ÐÇ¿Õ´«Ã½

although it must be comforting for the sector to read soothing comments about "confidence and stability emerging at last" emanating from the insurance market (HT 20 February, page 15), observers will have noted that no long-term guarantees have been provided. In fact, closer examination reveals that there are no short-term guarantees either.

Insurance costs are driven by much more than just an organisation's approach to risk management. No amount of risk management within a registered social landlord could have prevented the World Trade Center attacks, yet the costs to reinsurers of that disaster have been passed down through the market to the insurance buyer.

Insurance companies are in business to make profit. The capital collected by these companies is paid out in claims, operating expenses, reinsurance purchase and dividends to shareholders.

In recent years the demands of shareholders have become more strident as stock market returns have diminished. The spectre of international terrorism is with us to stay, so substantial claims elsewhere in the world, outside the RSL sector, can and will have a impact on premiums.

In theory, as the whole of society becomes more conscious of risk management because of heightened awareness and increasing legislation, the improvements to loss records should allow insurers to make more profit for their shareholders.

Is this why a social landlord should focus on risk management? The driver for risk management should not be a reaction to an adverse insurance premium but a desire to control and minimise loss, particularly as the administration costs associated with losses are substantial, and not recoverable from underwriters.

Claims outside the RSL sector affect premiums – and terrorism is here to stay

As commercial businesses get better at managing risk, they have invariably found that they become able to finance more risk themselves. It is inevitable that other sectors will follow the same path, as financial directors recognise that, if you are managing risk well, why pass the benefits of that success to an insurance company, when it can be retained in-house?

The only long-term solution if you are managing risk well is to retain more of that risk yourself, and reduce those elements you can't control – one of which is insurance.

Of course the ultimate expression of self reliance (in the form of a fund or a captive of some sort) is not a solution that suits all. But the advent of cell structures makes risk financing viable for organisations previously thought too small in premium terms.

Even cells where financial benefits may seem marginal (because of transactional costs) can deliver economic benefit by the provision of direct access to the reinsurance market. Such access can – for various covers – enable the purchase of reinsurance for events of a catastrophic nature.

This need only be for an amount equal to the estimated maximum loss, instead of a total reinstatement sum insured for the entire portfolio from the direct insurer, which has higher management and administration costs.