Hotel Maritim Pro-Arte	William J. Kelly



Berlin, Germany	Managing Director J.P. Morgan October 26, 1999

Chairman International Federation of Risk and Insurance

Management Associations (www.rims.org/ifrima)



WILLIAM J. KELLY



William J. Kelly is a Managing Director of J.P. Morgan, a

leading, global financial services firm based  in New York City. 

His responsibilities include corporate risk and insurance

management and various other corporate resource areas.  Before

joining J.P. Morgan fourteen years ago, he was the Director of

Insurance and Risk Management at Merrill Lynch.



Mr. Kelly is presently the Chairman of the International

Federation of Risk and Insurance Management Associations

*(IFRIMA), a global body of 30 associations from over 20

countries throughout the world and he is also a member of the

board of the Global Risk Management Institute.  He was the

1995-96 President of the Risk and Insurance Management Society

(RIMS), the world's largest such organization with membership of

4,500 entities in the U.S. and Canada, employing 8,000 individual

deputy members.  Mr. Kelly is a member of the Risk Management

Advisory Council of Allianz Insurance Company, a director of the

Spencer Educational Foundation and has served as a member of the

Risk Management Executive Council of Protection Mutual Insurance

Company.  He was also the recipient of the 1995 Matthew Lenz Risk

Management Award from the New York Chapter of CPCU.  He has

frequently spoken on risk and insurance management at conferences

throughout the world and has published many articles on these

subjects.



He is a past Chairman of the Insurance Committee of the American

Bankers Association (ABA), served as Chairman of the ABA's 1993

National Security and Risk Management Conference and Co-Chairman

of the 1995 Monte Carlo Risk Management Forum.



Mr. Kelly began his insurance career as an underwriter with the

INA in 1972 and subsequently served as an officer in the Risk

Management Department of Chase Manhattan Bank, and as a Vice

President of Bankers Trust Company.



Mr. Kelly holds a B.A. in English Literature from Fordham

University in New York City and a Masters Degree in Business from

the Fordham Graduate School of Business at Lincoln Center.



* www.rims.org/ifrima



Guten Morgen, GOOD MORNING





WE ARE HERE TODAY TO DISCUSS INTEGRATED AND ENTERPRISE RISK

MANAGEMENT PROGRAMS.  OUR SUBJECT IS REALLY THE EVOLUTION OF RISK

AND INSURANCE MANAGEMENT.  AS IN NATURE, EVOLUTION RESULTS IN AN

ENVIRONMENT THAT IS INCREASINGLY COMPLEX.  THE PRODUCTS OF

EARLIER STAGES OF EVOLUTION DON'T NECESSARILY DISAPPEAR BUT OFTEN

CONTINUE TO CO-EXIST WITH NEWER LIFE FORMS, ADAPTED TO DIFFERENT

PURPOSES OR ENVIRONMENTS.  THIS IS A CRITICAL POINT.  NEW

APPROACHES TO RISK AND INSURANCE MANAGEMENT DO NOT NECESSARILY

ELIMINATE OR INVALIDATE ESTABLISHED METHODS.  TO ME, THE REAL

VALUE OF INTEGRATED AND ENTERPRISE RISK MANAGEMENT IS NOT AS

RADICAL ALTERNATIVES TO INSURANCE BUT, RATHER AS ADDITIONAL

METHODOLOGIES FOCUSING ON EXPOSURES AND FINANCIAL NEEDS NEVER

PREVIOUSLY ADDRESSED, AT LEVELS NEVER BEFORE ATTAINED.  AS A RISK

MANAGER, MY ROLE AS THE FINAL SPEAKER ON THIS PANEL, IS TO

CHALLENGE AND QUESTION THOSE WHO WOULD SELL THESE PRODUCTS TO US.



BEFORE WE CONSIDER WHERE RISK AND INSURANCE MANAGEMENT IS GOING,

LETS TAKE A MOMENT TO REVIEW WHERE WE HAVE BEEN.  IT IS IMPORTANT

TO PREFACE THESE COMMENTS WITH THE STATEMENT THAT THERE IS NO ONE

WAY TO PERFORM RISK AND INSURANCE MANAGEMENT, JUST AS THERE IS NO

ONE WAY TO DESIGN AN INVESTMENT PORTFOLIO.  IT DEPENDS ON THE

NATURE AND GOALS OF THE CLIENT.  THAT SAID, MOST CORPORATIONS

HAVE THE SAME BASIC TYPES OF INSURANCE PROGRAMS:   PROPERTY,

CASUALTY, PROFESSIONAL LIABILITY, CRIME, DIRECTORS AND OFFICERS

LIABILITY AND CERTAIN OTHERS.



IN A SOFT INSURANCE MARKET, WITH FLAT TO NEGATIVE GROWTH, THERE

IS CLEARLY A MOTIVATION FOR INSURERS AND BROKERS TO SELL

SOMETHING NEW AND DIFFERENT.  IN ADDITION, RISK MANAGERS WISH TO

BE INNOVATIVE.   WITHIN THIS CONTEXT THE CONCEPT OF INTEGRATED

COVERAGE WAS INTRODUCED.  HAVING, OVER THE YEARS, WITNESSED THE

INTRODUCTION OF A NUMBER OF PRODUCTS THAT WERE BORN BEFORE THEY

WERE CONCEIVED, WE ALL KNOW THAT ANY NEW PROPOSAL MUST BE

CAREFULLY CONSIDERED.



INTEGRATED PROGRAMS TAKE ALL OR A NUMBER OF THE PRE-EXISTING

INSURANCE PROGRAMS AND PUT THEM UNDER ONE POLICY, SOMETIMES ALSO

ADDING NEW COVERAGES.  THE ARGUMENTS FOR THIS CONSOLIDATION ARE

SIMPLE AND SEEMINGLY LOGICAL.  IS IT NOT MORE EFFICIENT TO HAVE

ONE POLICY WITH ONE RENEWAL THAN TO HAVE SEVERAL?  IS IT NOT

BETTER TO HAVE ONE FINANCIALLY SOUND INSURER THAN TO HAVE MANY,

WHOSE FINANCIAL STABILITY MUST BE MONITORED?  THE CONSOLIDATION

OF COVERAGE CAN ALSO RESULT IN COST SAVINGS.  AT FIRST GLANCE,

THE CONCEPT SEEMS ATTRACTIVE, AND FOR CERTAIN FIRMS, ESPECIALLY

THOSE HAVING DIFFICULTY SECURING COVERAGE, IT ACTUALLY MAY BE.



HOWEVER, FOR FIRMS WITH GOOD LONG TERM RELATIONSHIPS WITH THEIR

PRIMARY INSURERS, THERE ARE A NUMBER OF QUESTIONS TO BE POSED

BEFORE ENTERING INTO INTEGRATED PROGRAMS, ESPECIALLY WITH RESPECT

TO THE BASIS OF THE PROJECTED COST SAVINGS.



WHEN INTRODUCED, INTEGRATED PROGRAMS WERE WRITTEN ON A CLAIMS

MADE BASIS, RATHER THAN ON AN OCCURRENCE FORM.  THIS IS A MAJOR

DIFFERENCE.   PUBLIC LIABILITY POLICIES WRITTEN ON AN OCCURRENCE

FORM APPLY TO INJURIES WHICH OCCUR WHILE THE POLICY IS IN EFFECT.

 ON THIS BASIS, AN INSURED CAN BENEFIT FROM THE AGGREGATION OF

ALL COVERAGES MAINTAINED OVER DECADES, AS HAPPENED WITH ASBESTOS

CLAIMS.  ON A CLAIMS MADE BASIS, THE INSURED ONLY HAS THE BENEFIT

OF THE LIMIT OF THE ONE POLICY IN FORCE AT THE TIME THE CLAIM IS

MADE.



ONE OF THE CHIEF REASONS FOR THE REDUCTION IN PREMIUM IN

INTEGRATED PROGRAMS IS A RADICAL REDUCTION IN AVAILABLE COVERAGE.

 IN A TRADITIONAL ARRANGEMENT, EACH PROGRAM HAS ITS OWN AGGREGATE

LIMIT OFTEN ON AN ANNUAL BASIS.  AN INTEGRATED PROGRAM REDUCES

COVERAGE IN THREE WAYS.  FIRST, ALL OF THE PREVIOUSLY FREE

STANDING AGGREGATES ARE REDUCED TO ONE.  SECONDLY, SINCE

INTEGRATED PROGRAMS ARE ON A MULTIYEAR BASIS, ANNUAL AGGREGATE

LIMITS BECOME STRETCHED OVER 36 MONTHS.  A $100 MILLION ANNUAL

AGGREGATE REPRESENTS $300 MILLION OVER THREE YEARS.  CHANGING A

$100 MILLION ANNUAL AGGREGATE TO $100 MILLION OVER 36 MONTHS,

REDUCES AVAILABLE COVERAGE BY $200 MILLION. WHILE LIMITS CAN

USUALLY BE REINSTATED, THERE IS A COST ASSOCIATED WITH THIS.



WHEN DEALING WITH ONE DISCREET COVERAGE LIKE DIRECTORS AND

OFFICERS LIABILITY, AGGREGATE ADEQUACY CAN BE CAREFULLY MONITORED

AND AUTOMATIC REINSTATEMENTS PRE-NEGOTIATED.  WITH AN INTEGRATED

PROGRAM, COVERING MULTIPLE AREAS, THE ISSUES BECOME MORE COMPLEX.

 WHEN INTEGRATED PROGRAMS WERE INTRODUCED, THE TREATMENT OF

AGGREGATE DEPLETION, EXCESS POLICY DROP DOWN AND REINSTATEMENT

WERE NOT CLEAR.



THE THIRD WAY IN WHICH COVERAGE IS SIGNIFICANTLY REDUCED IS THE

IMPOSITION OF A VERY LARGE RETENTION OR DEDUCTIBLE.  THIS IS

ESPECIALLY DIFFICULT TO JUSTIFY RELATIVE TO THE INEXPENSIVE

COVERAGE AVAILABLE ON A PRIMARY BASIS.  GIVEN ALL OF THE ABOVE,

IT IS NOT SURPRISING THAT INTEGRATED PROGRAMS REDUCE COSTSÖ AS

LONG AS THERE ARE NO SIGNIFICANT LOSSES.



IF A MAJOR LOSS OCCURS UNDER A TRADITIONAL ARRANGEMENT, IT

AFFECTS ONLY ONE PROGRAM AND ONE INSURER RELATIONSHIP.  UNDER AN

INTEGRATED PROGRAM, A MAJOR LOSS, OF ANY TYPE, CAN PLACE THE

ENTIRE ARRANGEMENT AT RISK, AS SOME FIRMS WHICH MOVED TO

INTEGRATED PROGRAMS FOUND OUT.  IS IT WISE TO SUBJECT THE INSURER

PROTECTING THE PERSONAL ASSETS OF INDIVIDUAL DIRECTORS AND

OFFICERS TO THE GENERAL LOSS EXPERIENCE OF THE FIRM AS A WHOLE?



THERE IS ALSO THE QUESTION OF THE DEGREE OF EXPERTISE ANY ONE

INSURER HAS IN ALL COVERAGE AREAS.  FOR EXAMPLE, HIGHLY PROTECTED

RISK PROPERTY INSURERS REPRESENT A NICHE MARKET THAT OFFERS VERY

COST EFFECTIVE PROTECTION.  IN ADDITION, THERE ARE RELATIVELY FEW

INSURERS WITH EXTENSIVE EXPERTISE IN DIRECTORS AND OFFICERS

LIABILITY ISSUES.



AN INTEGRATED PROGRAM MAY BE AN ATTRACTIVE PROPOSITION FOR FIRMS

WITH CERTAIN RISK PROFILES AND LOSS HISTORIES BUT THE ABOVE

INDICATED ISSUES NEED TO BE THOROUGHLY ADDRESSED.



AS I SAID AT THE OUTSET, THE VALUE OF AN INTEGRATED RISK PROGRAM

IS NOT AS AN ALTERNATIVE TO TRADITIONAL METHODS BUT AS AN

ADDITIONAL METHODOLOGY FOCUSING ON EXPOSURES AND FINANCIAL NEEDS

NOT PREVIOUSLY ADDRESSED.



IN THE CASE OF MY OWN FIRM, WE APPLIED THE CONCEPT OF RISK

INTEGRATION TO ACHIEVE A WHOLE NEW LEVEL OF PROTECTION AND ALSO

EMBRACE PREVIOUSLY UNINSURABLE OPERATIONAL EXPOSURES.  LEAVING

ALL OF OUR PRIMARY RELATIONSHIPS AND PROGRAMS INTACT, WE

SYNDICATED A $400 MILLION CATASTROPHE EXCESS PROGRAM.  AS EXCESS,

THE POLICY ATTACHES IN EXCESS OF THE PRE-EXISTING DIRECTORS AND

OFFICERS LIABILITY POLICY AND OUR CRIME INSURANCE.  AS A

CATASTROPHE PROGRAM, IT ATTACHES OVER A $100 MILLION RETENTION

PROVIDING CORPORATE PROFESSIONAL LIABILITY COVERAGE AND WHAT, IN

1997, WAS THE FIRST INSURANCE POLICY PROVIDING COVERAGE FOR ALL

UNAUTHORIZED ACTS, INCLUDING, WITHOUT LIMITATION, UNAUTHORIZED

TRADING.  THIS PROGRAM IS AN EXAMPLE OF THE INTEGRATION OF RISK

WITHOUT ANY OF THE POTENTIALLY NEGATIVE EFFECTS.  THE KEY REASON

FOR THIS IS THAT THE CONCEPTS OF INTEGRATED RISK WERE NOT APPLIED

AS AN ALTERNATIVE TO EXISTING PRIMARY PROGRAMS BUT AS A FURTHER

ENHANCEMENT AT A HIGHER LEVEL, THEREBY PROVIDING A MORE MATERIAL

LEVEL OF EARNINGS PROTECTION.  IT ALSO PERMITTED US TO ELIMINATE

CERTAIN MORE NARROWLY FOCUSED AND EXPENSIVE EXCESS COVERAGES.



SOME MONTHS AFTER THE POLICY WAS EFFECTED, LLOYDS INTRODUCED A

COVERAGE SOLELY FOR UNAUTHORIZED PROPRIETARY (FIRST PARTY)

TRADING LOSSES.  THIS COVERAGE WAS INTENDED TO ATTACH SUBJECT TO

A LOWER RETENTION BUT WITH A MUCH HIGHER PREMIUM.  THIS MUCH MORE

LIMITED COVERAGE IS REFERRED TO AS THE SVB FORM.



JUST AS EVOLUTION IN NATURE RESULTS IN SOME RATHER STRANGE

CREATURES, SOME ODD COMBINATIONS OF EXPOSURES HAVE BEEN

INTRODUCED IN THE NAME OF INTEGRATED RISK.  ONE FIRM, FOR

EXAMPLE, CHOSE TO COMBINE THEIR PROPERTY AND CASUALTY PROGRAM,

INCLUDING PHYSICAL DAMAGE, PUBLIC LIABILITY AND WORKERS

COMPENSATION COVERAGE, UNDER A POLICY ALSO COVERING FOREIGN

EXCHANGE RISK.  AS BANKS HAVE FOR DECADES PROVIDED CLIENTS WITH

THE ABILITY TO INSURE AGAINST FOREIGN EXCHANGE EXPOSURE, THE

VALUE OF ADDRESSING THESE EXPOSURES UNDER ONE CONTRACT IS NOT

IMMEDIATELY APPARENT.



THE ARGUMENT IS ADVANCED THAT SINCE THE EXPOSURES ARE SO

UNRELATED THEY WILL NOT BE AFFECTED BY THE SAME EVENT.  THIS IS

TRUE.   IN FACT, THEY ARE SO COMPLETELY UNRELATED THAT THEY CAN

READILY BE ADDRESSED SEPARATELY.  IT WOULD APPEAR MORE

ADVANTAGEOUS TO COMBINE TWO RISKS THAT BEAR AN INVERSE

RELATIONSHIP TO EACH OTHER, SUCH THAT UPWARD MOVEMENT IN ONE

WOULD SERVE TO BE OFFSET BY DOWNWARD MOVEMENT IN THE OTHER,

CREATING AN AUTOMATIC HEDGE.



THIS COMBINATION WAS SAID TO RESULT IN COST SAVINGS.  AS WITH

OTHER INTEGRATED RISK PROPOSALS, THIS CLAIM WOULD HAVE TO BE

ANALYZED IN TERMS OF THE DEGREE TO WHICH OVERALL COVERAGE WAS

REDUCED AND THE RETENTION WAS INCREASED.  IT WAS REPORTED THAT

THIS PROGRAM WAS STRUCTURED WITH ACROSS THE BOARD ANNUAL

RETENTIONS OF FROM $25 TO $35 MILLION DOLLARS.



THERE IS CERTAINLY POTENTIAL FOR FURTHER INVENTIVE COMBINATIONS

OF RISKS AND THERE ARE SOME VERY TALENTED PEOPLE EXPLORING THE

POSSIBILITIES.  BUT ANY PROPOSAL MUST BE CHALLENGED IN TERMS OF

AVAILABLE ALTERNATIVES AND IT MUST BE DETERMINED THAT COMBINING

THESE RISKS REPRESENTS GREATER VALUE THAN ADDRESSING THEM

SEPARATELY.  THE WHOLE MUST TRULY BE GREATER THAN THE SUM OF ITS

PARTS AND, AS WE HAVE DEMONSTRATED, ALLEGED COST SAVINGS CAN BE

ILLUSORY.



THE CONCEPT OF ENTERPRISE RISK IS FAR MORE SWEEPING THAN

INTEGRATED RISK.  WHERE INTEGRATION FOCUSES LARGELY ON THE

COMBINATION OF WHAT ALREADY EXISTS.  ENTERPRISE RISK ATTEMPTS TO

ADDRESS THE ENTIRE SPECTRUM OF RISK FACED BY A BUSINESS

ENTERPRISE, INCLUDING MARKET RISK, CREDIT RISK AND OPERATING

RISK.  STRATEGICALLY, THERE IS VALUE IN VIEWING RISK HOLISTICALLY

BUT IN TERMS OF TACTICAL SOLUTIONS, IT IS NECESSARY TO

DISTINGUISH AMONG THE DIFFERENT TYPES OF RISKS.  WITH RESPECT TO

MARKET AND CREDIT RISK, THERE ARE ALREADY MANY WAYS IN WHICH TO

FUND AND HEDGE THESE EXPOSURES.  IN ADDITION, THERE ARE FINANCIAL

SERVICE FIRMS FOR WHOM THE MANAGEMENT OF MARKET AND CREDIT RISK

IS THEIR CORE COMPETENCY AND REVENUE SOURCE.  THIS DOES NOT MEAN

THAT NEW PLAYERS AND APPROACHES MAY NOT BE VALUABLE BUT IT DOES

MEAN THAT THE VALUE CANNOT BE ASSESSED WITHOUT A THOROUGH

UNDERSTANDING OF THE EXISTING ALTERNATIVES.



EARLY ITERATIONS OF ENTERPRISE RISK PROPOSALS FAILED TO RECOGNIZE

THE DIFFERENCES IN RISKS.  THEY WERE CHARACTERIZED AS "BALANCE

SHEET" PROTECTION PROGRAMS.  THEIR FOCUS WAS NOT ON THE SPECIFIC

CAUSE OF LOSS BUT RATHER ON THE BALANCE SHEET IMPACT OF ANY TYPE

OF LOSS.



THE FIRST PROPOSALS OF THIS TYPE USUALLY CALLED FOR A GROUP OF

FIRMS TO POOL ASSETS OVER THE LONG TERM TO CREATE FROM $500

MILLION TO $1 BILLION IN COVERAGE, THAT WOULD ATTACH AT PERHAPS

$100 MILLION. THESE EARLY PROPOSALS WERE EXTREMELY EXPENSIVE FOR

THE PROSPECTIVE INSUREDS BUT HIGHLY LUCRATIVE FOR THE INVOLVED

INTERMEDIARIES.  THE PROJECTED FINANCIAL ADEQUACY OF SUCH

ARRANGEMENTS WAS BASED ON MODELS WITH A QUESTIONABLE AND LIMITED

STATISTICAL FOUNDATION.



AGAIN, THE BASIC PROBLEM WITH THESE PROPOSALS WAS THAT THEY WERE

STILL BEING PRESENTED AS AN ALTERNATIVE TO INSURANCE.  THE LIMITS

BEING OFFERED AND THE POINT OF ATTACHMENT COULD READILY AND

INEXPENSIVELY BE MATCHED THROUGH A BROAD INSURANCE COVERAGE, SUCH

AS THE CATASTROPHE PROGRAM WE ARRANGED AT J.P. MORGAN.



SINCE THAT TIME, ENTERPRISE RISK MANAGEMENT CONCEPTS HAVE FURTHER

 MATURED.  THE CRITICAL FACTOR IS THE REALIZATION THAT ENTERPRISE

RISK PROGRAMS ARE NOT IN COMPETITION WITH INSURANCE, WHICH

REMAINS CHEAP AND EFFICIENT.  WHILE THE EARLY "BALANCE SHEET"

OFFERINGS ATTEMPTED TO ADDRESS ALL RISKS BY FOCUSING ON BALANCE

SHEET IMPACT AS A TRIGGER, MORE RECENT DISCUSSION NOW TENDS TO

FOCUS MORE SPECIFICALLY ON OPERATING RISK.  AS I HAVE INDICATED,

THERE ARE MANY FINANCIAL VEHICLES AVAILABLE TO ADDRESS MARKET AND

CREDIT RISK AND THE MODELS USED HAVE AN EXTENSIVE STATISTICAL

FOUNDATION.  HOWEVER, OPERATING RISK, HAS REMAINED A RELATIVELY

UNDEFINED THREAT.  THE AVAILABLE DATA ON ACTUAL OPERATING LOSSES

HAS BEEN QUITE LIMITED AND IT HAS, THEREFORE, BEEN VIRTUALLY

IMPOSSIBLE TO QUANTIFY THIS EXPOSURE.



OPERATING RISK FUNDING PROPOSALS, NOW IN THEIR EARLY STAGES OF

INTRODUCTION, NO LONGER CHARACTERIZE THEMSELVES AS ALTERNATIVES

TO INSURANCE BUT AS CAPITAL ALLOCATION TOOLS AND ARE BASED ON

MORE EXTENSIVE OPERATING LOSS EXPERIENCE DATA.  THE STATISTICAL

UNIVERSE OF SUCH LOSSES IS STILL RELATIVELY LIMITED, AND THE

CONTINUOUS CHANGES IN THE UNDERLYING TECHNOLOGICAL ENVIRONMENT

MAKE HISTORICAL EXPERIENCE OF LIMITED VALUE IN PREDICTING THE

FUTURE.   HOWEVER,  THESE LIMITATIONS ARE RECOGNIZED BY INSURERS

WHO REALISTICALLY VIEW THE DATABASE OF OPERATING RISK AS ONE

ADDITIONAL TOOL, WHICH NEEDS TO BE FURTHER IMPROVED.



FOR MAJOR CORPORATIONS, TRADITIONAL INSURANCE CONTINUES TO OFFER

AN EFFICIENT METHOD OF EARNINGS PROTECTION, ESPECIALLY IN

COMBINATION WITH EXCESS INTEGRATED CATASTROPHE PROGRAMS.  

HOWEVER, THE AMOUNT AND SCOPE OF COVERAGE AVAILABLE HAS NEVER

BEEN SUFFICIENT TO PROTECT SUCH ENTITIES FROM LIFE THREATENING

LOSSES ARISING OUT OF OPERATING RISKS.



ONE INSURER ATTEMPTING TO ADDRESS OPERATING RISK IS SWISS RE. 

SWISS RE IS IN THE PROCESS OF INTRODUCING A NEW FINANCIAL

INSTITUTION OPERATING RISK INSURANCE, WHICH THEY REFER TO AS

FIORI.   THE INSURER PERCEIVES OPERATING RISK AS ARISING OUT OF

THE FOLLOWING CATEGORIES:  PERSONNEL, TECHNOLOGY, PHYSICAL

ASSETS, RELATIONSHIPS AND EXTERNAL. PERSONNEL - BUSINESS

REQUIREMENTS ARE NOT MET DUE TO MOTIVATIONAL ISSUES, FRAUD OR

IMPROPER PERSONNEL POLICIES. TECHNOLOGY - SYSTEMS UNAVAILABILITY,

POOR DATA QUALITY, SYSTEM ERRORS, SOFTWARE PROBLEMS PHYSICAL

ASSETS - ONGOING BUSINESS ADVERSELY AFFECTED BY DAMAGE OR LOSS OF

PHYSICAL ASSETS RELATIONSHIPS - UNSUITABLE RELATIONSHIPS, SALES

PRACTICES, CUSTOMER PROBLEMS ETC. EXTERNAL - RISK THAT A

TRANSACTION IS OR BECOMES UNENFORCEABLE, AS WELL AS CHANGES IN

LAW OR OF RELEVANT STANDARDS



SWISS RE WOULD LIKE TO DEVELOP OPERATING RISK PROTECTION THAT

WOULD MATERIALLY IMPROVE THE PERCEPTION OF THE INSURED BY

REGULATORS, STOCKHOLDERS AND BONDHOLDERS.  THE DIFFICULTY WILL BE

IN SYNDICATING SUFFICIENT CAPACITY TO PROVIDE A MATERIAL LEVEL OF

PROTECTION.  FOR THE LARGEST FINANCIAL INSTITUTIONS, IN MY

OPINION, THIS COULD REQUIRE TOTAL CAPACITY APPROACHING $10

BILLION.  IT IS SWISS RE'S STATED VISION, AS A PIONEER IN THIS

AREA, THAT INSURANCE COMPANIES AND BANKS SHOULD WORK TOGETHER TO

CREATE A COMMON MARKET, WHERE INSURERS WILL ACT FIRST AS

PROVIDERS OF CAPITAL AND LIQUIDITY,  IN THE LONG RUN BECOMING

MARKET  MAKERS FOR ADDITIONAL CAPITAL, WHICH MIGHT FLOW IN FROM

OTHER SOURCES SUCH AS ASSET MANAGERS.



THE EMERGENCE OF SUCH ENTERPRISE RISK PROGRAMS FOCUSING ON

OPERATING RISKS POSES A SIGNIFICANT CHALLENGE TO PRACTITIONERS OF

TRADITIONAL RISK AND INSURANCE MANAGEMENT.  THERE ARE TWO MAJOR

ASPECTS TO ENTERPRISE OPERATING RISK PROGRAMS: THE FIRST IS

FINANCIAL, IN THAT THESE PROGRAMS ARE BEING DESIGNED AS CAPITAL

MANAGEMENT TOOLS AND THE SECOND IS TECHNOLOGICAL, AS TECHNOLOGY

IS PERHAPS THE MAJOR SOURCE OF OPERATING RISK FOR MANY FIRMS. 

FOR THESE REASONS, THE DEVELOPMENT OF THE ROLE OF ENTERPRISE RISK

MANAGER MAY, DEPENDING UPON THE NATURE OF THE FIRM, FAVOR

INDIVIDUALS WITH EXTENSIVE FINANCIAL AND/OR TECHNOLOGICAL

BACKGROUNDS.  IN MY OPINION, THIS DOES NOT DESCRIBE MOST CURRENT

PRACTITIONERS OF RISK AND INSURANCE MANAGEMENT. SUCH

PRACTITIONERS MUST EITHER GROW TO MEET THESE OPPORTUNITIES OR

RISK BEING RELEGATED TO A MIDDLE MANAGEMENT ROLE, AS LIMITED

SUBJECT MATTER SPECIALISTS, FOCUSING ON A NARROW INSURABLE BAND

WITHIN THE BROAD SPECTRUM OF OPERATING RISK.  THIS VIEW IS

REINFORCED BY THE FACT THAT TODAY AN INCREASING NUMBER OF LEADING

UNDERWRITERS HAVE BACKGROUNDS IN BANKING AND FINANCIAL CONSULTING

RATHER THAN INSURANCE.



CONTINUING WITH OUR THEME OF EVOLUTION AND THE PROCESS OF NATURAL

SELECTION, THOSE RISK AND INSURANCE PRACTITIONERS WHO CAN ADAPT

AND CONTRIBUTE IN THIS CHANGING ENVIRONMENT BY ARRANGING THE BEST

COMBINATION OF AVAILABLE ALTERNATIVES, WILL SUCCEED.



AS IN NATURE, EVOLUTION RESULTS IN AN ENVIRONMENT THAT IS

INCREASINGLY COMPLEX.  THE PRODUCTS OF EARLIER STAGES OF

EVOLUTION DON'T NECESSARILY DISAPPEAR BUT OFTEN CONTINUE TO

COEXIST WITH NEWER LIFE FORMS, ADAPTED TO DIFFERENT PURPOSES OR

ENVIRONMENTS.

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