A Full Service Global Management Consulting and Executive Training Firm
by Kent F. Moors, Ph.D.
Executive Managing Partner:
Risk Management Associates, International, LLP
Toward the end of 2004, regulators began to clamp down on accounting practices in the insurance sector. The moves followed high visibility broker kickback problems at a leading insurance company and a dominant insurance broker.
Accounting practices are drawing intense scrutiny and, as regulators uncover more improprieties, companies are relying upon risk managers to assess the quality of their insurance programs. As a result, the profile of the formerly almost invisible corporate risk officer has been raised considerably. It is now common practice for Chief Financial Officers to ask risk managers questions which appeared the province only of the top executive level only a few months ago.
Most of this follows charges filed in October 2004 against one of the largest insurance brokers. The company in question is an international leader in the industry, relied upon to provide insurance brokerage services to a wide array of corporate and other organizational clients. It was charged with bid-rigging, improper bonuses, and illegal kickback payments. Those payments quickly involved other high visibility insurance providers and revealed wide spread practices.
The industry was aware that brokers had been accepting special bonuses from certain insurers and the threat of shareholder lawsuits posed concern. But the impact of the practices had not set in. Against basic elements of sound oversight practice, insurance and accounting agency managers had ceded considerable risk control to brokers over a period of at least a decade. In the 1990s, the indicted company mentioned above and others decided to take a more hands-on approach to the complicated business of structuring policies and began offering a wider variety of services such as risk management, research and consulting. As a result, the traditional roles of risk managers became more passive.
But the current investigation has changed the relationship between brokers and risk managers dramatically. Awareness of risk managers has increased substantially in the wake of the 2004 investigations. A major sector-wide study suggests companies should delegate more responsibility to risk managers. Analysts say the most effective ones handle risk modeling strategies and thoroughly evaluate alternative insurance options such as captives in addition to the usual tasks of signing off on standard insurance programs. Everybody involved in monitoring risk of all kinds should have a genuine influence over decision-making.
As a result, by the first half of 2005, risk managers had begun to ask tough questions about fees and commissions and how brokers place coverage. What had been a rather informal process between brokers and risk managers is now becoming more formal. In some cases, in revisions of practice long overdue, oversight requirements are becoming more stringent as a result of new demands by directors and senior managers. One reason why ties between risk managers and brokers were close was that modestly-paid risk managers often defected to brokers in search of higher salaries. Leaving for brokerages often allowed them to double or triple their pay.
Industry leaders are now moving to tighten up accountability and positioning solid risk management practices as the focus of their practices. Basic to the new accountability, is placing more sophisticated responsibilities and expectations on risk managers. In the aftermath of September 11, 2001, risk managers found themselves in a difficult situation as the insurance market hardened. Risk managers were often given the responsibility of seeing that insurers bottom lines were maintained, a function at variance with their actual professional purpose. The current rounds of investigations have obliged a reexamination of such practices.
Corporate scandals in the wider business world have also put risk management in the spotlight as companies struggle to figure out how to handle the threat of reputational risk. The net result of these scandals has been new regulations. After the passage of the Sarbanes-Oxley act, companies are taking it upon themselves to interpret rules in the strictest possible way to avoid further potential problems. But for risk managers, this comes at a potential cost. They have complained the focus on box-ticking compliance with the new rules can act as a sort of tax and leaves them with less time to guard against less quantifiable threats, such as risks to reputation.
What is required for both accounting and insurance providers is a double-faceted risk management approach. The first addresses adherence to stricter standards of professional and regulatory compliance. Revaluations of such elements have begun at a number of companies. But the second requirement is still to be initiated at most agencies. This involves the integration of traditional risk management priorities with a broad-based corporate reputational risk assessment and strategy. Making decisions solely on how they impact on bottom-line revenue protections will guarantee unanticipated and shattering problems. Just ask Arthur Andersen.