularly with customers. The firms that will survive and thrive in this challenging economy are those that strengthen their customer focus and strive to be the destination of choice for the best talent. <p></p> GREG CASE is the president and CEO of Aon Corp. <p></p> Mind Your Three P's: Property, Patents and Protection <p></p> In January, more than 25 risk executives of some of the largest technology companies met at the annual Technology Industry Risk Forum and it was clear to me as I spoke with peers that two risks were forefront: The financial viability of our insurance carriers and the increasing challenges of intellectual property and, particularly, patent protection. <p></p> [ILLUSTRATION OMITTED] <p></p> Some risk managers are developing their own risk metrics to evaluate the financial health and the stability of their insurance carriersand risk financing partners. These metrics, which will reflect each company's individual concerns, priorities and risks, are evolving in part because of the financial crisis. <p></p> [ILLUSTRATION OMITTED] <p></p> Risk metrics typically go beyond ratings, although the ratings continue to have value. But many feel that it is increasingly important for risk managers to have an independent and internal benchmark to apply to our financial partners. <p></p> Risk professionals have a fiduciary obligation to verify that our financial partners are stable. Whatever factors one looks at--cash flow, reserves, investment asset allocation--the financial criteria must reflect what's important to your company and provide a timely perspective on that firm's health. Looking back at 2008, it's clear that the ratings agencies did not provide a strong warning of the developing problems at AIG, nor at other major financial institutions. Some believe that an independent assessment of the quality of the risk management process at our carriers is an increasingly important factor. <p></p> Intellectual property remains a significant risk to me and to manytechnology companies. It's a risk that most technology companies work hard to manage. It isn't an area where insurance offers easy answers. <p></p> Frankly there isn't much of a market for patent insurance. Becauseof the size of the potential risk, these intellectual property issues can quickly become unanticipated catastrophe exposures made even more difficult by the long-tailed nature of the risks. Generally speaking, those with significant patent exposures, especially in the US, are looking at achieving some form of a comprehensive alternative risk financing approach to these issues. <p></p> Many technology analysts expect increasing consolidation within the tech space. That elevates the importance of risk analysis and identification in the mergers and acquisition process. In today's economy,you certainly can't afford to acquire possible toxic liabilities--like a big intellectual property issue--in a merger or acquisition without clearly understanding the costs and the possible benefits. That requires a level of due diligence that strongly factors in the risk issues in the analysis. In a sense, it can also call for continued progress to improve enterprise risk analysis as a part of the risk management process. <p></p> GEORGE HAITSCH is the vice president for corporate risk for SAP AG <p></p> The Best Medicine for Cutting Workers' Comp Claims <p></p> Medical costs have been the Achilles' heel of the workers' compensation industry for the last decade. Given the current economic environment, it does not appear that average medical costs per claim will be getting better any time soon. Frequency of claims is down dramatically, primarily due to work force reductions, exacerbating average medical costs per claim in three major ways. Our experience has shown that claimants without a job to return to typically have longer claim duration. Longer claim durations will typically lead to increased medical costs. <p></p> [ILLUSTRATION OMITTED] <p></p> The average age of employees is projected to increase as younger workers are furloughed by companies. Data tells us that while older workers have lower injury rates, they are slower to heal when they are injured, providing another driver for longer durations, again leadingto higher medical costs. <p></p> Now for the elephant in the room--most vendors employed by companies to manage these costs are compensated primarily through frequency of claims and frequency of treatments. These business models don't encourage the control of utilization of treatments. As the frequency ofclaims decrease, one way to offset this revenue decline is through increased utilization of medical treatments on existing claims. <p></p> THE OPPORTUNITIES <p></p> What can risk managers do to reduce medical costs in these turbulent times? <p></p> First, identify those claims where claimants don't have a job to return to and develop alternative strategies to bring these claims to closure. You may end up paying more now but statistics say you will save in the long term. <p></p> Second, compare average medical costs year over year. This comparison will require a deeper analysis to differentiate the increase in cost that is the result of an older workforce versus the increase thatis due to an unsubstantiated increase in utilization of medical treatments. If you notice an unsubstantiated rise in frequency of treatments, stem the tide by increasing oversight of vendors and performing audits to verify utilization of treatments that are reasonable and within guidelines. <p></p> Finally, understand the business models of your selected vendors and demand the transparency to insure your interests are protected. This is especially true in situations where the vendor's business modeland the customer's interest are not aligned. <p></p> Risk managers today must not only understand how this economy is impacting their programs but they also have the added challenge of understanding how this economy is effecting their vendors' actions. The majority of current business models on the medical side of the house are simply not aligned with protecting the customer's interests. We can only hope that this situation changes in the future. <p></p> [ILLUSTRATION OMITTED] <p></p> JOE BOURES is president of Hartford, Conn.-based Specialty Risk Services, one of the nation's largest TPA's. SRS provides claims and risk management services. <p></p> Dealing with Nasty Staphs <p></p> One big, emerging risk that we think will become increasingly common and the subject of some costly lawsuits is call MRSA--Methicillin-Resistent Staphylococcus Aureus. This kind of hospital-born infectionis unusually resistant to broad-spectrum antibiotics, so it's especially difficult to treat. It's so tough that it can be fatal. <p></p> Hospitals and healthcare facilities, like nursing homes, are especially susceptible to MRSA infections. And now it's also being discovered at other locations like health clubs. In the past, it typically infected older people with reduced immune protection but it has becomemore common among the general population. This kind of "pollution" unfortunately, has the potential to become a new version of the mold issue that was in the news a few years ago. <p></p> Safety and prevention are the key factors. Right now, most pollution insurance policies don't cover MRSA. Policies at hospitals and nursing homes specifically exclude coverage of the infection. The numberof MRSA-related legal actions is also increasing significantly. For example, the families of three young children, all victims of hospital born infections, died and lawsuits were filed against the hospitals. <p></p> [ILLUSTRATION OMITTED] <p></p> The difficulty, from an insurance point of view, is how to underwrite the risk. There may be some precedent in underwriting standards for mold. With mold, we look at how an institution keeps water and moisture out of its property. Track the source of the water and there's a good chance you will find the cause of the mold. That helps us figure out the best ways to underwrite mold risk. <p></p> With MRSA, we need to find that key underwriting link. What is thebest way to keep a facility hygienic? How do we measure that? What kind of hygienic procedures are in place and which ones are the most effective? How, with these kinds of institutions, do you make sure that the needed measures are implemented 24 hours a day, seven days a week? Even more basic are questions that are difficult to answer: How, exactly, is the infectious bacteria transmitted? This risk deserves priority both to protect the institutions, the patients and the hospital staff and to make it possible from an insurance perspective to protect the financial health of the institution. It's a huge challenge for both public health officials and the insurance industry. <p></p> JOE BOREN, former chairman and CEO of AIG Environmental, recently joined with Ironshore, the Bermuda-based insurer, to head up its environmental facility, Ironshore Environmental <p></p> D&O Frequency.... It's baaaaack! <p></p> Rising numbers of securities class action filings, increasingly expensive settlements, proliferation of bankruptcies and economic constriction, and new legal decisions easing pleading standards all have created a more litigious environment for directors and officers today. <p></p> The roster of 2009 filings to date has only confirmed this increase, with 40 eases filed by March 9. At the current rate, we appear headed for a second straight year of 200 or more cases. More than 218 directors' and officers' actions were filed in 2008, 31 percent above 2007 and 16 percent more than the 1997-2007 average. <p></p> As a result, the question is no longer whether there will be a return to frequency and severity in directors' and officers' liability, but rather where and to what level it will grow. Compounding frequency are additional securities cases filed in state courts, in the midstof conflicting ease holdings on whether federal courts have exclusive jurisdiction over cases filed under the Securities Act of 1933. <p></p> Companies in the financial sector are by far the most frequently sued organizations, with 46 percent of the securities fraud class actions filed in 2008 brought against financial firms and their directorsand officers. A third of the largest financial firms were sued in credit-related cases in 2008, and two-thirds of the financial sector firms were sued for securities class actions in 2007 and 2008. <p></p> There are several reasons for the increase in filings. First, 43 percent of securities class action filings since 2007 were related to the credit crisis, with 101 credit-related actions filed in 2008 and another 30 eases filed between January I and March 16 of this year. Second, 59 Madoff-related cases drive up the frequency, with 18 cases filed in 2008 and another 41 filed by March 13, 2009, which include numerous class actions. Third, bankruptcy contributes to increased filings. In 2007 and 2008, 77 percent of large public companies that filed for bankruptcy were sued in a securities class action, an increasefrom an average of 35 percent since 1995. Experts predict that therewill be a 50 percent increase in the number of bankruptcies in the United States in 2009, presumably accompanied by further increases in securities class action filings. <p></p> In addition to the rise in director' and officers' liability eases, average settlement values increased from $17.1 million between 1996and 2001 to $45.1 million from 2003 through 2008. The increase is driven by the rise in the number of eases settling for more than $100 million; less than 2 percent of all settlements were valued over $100 million in 1998, in contrast with approximately 8 percent in 2006 and2007. <p></p> More than 40 percent of all cases were dismissed each year from 2004 to 2006. This was an increase from prior years, with dismissal rates in the 30 percent range from 1996 to 1999. The reason for this increase may be the more stringent pleading standards ushered in by the Private Securities Litigation Reform Act of 1995, which requires plaintiffs to state more explicitly the basis for an inference of fraud. However, several 2008 eases may make it harder to win a dismissal. Inparticular, several cases adopted the 'core operations' and 'collective intent' theories, which resulted in a strong inference of fraud related to a major product by demonstrating the collective intent of various individuals. <p></p> [ILLUSTRATION OMITTED] <p></p> Now more than ever, companies in the financial sector should review their directors' and officers' coverage options and risk managementpractices so they can ensure their survival in the marketplace. <p></p> CAROL A. N. ZACHARIAS is chief counsel and senior vice president of ACE USA Professional Risk, part of ACE USA. <br> <br> April 28, 2009 <br> <br> <div> <div class="x_nshr"> <center></center> <center><a href="http://www.lexis-nexis.com/lncc/about/copyrt.html" target="_new" class="x_pagelinks">Copyright © 2009 LexisNexis, a division of Reed Elsevier Inc. All Rights Reserved. </a><br> <a href="http://www.lexis-nexis.com/terms/general" target="_new" class="x_pagelinks">Terms and Conditions</a> <a href="http://www.lexis-nexis.com/terms/privacy" target="_new" class="x_pagelinks"> Privacy Policy</a> <br> </center> </div> </div> </span></span></span>
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