Risk Management Top Concern Among CFOs

The current financial crisis has senior finance executives more likely to be concerned about their firms’ risk management practices (72 percent) than they are about their access to capital. A CFO Research Services study in conjunction with Towers Perrin, found that respondents were less concerned about issues such as accessing long-term debt financing (65 percent) and short-term financing (61 percent), in comparison to risk management. The companies surveyed also acknowledged they will need to retool their risk management practices, with 55 percent saying their risk management practices are likely to change at either the board or employee level.

When  asked which items contributed to the current financial crisis, respondents as a whole blame risk management practices at banks (62 percent), followed by the increased complexity of financial instruments (59 percent) and financial market speculators (57 percent). Additionally, 24 percent  said that fair-value accounting requirements were a major contributor to the crisis.  While the majority of respondents (62 percent) acknowledged that the financial crisis would dampen profit expectations and leave a potentially lasting dent on the world economy, only  4 percent said they feared a major negative impact on their financial results.

Above Average Hurricane Risk for October

If you thought hurricane season was over, think again. Colorado State University’s Tropical Meteorology Project team has warned that October will see well above average activity. The forecast calls for three named storms, one of which is expected to become a major hurricane (Category 3-4-5) as well as two hurricanes. An active October is in line with the well above-average activity that has occurred so far during the 2008 Atlantic hurricane season, the team noted. Bear in mind that even before this year’s hurricane season got underway, insured catastrophe losses as noted by ISO reached $10.3 billion during the first half of the year. This is higher than the 12-month totals for both 2006 and 2007, at $9.2 billion and $6.2 billion, respectively. Hurricane Ike – with an estimated insured loss of around $9.8 billion – is on track to become the fourth most costly hurricane in United States history and it was not the only major hurricane of the year. Hurricane Gustav caused $1.9 billion in insured losses, according to ISO’s PCS unit. The 2008 catastrophe loss bill for insurers is adding up. Check out I.I.I. facts and stats on catastrophes.  

Fundamentals Sound

The p/c industry yesterday reported a 57.4 percent drop in net income after taxes to $13.9 billion in the first half of 2008, down from $32.7 billion in first half 2007. The industry’s annualized statutory rate of return on average surplus fell to 5.4 percent in first half 2008 from 13.1 percent in first half 2007. The sharp decline in profitability is partially attributable to a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the p/c industry.

Despite the deterioration in profitability, in his commentary on the results I.I.I. president Dr. Robert Hartwig says a case can be made that the p/c industry is a pillar of strength in the financial services sector. Why? Dr. Hartwig explains that insurer investment portfolios are generally conservatively managed and insurers have avoided some of the problems of the investment banks and many other financial institutions because of their superior risk management model. He goes on: “The reality is that throughout its nearly 200-year history in the United States, the p/c insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere.”