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PwC: Insurers Must Be Alert to Changes in Corporate Risk Triggered by Financial Crisis

Source: AM Best

Posted on 05 Feb 2010

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According to PricewaterhouseCoopers, the threats posed by the international financial crisis to the profits and capital bases of large corporations created a new set of demands on insurers and their clients.

Achim Bauer, a partner at PwC in London, said adjustments in corporate strategies began as the economic crisis hit about 18 months ago. Companies decided to evaluate their supply chains, consolidate manufacturing operations, outsource some activities and shift others to offshore locations, said Bauer in an interview. The result was a rapid and long-term change in the nature of exposures, and the effects of the recession will linger even after things improve.

"We expect risk to continue changing, not in an evolutionary way going forward, but in a very dynamic and very agile way and this is what the industry needs to get used to," Bauer said.

Companies are aware that they must protect both their capital bases and their profits during the current economic difficulty. Bauer said he believes the improvement of risk management practice can be delayed by the tendency of corporations to look at their risk management requirements in isolation. This has also slowed the ability of insurers to adjust their covers.

PwC, which counts both insurers and commercial insurance customers among its client base, would like to see insurers respond more effectively to this challenge.

"We're trying to raise the flag -- at least the yellow one, if not the red -- by making [the insurers] aware of the fact that they had been caught unawares," said Bauer, who advises insurers on how to transform their strategies.

The insurance industry needs to develop a better sense of what clients need and how risks are changing. The new economic climate is likely to generate insurance claims for exposures that the insurers did not even realize they had, Bauer said.

The inability of insurers to anticipate these claims grows out of the failure of the insurance contract to reflect the changed risk realities, he said. Gaps in information could leave a corporate customer uninsured and endanger a relationship. Bauer said that many are buying the wrong cover.

On an immediate, tactical basis, insurers need to assess these changes in risk and how they are likely to bring other problems, said Bauer. He compared this to gauging the likelihood of a tsunami after an earthquake.

The next step should be to try to restructure existing insurance contracts to respond to the new environment. This should be followed by an assessment of the potential for adverse claims, said Bauer.

Bauer expressed concern at what he said has been a trend in recent years toward the purchase of commercial insurance solely on price. The insurers that have won business, he believes, have often been the ones "who asked the least questions."