Banking companies did not originally intend to get into the risk management business - they were pulled into it when they bought property/casualty agencies that offered such services.
But some banking companies are discovering that these services can be a strong addition to their commercial loan business, especially with small-business clients.
Risk management services can range from the basic, such as analyzing historical loss data (the amount of losses a company has had to pay for itself because its insurance didn't cover it), to implementing workplace safety programs to reduce premiums, to helping clients determine how much coverage they need.
The services can also include more cutting-edge items, such as helping a company start its own captive insurance company, reduce its premiums, or securitize and sell its risk in the capital markets.
Larger companies as a rule have their own risk management departments that take care of many of these needs in-house. But small and midsize firms, which usually do not have a full-time risk manager on staff, often turn to an outside consultant to help reduce their insurance costs and make sure they have adequate coverage.
Companies with revenues of under $1 billion tend to have higher risk costs than larger ones, according to statistics from the Risk and Insurance Management Society.
The risk services unit of Webster Insurance, a subsidiary of $12 billion-asset Webster Financial Corp., in Westport, Conn., provides services including claims consulting, claims auditing, and traditional risk control to middle-market companies.
The unit assigns a risk services specialist to each of the agency's business clients from the moment the client creates a relationship with the agency. That specialist stays with the client throughout its relationship with Webster Insurance.
"Our business is predicated on the fact that we can forge a relationship that goes beyond just insurance," said John Queirolo, the president and chief executive officer of Webster Insurance, which had revenues of $16 million last year. Risk management service is a big part of that relationship, he said.
The risk services are normally included in the price of Webster products for which the services could be required, such as property/casualty, liability, and workers compensation policies. If a client has more extensive needs, the risk management unit may charge a separate fee for these services.
Webster built the risk management unit by acquiring property/casualty agencies that specialized in these firms. The department has five specialists who can visit a client, assess its risks, inspect buildings, install workplace safety programs, offer advise on ergonomics and Occupational Safety and Health Administration requirements, and perform loss forecasts and retention analysis.
Much of the work in risk management involves understanding the clients' businesses, their financial situation, and their ability to absorb, mitigate, or insure against risks, Mr. Queirolo said. "It's simple: The last solution is to insure risk, after you try to avoid or transfer it."
As Webster's insurance unit grows, Mr. Queirolo says, he will add more offerings to the risk management operation. "We want to expand our services in areas such as captive management."
First Niagara Financial Corp. of Lockport, N.Y., is one of the latest banking companies to start providing this type of advice to clients. Last month its created its own risk management department and hired Wayne Salen, who had been the director of risk management for Park Associates of East Aurora, to run it.
The $2.7 billion-asset company, which owns the insurance agency Warren-Hoffman & Associates, formed First Niagara Risk Management within that agency to broaden the services it offers to its commercial customers.
Mr. Salen said he works with First Niagara's insurance agents to assess their clients' risk and reduce their insurance costs with things like improved safety procedures.
This is especially important now, as commercial property/casualty insurance prices are rising for the first time in several years, Mr. Salen said. This will increase the cost of managing risks, especially for smaller companies, he said.
First Niagara plans eventually to add alternative risk products and services such as self-insurance, captives, and securitization.
Tony Fenton, an executive vice president and the chief operating officer of First Union Insurance Services, which had $53 million of revenues last year, also said risk management can help a banking company provide better service to midsize clients.
"For a lot of small businesses, packaged products exist that cover the vast majority of risks," but "the larger the organization, the more complex it becomes, and therefore there's more opportunity to get in and be involved," Mr. Fenton said.
Joseph Hunnicutt, a vice president and a senior consultant with the First Union Corp. subsidiary's commercial lines department, said that the agency's risk management unit draws on the expertise of the agents in the various agencies it has acquired.
For example, if a client is interested in directors and officers insurance, "we may have a broker in Washington who's a specialist in D&O, and we'll bring that guy out," he said.
Risk consulting services are included in the price of insurance products First Union sells, Mr. Hunnicutt said. However, if the risk management department is acting strictly as a consultant for a client who buys the insurance elsewhere, the client is charged an hourly or lump-sum fee for the service.
Risk management services also provides a good cross-selling opportunity for First Union's bankers, Mr. Hunnicutt said. If a banking client already has insurance from an outside agency, First Union's risk management staff can go to that client's company and assess its current insurance expenses and needs, for a fee, he said.
Mr. Hunnicutt and Mr. Fenton said First Union Insurance plans to expand its risk management business by adding insurance products developed by its risk management specialists to handle nontraditional risks, such as insurance for export credit and an environmental policy to protect bank loans.
John Wepler, a senior vice president of mergers and acquisitions at Marsh Berry & Co., a Concord, Ohio, bank insurance consulting firm, said banking companies are realizing that just owning an insurance agency does not guarantee that fee income will roll in. Smarter companies are turning to risk management because of the value-added services they can provide, he said.
"A lot of banks just say, 'We want to cross-sell,' or 'Let's buy as many agencies as we possibly can,' " but that's shortsighted, he said. To retain clients, bank-owned agencies must "graduate from being a vendor to being a trusted adviser and a real part of [their clients'] future success."
To be successful, bank-owned agencies must deepen their relationships with clients by providing the tools, like risk management services, that remove the administrative burden from a business owner and help protect the business against various risks, Mr. Wepler said.
A lot of bank-owned agencies, along with their independent counterparts, say they provide risk management services, but few provide more than cursory services, he said. "I would say that 90% of the bank-owned agencies say they are risk managers, but they are really insurance producers."
The best bank-owned commercial agencies have "a holistic risk management process that they take customers through," he said. These agencies assess all the risks of the business, and then offer a range of solutions that can help prevent losses, such as safety programs, new policies and procedures, or insurance, he said.
The idea is to "enhance their likelihood of being a successful business," Mr. Wepler said.
To provide this type of service, banking companies need to dedicate staff to risk management and have proven experts who can assess the issues of a business, he said. Even for those companies that are doing this well, "it's only the beginning of what they want to accomplish."
Kenneth Kehrer, the president of Kenneth Kehrer Associates, a bank insurance consulting firm in Princeton, N.J., said risk management services are "sort of a natural extension of being a prime provider of financial services to small and medium-size businesses.
"The key clients are the ones that are dynamic and growing, "and those are the ones whose business you want to capture - their banking business as well as their nontraditional financial services business - before they grow up and go to someone else," he said.
