Toward Larger, Smarter Companies - Brief Article

Consolidation within various industries is affecting how risk managers and insurance companies interact. As a result, risk managers will begin to form more strategic alliances with their insurance providers.

We are witnesses to one of the most incredible periods of consolidation in U.S. history. It seems like each day we read about a multibillion dollar merger, corporate buyout or hostile takeover.

No industry is immune. Telecommunications, banking, automotive, health care, consumer, business-to-business--consolidation is rampant as big fish gobble up little fish from coast to coast and around the world.

Not surprisingly, consolidation is having a rippling effect on risk managers and insurance providers, affecting everything from day-to-day responsibilities to marketing to product offerings.

Behind Consolidation

What is contributing to the current wave of consolidation? Multiple factors are at work, fueling the nation's rampant appetite:

* Strength of the economy. There is a direct correlation between merger activity and the economy. We are in the midst of one of the biggest and longest economic booms in our history, and corporations looking toward growth have easy access to capital. Consolidation is one of the fastest ways to export extra capital, keep shareholders happy, and fuel growth through publicity.

* Global markets. Gone are the days when our competition was the Joneses across the street. Today, business is conducted in a global marketplace, which is forcing some companies to increase efficiency through economies of scale, allowing costs to be spread over larger volumes. Some corporations build efficiency and acceptance by acquiring what they used to outsource--bringing the function in-house and building local expertise in a foreign market.

* Technology/information systems. Technology fuels consolidation by tearing down barriers that used to keep companies in easily accessible markets. Video conferencing, fax machines, pagers, cell phones, and the Internet are just a few examples of tools that have revolutionized communications between multiple locations.

* Speed. Consolidation has become a foot race with the first consolidator getting the pick of the litter. Companies can grow portfolios, get economies of scale right away, and capitalize on the expanded wealth of professional talent. This trickles down through the industry as second-place operators make similar moves to protect market position.

Challenges for Risk Managers

As consolidation continues, the responsibilities are weighing heavily on risk managers' shoulders because multiple locations mean multiple risks.

Corporate culture, for example, takes on a pre-eminent role in consolidation. How a company does business is equally important to where it does business. Risk managers today are realizing the challenges of integrating different corporate cultures and, in some cases, creating from scratch an overall umbrella culture, picking the best of multiple sites.

For the first time in their careers, many risk managers have to establish new lines of communication. Long-standing policies and procedures have to be rewritten. Also, risk managers are finding their programs are subject to corporate whims more than ever. Bigger means more ideas, more unsolicited advice and more politics to manage.

Another great area of concern for risk managers is the increased regulatory scrutiny and the litigious nature of our society. Employees are suing at the slightest provocation and jury awards are climbing at an astronomical rate. Risk managers, stretched thin by monitoring the activities over several locations, could be more prone to dropping the proverbial ball--be it failure to provide a fair work environment or to comply with state, federal or international laws--and setting off an unwanted lawsuit with all its accompanying financial risk and negative publicity.

As consolidation crosses state lines and international borders, risk managers must fully understand labor practices in the company's areas of operation. Issues such as language, different culture and customs--both personal and professional--become areas of concern. Loss prevention strategies must factor labor practice into the program to secure the customer's largest line item.

Lastly, there is technology--perhaps one of the largest and most uncharted areas of risk today. Large, consolidated companies tend to embrace technology with all its bells and whistles faster than others. This brings a whole new area of risk exposure that will occupy risk managers in all types of businesses. We need look no further than the Y2K phenomenon to understand our dependence on technology.

Will consolidation lead to companies getting too big? History tells us it is just a matter of time. As a business grows, it adds overhead and complexity, while spreading management thinner. Progressive companies will take their risk managers into the boardroom, realizing that they are their first line of defense against a variety of very critical issues facing business in the new millennium.

Changes For Insurers

Let's flip the coin and look at the effects of consolidation on insurance companies. Long known as bastions of conservatism and slow to change, the model insurance provider in the new millennium will conduct business under a radically different model from anything risk managers have seen in the past.

For one thing, insurance marketing will change dramatically. Disappearing is "push," or interruption, marketing as the means of talking to risk managers. Sales calls will become education sessions, giving the risk manager more control over the content of the meeting. Sharing of information will become tantamount to selling. Relevant communication will drive the entire process, leading to personalized relationships based on an in-depth understanding of each others' needs.

What's more, consolidation is putting risk managers in the buyers' seat. It's adios to the "good old boy" network and sayonara to uncooperative, inefficient, inflexible providers in the 21st century. Customers will have more say than underwriters in the future (some will even participate on insurance company advisory boards), and insurance providers will invest more in listening to what's happening on the front lines and less time promoting status quo policies.

But by far, the biggest effect of consolidation on insurance providers is the change it's forcing in their product offerings. Expect to see fewer additional insurance riders, endorsements and supplemental coverages. The one-size-fits-all policy will be shelved in favor of innovative, flexible, customer-tailored programs that will be the benchmarks of tomorrow's insurance company.

We'll see more insurance providers working with risk managers to build their programs. We'll also have more simplified ways to update coverage when needs change--which will happen.

Policy add-ins may include alternative risk financing options such as retrospective rating plans, captives, deductible plans, or retentions. Multiple specialists brought together as a service team will replace the one-agent model. Specialized claims services, especially hotlines to report events, early intervention medical services, return-to-work packages, mock "practice" trials, and major loss teams will become more prevalent.

More emphasis -will be placed on servicing accounts in the future and growing the role of loss prevention specialists who help risk managers to reduce accidents that impact productivity and profits. A consultant that will come with the policy, this specialist will be more active in identifying loss reduction goals, establishing time lines for completion, developing action steps for implementation, assigning responsibility of action steps, and determining measurable results.

Another forecasted change due to consolidation is the Internet. Expect radical changes to insurance providers' Web sites, including methods of comparing providers and having fingertip access to policies and online claims services. This will provide a business model that will lower overhead costs of providers, offer greater flexibility, and improve response time.

What's Ahead?

Consolidation underscores the wisdom in retaining risk and taking hands-on control. Part of that control will be the formation of more strategic alliances between risk managers and their insurance providers. Much of that success from the alliance will depend on choosing the carrier best able to meet company needs.

How does a risk manager choose the right carrier? Here are some attributes to consider:

* Specialization. Which would be of more value for your needs: a multi-faceted provider or an industry-specific provider? Do the programs offered truly fit your needs? Look at the track record.

* Service. Do you really know what you're getting? Ask to see policyholder information. Is it informative and educational--tips you can actually use, or just so much puffery and advertising hype?

* Accessibility. How fast do they respond to claims? Is there only one individual assigned to your account or are you assigned a team of experts? Can the provider further support your needs through its family of operations?

Gaining an understanding of needs and solutions is the first step to establishing a mutually beneficial relationship between the risk manager and provider.

This is an exciting time. The spirit of consolidation, smarter consumers and ever-changing technologies are causing us to reevaluate the way we do business. This is not the time to sit on the sidelines. Competition in our marketplace is intensifying. Those willing to take the steps to improve operations and relationships will be better positioned for success in the new millennium.

John M. Weber is director of marketing for special account services, Universal Underwriters Group.

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