OK, the storm clouds.  I have been reading about underwriting results over the last month or two, and losses are mounting.  Just this week, Risk Management Solutions updated the estimated losses associated with Hurrican Ike  to be $13-21 billion, and reinsurers are starting to talk premium increases.  Add in this morning’s news along with all of the other Wall St. and economic woes, and the picture is looking eerily familiar.  It it quote possible that the soft market is coming to a close and the hard market is approaching, bringing with it increasing premiums and constricting terms and conditions as is typical during such a market.

So, enjoy the sun for a little while longer, but start closing the windows and crank down the umbrellas.  It’s time to roll up your sleeves and put your risk management hats on again.  It’s time to get strategic, have plans in place, and think outside the box.  But don’t wait, because you’ll get very wet if you aren’t ready for it.

So you say you hate insurance?  Why is that?  Yes, it costs money.  But so does a vacation to Barbados.  So do you hate Barbados?  No, because it brings you warmth, comfort, and relaxation.  How about that nice steak dinner that you had at Morton’s last night?  That wasn’t cheap, so you must hate it right?  Well, no because it was delicious and it left you feeling satiated.  OK, how about that new Bimmer you leased last month – isn’t that $500 payment boiling the hate from the pit of your stomach?  Oh, so the fine leather seats and the neck spraining horsepower invigorate you and rev up your heart beat, so no hate there.  So why the hate for insurance?

Going through the process of structuring an insurance renewal once a year isn’t much fun.  You have to collect all sorts of information for the underwriters.  You have numerous meetings with funny looking insurance brokers (except for me) and answer the same questions, over and over.  You have to strategize on how you are going to keep the premiums under control while not sacrificing coverage.  You have to meet with loss control inspectors and answer the same questions over and over again, often repeating this for days on end depending on how many insurers are quoting on your insurance.  On top of all of that, you have to spend money on something that isn’t really tangible, other than a stack of paper with a bunch of legal jargon in it.  The monotony, the repetition, the expense!

But when disaster strikes, that stack of paper that was so painful to produce suddenly provides the same enjoyment that you got out of the realxing Barbados vacation, the tasty Morton’s steak, and the sexy Bimmer.  You get a warm feeling that you are going to be OK, and you can relax.  You can feel satisfied because something that you prepared for actually worked for you (and you can still afford a tasty steak).  And you will feel invigorated to know that you win and your company will survive on.

So really, it isn’t insurance that you really hate, even though you don’t know it.  It is the montony, the repetition, and the expense that you hate.  I feel better already.

I guess it’s going to be a little harder than we thought to change Wall Street and sterilize the greed that permeates the air.   Honestly, it doesn’t surprise me because once you get to the Garden of Eden, you won’t ever want to leave.  Plus, when you leave a group of voracious glutens with boatloads of cake and the utensils with which to eat it, you’re liable to see some excess.

This got me thinking about common sense and the trouble that it prevents if you use it.  To paint the picture, here are some of the one’s I thought of:

• Don’t drink and drive (obvious)
• Don’t smoke while pumping gas (Kaboom)
• Don’t leave a metal rake on the ground with the tines facing up (schwapp)
• Smell the milk before you take a big slug (hurl)
• Don’t stick a metal object in an electrical outlet (need hair relaxer)
• Don’t ask when the baby is due unless you know that she is pregnant (dislocated knee from inserting foot in mouth)
• Never run from a growling dog (depends if you want the bite on your front or backside)
• Don’t talk to strangers (can’t avoid this; everyone is strange)
• Don’t gulp-sip a fresh coffee (you’ll need an expensive financial advisor to manage the millions you get in the lawsuit)
• Don’t sign anything if possible (its amazing how the little scribble of your name can knife you in the back down the road)
• Never look a gift horse in the mouth (never really have been sure of this one)

Please pardon the humor in a serious subject, but I needed to get away from the tragic overtone from the train accidents.  Look, ignorance is the villain to common sense, and it feeds on complacency and distraction.  It’s like an invasive plant species that can exist and flourish in the harshest environments and forces out all other species.  Common sense, on the other hand, needs attention and nourishment.  My point is that you have to engage a thought process and use common sense in order to prevent accidents.  If not, ignorance exists by default and someone gets hurt, or worse.  But common sense is oh so transparent, it seems to be human nature to forget that we have it in our holster.  Hey, I just thought of a great money making scheme; I will invent a common sense alarm that reminds us that we have it at our disposal and we should use it in moments of   Of course, common sense tells me that isn’t possible.

However, I believe that this may change, considering what just transpired with the AIG.  I have witnessed several insurers disappear before my eyes over the last fifteen years such as Reliance, Kemper, and Royal Sun Alliance to name a few.  AIG is different, as their insurance operations are financially strong, and it is the parent company that is strained.  But my point is that for something that is considered the last barrier between going out of business or surviving to live another day, you should know the insurance companies that you do business with and stay abreast of their financial stability.  In these volatile and uncertain times, it is ever so important.  If not, you could find yourself wearing chaps instead of jeans on a very, very cold day.

Social media has turned the internet into a living, breathing thing that shifts, expands, and displays physiological traits like a biological organism.  It is nourished by the “macrological” input of the masses and displays its nutrition in the way of statistical expressions that are generally accepted as truthful.  It is the ultimate expression of We The People.  It is this very premise that draws more and more people to the internet every minute, drawn to the internet for honest and credible answers to their specific questions.  And this is why I believe that price comparison websites will have an effect on the insurance industry.  Insurance carriers are no stranger to competition, and they have created countless strategies to compete on other criteria such as claims service and other value adds.  But when the lowest bidder continues to scoop up market share, the only recourse for other insurers will be to lower their premiums.  That’s exactly what they are doing now, as we are several years into a soft U.S. insurance market.  Of course this all changes with the same issues that harden insurance markets, like catastrophic events and economic changes.

I believe that social media is going to change everything(it already has, really).  It’s like all of a sudden the little dog pulls the curtain aside to reveal the so-called wizard behind the curtain, and everyone sees him.  Companies are going to have to get damn good at what they do or they will be exposed.  And they will have to be more competitive when it comes to pricing, or they will lose to those that are.

Most people are familiar with the AIG brand, noting mostly that it is a giant company, and a blue chip powerhouse.  But AIG is so much more to the insurance industry.  They are the groundbreakers, the company that everyone hates but still wishes they could be just like them.  Hank Greenberg, the ex CEO who brought AIG to their perch high above the rest of the insurance kingdom, was known for being a hardnosed, shrewd leader who knew what he wanted and wouldn’t stop until he got it.  You can consider AIG the anchor tenant of an idustry with many, many other players.

So here we are, with AIG in a corner with seemingly nowhere to go.  But similarly, like an eight thousand pound elephant in the same corner, you aren’t going to be able to move it.  AIG’s power and indispensible necessity is formidable, to say the worst, and they will still be standing when the smoke clears and the medics are hauling away the casualties.  And Merrill Lynch and Lehman Brothers?  I don’t really know, but I think that it is pretty much playing out as we speak.  Images of ex-employees walking out with boxes, and pieces of once great companies sold off like copper pipes stripped from old houses.

In the end, all of this will play out and we will not have any say in the matter.  This recession is in full tilt and we will just have to lash ourselves to the mast and weather the storm.  Just like we have done several times before!

A company needs to be able to clearly visualize every potential risk exposure faced, and list them in terms of severity and frequency potential.  Then separate the mandated coverages like workers compensation and auto, etc., from the coverages that you are not required by law or contract to buy.  Then you can address the mandated coverages and list the possible strategies to reduce costs.  For workers compensation, it can be improving safety and awarness, which results in lower claims frequency/severity, which then results in a lower experience modification, further resulting in lower  premium.  Of course if you already have a low experience modification due to the fact that your operations are low hazard, i.e. an office type exposure, this is moot.  If your experience modification is low, but is a result of shear luck, you should still work to analyze the exposures and improve safety.  In any case, these are long term fixes and you would hope that by the time you reap the benefits, the recession will be over.  But, you will have lowered your premium costs.

For auto coverage, you can take advantage of driver training offerings from your insurance carrier.  Additionally, you can check the driving records of your employees to determine the drivers that would present a higher probability of accidents.  Insurers rate auto premium by many factors, especially the driving records of your employees and the loss history of your company.  So with better drivers and lower loss history, you will get lower premiums, it’s that simple.

The same goes for coverage that may not be mandated by law, but is mandated by contract.  A good example of this is errors & omissions insurance, also know as professional liability.  Many software/IT vendors are required by contract to carry this coverage if the are to be hired by a potential client.  The same strategy is appropriate; determine the risks that could lead to a claim, address them, and demonstrate to the insurer that you have done so.  So then, since you have done all this and an incident seems unlikely, why do you have to buy it?  Because the man with the checkbook that pays you says you have to.

Then you have the insurance coverages that are mandated by no one.  Employment Practices Liability, Cyber Insurance, and Directors & Officers (if you are a privately held company) to name a few.  This is where things get tricky and you have to make calculated decisions that could have serious future impact on your company.  But again, in getting your arms around the risk exposures to completely understand the possibilities, you can make an informed decision as to whether or not you will buy the insurance or not.

I think that you get the picture here.  Insurance coverage is not just something that you just bargain for once a year by piting a bunch of brokers against each other.  Yes, competition is a great motivator for insurance companies to put their best number forward, I agree.  But the real strategy is understanding the big picture, and making informed and strategic business decisions.  If you’re at point A, and you want to get to point B ten miles across the lake, you aren’t going to swim, you are going to drive.  Perhaps this isn’t the best analogy, but the simple fact is that you need to understand the consequences of an action before you take it. 

So now we have a recession.  If you have taken similar steps as I outline here, your insurance is one less issue to worry about.  And you can probably cancel the renewal day parade of competing insurance brokers at your office!

This is obviously a very important topic, and one that is evolving rapidly.  In the near term, I will be publishing a white paper on insurance strategies for the intellectual property of emerging technology ventures, as well as other businesses that dance dangerously close to IP infringement.  I will focus on some the perils of IP infringement and how the insurance industry addresses them, as well as insurance strategies to fund IP litigation in enforcing IP rights.  IP is the beating heart of emerging technology, and if you don’t treat it like gold, someone else will take it from you.  Conversely, if you don’t do your homework (or if your IP attorney doesn’t) you will face the wrath of someone else defending their IP rights.  Quite frankly, you should treat your gold like intellectual property!