A matter of perspective

A survey released this week showed an interesting disconnect between companies’ top executives and their risk managers on the risks facing their companies as they expand internationally.

Among its findings, the 2007 Chubb International Risk Survey reports that 43% of C-level executives surveyed said international risks pose a greater threat to their companies than domestic risks. Meanwhile, only 16% of risk manager respondents saw a greater threat from international exposures than those at home.

They also had different points of view on the top risk facing their multinational operations, with 24% of C-level executives calling terrorism the top threat, while the same percentage of risk manager respondents, 24%, called hurricanes and earthquakes the top threat.

Chubb suggested that the differences highlight the need for closer collaboration between companies’ risk managers and their top executives. In a statement, Kathleen Ellis, senior vp at Chubb & Son and worldwide manager of the Multinational Risk Group for Chubb Commercial Insurance, stressed the importance of companies developing an agreed upon perspective on global risk.

“Companies that don’t take this holistic approach could find themselves unexpectedly self-insuring losses that occur outside the United States and Canada,” she said.

Risk managers and C-level executives also split on emerging professional liability exposures confronting their international operations. Among C-level respondents, 59% cited employment practices liability as becoming a significant source of risk outside the U.S. and Canada, followed by fiduciary liability (58%), and directors and officers liability (55%).

Risk managers ordered those risks differently, with 55% identifying directors and officers liability as a growing source of risk, followed by employment practices liability (43%) and fiduciary liability (35%).

Speaking of risk managers, I’ll be attending the Risk & Insurance Management Society’s Annual Conference next week in New Orleans and I’m expecting to post to the blog from the event.

Go I-Dawgs!

I’m back in Chicago today after a couple of days in Mississippi to moderate a panel at the annual MSU Insurance Day at Mississippi State University.

This year’s gathering was the 20th anniversary of the event, presented by the Risk Management, Insurance & Financial Planning program at MSU. It was a solid program, and very well attended.

Among the various presentations at the MSU I-Day, Paula Rosput Reynolds, president and chief executive officer of Seattle-based Safeco Corp., raised a number of interesting issues in her presentation on “Disruptive Forces in Insurance.”

Ms. Reynolds suggested there is a technology “arms race” between insurance and the banking industry, with insurance “a little behind.” The banking industry tends to be more customer facing with its technology investments, she said, though adding that she feels there’s no reason the insurance industry couldn’t follow suit.

“You have to know how to deploy smartly and you have to have a vision around the future,” the Safeco CEO said. With that in mind, the insurer plans to include some of its product development folks in upcoming meetings with Microsoft. “It’s really important to us to try to program ahead rather than be programming in the rear view mirror,” Ms. Reynolds said.

Ms. Reynolds also talked about changes in the way insurers are positioning themselves in the marketplace. The large companies who represent the bulk of insurance industry advertising spending have moved away from simply “talking about their product in a feel good way,” she said. With so much advertising bombarding consumers through various media these days, companies are focusing less on brand-based advertising and more on emphasizing product features and convenience, she said.

Ms. Reynolds raised a potential regulatory issue associated with insurance companies making more of their products available to buyers online. As companies offer consumers more and more self-service options, she said, it’s likely that at some point regulators may face the question “should the consumer have been allowed to do this transaction unadvised?”

Thanks to Edwin H. Duett, Peter K. Lutken chair of insurance at MSU, for offering me the opportunity to participate in this year’s I-Day (and for the chance Tuesday night to enjoy a strong performance  by the Mississippi State Bulldogs baseball team as they dispatched Southern Mississippi 11-2).

Keep smiling

Anyone who’s ever had the misfortune of working with a moody colleague of for a boss prone to wild swings of emotion can likely attest to the accuracy of a new paper by a pair of academics focusing on the impact of “affect”–emotion–on organizational behaviors.

The paper, Why Does Affect Matter in Organizations, was written by Sigal G. Barsade, associate professor of management at the University of Pennsylvania’s Wharton School, and Donald E. Gibson, associate professor of management at the Dolan School of Business at Fairfield University.

In it, the authors suggest that “Affect permeates organizations,” and contend that over the past 30 years an “affective revolution” has taken place in which academics and managers have come to appreciate that an organizational view that considers the impact of affect offers a perspective previously missing in analysis of the workplace.

The two professors examine three different types of feelings: discrete, short-lived emotions; moods–longer lasting feelings not necessarily connected to a particular cause; and dispositional traits, the personality characteristics defining an individual’s overall approach to life.

All three can be contagious, according to the paper, and “emotional contagion”–the sharing or transferring of emotions from one individual to others–often occurs without conscious knowledge. From a business perspective, such “contagion” can have a significant impact.

For example, the authors cite the case of the positive mood of bank tellers generating a positive emotional contagion among customers, leading to positive customer evaluations of service quality. In a group setting, positive emotional contagion from the leader has been found to have a subsequent positive impact on group coordination and effort.

While the paper cites some cases of conflict in research surrounding the impact of affect, it concludes that organizational researchers are increasingly recognizing the impact emotions have on any situation in which humans interact with one another and their environment, including the workplace. And, it says, “The evidence is overwhelming that experiencing and expressing positive emotions and moods tends to enhance performance at individual, group and organizational levels.”

Ultimately, affect matters to organizations, the two professors conclude, “because employees are not isolated `emotional islands.'” Thus, “an understanding of how these affective experiences and expressions operate and influence organizational outcomes is an essential piece in understanding how work is done and how to do it better.”

A very good year

The news today from the Insurance Services Office Inc. and the Property Casualty Insurers Assn. of America was decidedly good, though hardly surprising.

Driven by a combination of fears of a repeat of the catastrophe losses of 2005 and what in fact proved to be a relatively tame year natural catastrophe-wise, the U.S. property/casualty insurance industry posted sizable profits in 2006.

Jersey City, N.J.-based ISO and the Des Plaines, Ill.-based PCI reported that the U.S. P/C industry posted a $31.2 billion underwriting profit in 2006, a considerable improvement on its $5.6 billion net underwriting loss in 2005, with the industry’s combined ratio improving to 92.4% in 2006 from 100.9% in 2005.

That underwriting profit contributed to overall profits of $63.7 billion last year, a 44% increase from the U.S. property/casualty industry’s $44.2 billion profit in 2005.

Undoubtedly, the fact that last year’s direct insured losses from catastrophes in the U.S. dropped to $9.2 billion from $61.9 billion in 2005 was a significant factor in the industry’s 2006 results. In a statement, though, Geno Staranczak, PCI’s chief economist, noted that the industry–and the country–can’t let last year’s breather allow them to become complacent to the possibility of extreme cat losses.

“While meteorological anomalies confounded the experts and helped the U.S. escape major hurricane strikes in 2006, the threat of more frequent and severe storms, combined with the growing population and the increased value of property in the highest risk areas of the country, means that the threat of enormous losses from natural disasters is a financial problem the nation must deal with,” Mr. Staranczak said.

“Experts are now predicting that the 2007 hurricane season will be far worse than average, and huge parts of the U.S. remain vulnerable to earthquakes that can strike at any time,” the PCI economist continued. “Bottom line, natural catastrophes pose a huge and growing threat to consumers and businesses across the country.”

The question now is whether the industry can maintain its high level of profitability, even without an uptick in cat losses. ISO and the PCI noted there are already signs that insurers’ strong 2006 is leading to price cuts in many markets.

Risky times

According to one index of world political risk, these are particularly perilous times. A look at the morning paper is probably sufficient evidence of the accuracy of that assessment.

Yet, according to executives of Alliant Emerging Markets, the political and credit risk insurance broker responsible for the index, despite the high level of risk, it remains a good time to be a buyer of political risk insurance.

Chicago- and New York-based Alliant Emerging Markets’ Political Risk Index rose nearly 5% over the past 12 months, the largest 12-month increase since the Sept. 11, 2001 attacks, according to Michel Leonard, the firm’s chief economist and head of consulting. What’s more, the index currently stands at an even higher level than immediately after Sept. 11, Mr. Leonard said.

The increase has been driven primarily by rising expropriation risks in Latin America, regulatory uncertainty in Central Asia and worsening credit conditions in Eastern Europe and Southeast Asia, according to Alliant.

That combination of political risk, credit risk and market risk “have driven the index up to the strongest increase of any 12-month period since Sept. 11 and to a point where it’s at the highest level since Sept. 11,” Mr. Leonard said.

Given the current climate of risk, “We’re seeing more and more companies taking systematic steps to manage their political risks,” said John Minor, president of Alliant Emerging Markets. “We’re also seeing a rise in companies’ interest in political risk insurance again.”

While there is a perception of increased political risk in emerging market countries–and even claims being filed against political risk policies, “there continues to be a soft market in the political risk market and we don’t see that abating any time soon,” Mr. Minor said. “Barring a Sept. 11-type event happening, we don’t see that trend reversing.”

There are some exceptions to that soft market, notably power projects and exposures in Venezuela, but, “If you’re a risk manager, now is a good time to be buying political risk insurance,” Mr. Minor said.

Cat bond fever

There’s a pretty good industry event coming up in New York in a couple of weeks, which, given recent developments in the market might be particularly interesting (and well attended) this year.

It’s the Insurance- & Risk-Linked Securities Conference put on by the Securities Industry and Financial Markets Assn. (formerly the Bond Markets Assn.). I’ve been fortunate enough to attend the event several times in the past, and I’ve always found it to be a great and informative gathering of all the various key participants in the risk-linked securities marketplace.

Among the topics to be addressed at the April 23 and 24 gathering at New York’s Marriott Marquis are sources of future growth in the insurance securitization market, the use of the capital markets to address non-peak perils, modelling-related issues, triggers and basis risk, risk management of an insurance-linked securities portfolio and the ramifications of government intervention in the insurance industry.

Obviously, there’s more to the insurance- and risk-linked securities market than cat bonds, but the growth in the cat bond market has been dramatic since 2005’s hurricane season, as the market starts to realize the potential some have long seen for the capital markets as a source of reinsurance capacity.

According to a report on 2006 cat bond activity released earlier this year by Guy Carpenter & Co. L.L.C., 2006 saw $4.69 billion in cat bond issuance, a 136% increase over 2005’s previous record issuance of $1.99 billion, and a 311% increase over 2004’s $1.14 billion.

Last year’s cat bond issuance came in 20 different transactions from 15 sponsors, doubling the previous record number of transactions of 10 in 2005 and 1999.

All-in-all, 2006’s cat bond activity offers evidence of  “the broad-based convergence of the traditional and capital markets,” Guy Carpenter concluded, and suggests that the capital markets will continue to develop into an important component of the reinsurance marketplace. With that as the backdrop, the upcoming SIFMA conference in New York should be interesting indeed.

Concentrated risk?

Though I rallied late last yesterday to post to the blog, I’d spent the last couple of days home sick, the victim of some sort of abdominal bug, or, quite possibly, food poisoning.

Having had food poisoning before, this felt pretty much the same–I’ll spare you the details. And the aftermath was similar as well: I was pretty much wiped out for the better part Wednesday and much of Thursday. Wednesday, in fact, the effort of shooting an e-mail to colleagues explaining that I was going to be home sick was enough to send me back to bed for a couple of hours. Later the day was marked by occasionally mustering the strength to read three or four paragraphs of the day’s newspaper, then needing to sleep for an hour or so.

All in all, pretty grim. Thank goodness for baseball on TV and the Master’s coverage yesterday afternoon.

In the midst of all this, though, I did read a few more stories about the recent pet food recall, and heard a story on NPR’s Morning Edition about concentrated manufacturing, the single Canadian factory responsible for many different brands of contaminated pet food being but one example. The trend is by no means exclusive to food processing, obviously, having become commonplace in everything from consumer electronics to automotive components.

The obvious benefit to concentrated manufacturing is the economies of scale that exist in having a single manufacturer producing products in large numbers for a variety of brands. Naturally, there are risks, however, supply chain disruption being one.

And, in the food processing area, the pet food contamination incident shows the potential for food-borne illness on a wide scale. Events like last year’s fresh spinach recall scare show the risk can apply to human products as well, I think.

A story in the Chicago Tribune the other day noted that courts in some states are beginning to allow pet owners to be compensated for their grief over the loss of a pet–historically courts in many states would only allow plaintiffs to sue for animals’ replacement value. Obviously the value attached to a pet’s loss in any claims stemming from this contaminated pet food case would be less than those that might be attached to the loss of a child or other loved one in a similar kind of case. But imagine the potential economic impact that could result from a massive contamination of some widely consumed human food product, not to mention, obviously, the human catastrophe.

I’ve got to think some in the insurance industry are looking at the Menu Foods case with an eye toward what their exposure might be on food processing risks they insure. Better to address the exposure and seek to mitigate any risks before, rather than after, some catastrophic food-borne illness event.

So, who’s going to be on POTC IV?

Given all the fuss surrounding Keith Richards “joke” the other day about snorting a bit of his father’s ashes cut into a little coke, I figure any blogger that didn’t address the subject would be falling well short of expectations. So, here goes.

I was amused to read a Los Angeles Times item this afternoon discussing the angst at Walt Disney Studios over the Rolling Stones guitarist’s comment and its impact on the marketing campaign for the latest entry in the Pirates of the Caribbean motion picture franchise, due to hit theaters this May.

Richards, of course, has a cameo role in the film as the father of Johnny Depp’s Jack Sparrow character. Depp has previously said he has patterned his character’s look and demeanor after Richards.

Disney’s consternation over Richards’ claim that he snorted a bit of dear old dad is understandable–this is meant as a family picture, after all. I’ve got a nephew who is, I assume, a typically obsessed fan of the Pirates of the Caribbean series and like many boys his age he’s embraced this pirate thing pretty hard. I’d certainly hate to see him take the obsession another step following the film’s spring release and start embracing Keith Richards’ lifestyle. I’ll bet his dear old dad wouldn’t be too thrilled, either.

Disney’s hand-wringing over what Richards did or didn’t put up his nose (he’s since claimed the whole snorting pops thing was just a joke) is also amusing, though. I mean, the guy they chose to put in their movie is. . . Keith Richards. This is a guy as legendary for being the poster child for rock and roll excess as for his rhythm guitar genius. This is a guy who was said to have once had his blood changed to beat a heroin addiction (apparently just a rumor, he also later claimed that story was a joke–though it’s so rock and roll you’d like to believe it was true).

So the L.A. Times story says the Disney folks likely won’t involve Richards in any publicity efforts for the new film, and adds that the studio says it’s made no decision regarding whether there will be additional Pirates films after this one. On the other hand, the story also said the second Pirates movie has made $1 billion in worldwide box office since being released last summer. If this one does as well, do you think there will be discussions about Pirates IV?

And if Keith’s character tests well in screenings, you think someone might suggest bringing him back, too? So then the question is–for the insurance industry anyway–who’s on the coverage for Pirates IV?

Dancing in the dark

Money might be the marker businesses typically use for keeping score, but an interesting new study out today from Deloitte Touche Tohmatsu suggests that many companies’ board members and top executives feel they aren’t getting the information they need to truly understand the health of their organizations.

The Deloitte study, In the dark II: What many board executives STILL don’t know about the health of their businesses, concedes the importance of financial metrics and financial results. But the report suggests that business leaders feel it’s also extemely important to evaluate such non-financial indicators as customer satisfaction and employee commitment.  Many, however, believe their companies do a much poorer job measuring those non-financial indicators than they do financial metrics, Deloitte found.

The professional services firm found that 57% of the companies it surveyed are under increasing pressure to measure non-financial indicators. But, while companies indicated they’re aware of the pitfalls of focusing solely on financial measures, Deloitte found that executives’ ability to track performance through non-financial measurements appears inadequate, and that companies either don’t have or aren’t sharing non-financial performance data with their boards.

While 87% of the companies surveyed rated their ability to track financial performance as either good or excellent, only 29% described their ability to track non-financial performance in such terms.

Standing in the way of greater use of non-financial performance metrics, according to the Deloitte report, are such factors as undeveloped tools, “organizational skepticism” as to the value of such tools, unclear accountability for non-financial performance, time constraints and the concern that such metrics might provide competitors with too much information.

The Deloitte survey, done in cooperation with the Economist Intelligence Unit, follows a similar study conducted in 2004. The latest study found that the recognition of the importance of non-financial measures detected in 2004 has increased in the time since, and that some companies are demonstrating real business successes as a result of tracking and managing non-financial performance metrics, while many more are including non-financial data in annual reports or shareholder briefings.

Still, Deloitte concluded, their survey’s statistical results “raise some red flags” that business leaders aren’t getting the information they require to guide their companies effectively, and that at many businesses there’s still work to be done.