Commercial Risk Europe - August 2010 by Calixa Creative

www.commercialriskeurope.com VOL.1 / ISS.6 / JULY/AUGUST 2010

Commercial Risk Europe EUROPEAN INSURANCE & RISK MANAGEMENT NEWS

NORTHERN LIGHTS: This year’s AIRMIC conference in Manchester attracted a record number of delegates—we bring you the highlights from the event ............................................ p8

LATE NEWS: U.S. Supreme Court decision shields European companies

>> [WASHINGTON]—

A DECIsion by the U.S. Supreme Court to forbid foreign investors to claim for compensation under American law in cases involving shares purchased outside the United States will void the claims of most investors that have joined a class action that Vivendi, the French group, is facing in the United States, according to a top official at the company. The class action refers to accusations that the group released [PHOTOSHOT] misleading information about its financial health between 2000 and 2002. The firm has already been found guilty in lower courts in America, and an action in Jean-Marie Messier, France that aimed ex-Chief Executive to exclude French of Vivendi Universal shareholders from the suit underway in the U.S. has been rejected by the French Justice. But relief seems to have come as a result of another, unrelated lawsuit. The company has celebrated a decision by the Supreme Court, at the end of June, where the Justices decided that foreign investors that purchased shares of National Australia Bank in stock exchanges outside the U.S. could not sue the bank in New York for losses suffered by its American mortgage unit. In a statement, Vivendi, which volunteered to provide information in NAB’s suit, claimed that the decision goes in line with the legal arguments proposed by the firm both in America and France. Pierre Rodocanachi, a member of Vivendi’s supervisory board, told the participants of a risk management conference in Paris that the decision makes 80% of all claimants ineligible to compensation in case the company is condemned, as most of them are French and purchased their stocks in France. According to Mr. Rodocanachi, Vivendi had set aside €650m as a contingency provision for eventual payments that might have to be made by the company, in case the courts decided for the disgruntled shareholders. “This was a kind of risk that was very difficult to quantify, and it required a lot of work by legal and financial experts,” Mr. Rodocanachi told delegates at the Paris conference, which was organised by Association

VIVENDI: Turn to P23

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BUSINESS AS USUAL: BEN NORRIS speaks to Chartis’ Philippe Gouraud, about the state of the market, the outlook for European insurers and Chartis’ customers ............. p16

DON’T IGNORE THE SOFT STUFF: Marsh’s JONATHAN GROVES argues that risk managers ignore Solvency II’s so-called softer corporate governance requirements at their peril ................................................. p19

Captive owners ‘optimistic’ about latest Solvency II developments By Adrian Ladbury aladbury@commercialriskeurope.com

[BRUSSELS]—IT SEEMS INCREASINGly likely that Solvency II will not hit captives as hard as originally feared based on the latest papers from the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the European Commission, and comments from leading representatives of the insurance management community in recent weeks. Günter Dröse, Head of the European Captive Insurance and Reinsurance Owners’ Association (ECIROA), told Commercial Risk Europe that he is ‘optimistic’ about the final outcome of Solvency II for captives based on the latest news from CEIOPS and the Commission. CEIOPS issued the technical specifications for QIS5, its latest and hopefully final field test for Solvency II, and will provide the European Commission with the report in April of next year to help it decide on the final implementing measures. CEIOPS will run the QIS5 exercise between August and November so that it can provide quantitative input to the finalisation of the Commission’s proposal on level 2 implementing measures for the Directive.

As reported in last week’s Commercial Risk Europe newsletter [www.commericalriskeurope.com], buried deep within the 330 page document is a section on simplifications for captives that suggests that some of the concerns expressed to CEIOPS, the Commission and national politicians in recent months by ECIROA and FERMA about the limited applicability of the simplifications to captives may have been addressed. A number of leading European risk managers have told CRE in recent weeks that they are confident that the efforts made by FERMA and ECIROA to ensure that captives receive proportional treatment in the final rules will bear fruit. Mr. Dröse told CRE that he does not believe that the most recent papers from CEIOPS will ‘represent the final outcome’ in its discussion with EC and CEIOPS but added ‘I am optimistic’. ART OF PERSUASION “We have had a close contact with some of the regulators and are happy to see some success for captives in general,” said Mr. Dröse. He said that the lobbying to try and persuade CEIOPS and the Commission to take a less hardcore stance on captives had been a real team effort and that ECIROA had not worked on this alone

[ECIROA]

Günter Dröse

by any means. Despite the apparent recent progress made, he also promised that the effort would not be relaxed. “We will not stop our engagement and the diligent and broad activity which is very much time consuming,” said Mr. Dröse. To support this effort, Mr. Dröse urged European captive owners to take part in the QIS5 exercise and therefore provide CEIOPS and the Commission with the hard evidence needed to make the right decisions. “There is a lot to do. We need to convince captive owners to participate in QIS5, keep actuaries still busy with recommendations about how to calculate captive risks in line with Solvency II but ‘in proportion’ to commercial insur-

U.K. government review of Health and Safety draws mixed response By Adrian Ladbury

aladbury@commercialriskeurope.com

[LONDON]—AIRMIC, THE U.K. RISK and insurance buyers’ association, has told the U.K. government that it welcomes its recently launched review of health and safety law and the rise of the compensation culture and hopes that it can be used to cut claims handling costs. The association also told the government in its formal response that it hopes that the review can be used to tighten up the compulsory Brendan Barber employers’ liability system that it said penalises larger and more responsible companies that stick to the rules while others ﬂout them. U.K. Prime Minister David Cameron announced the appointment of the Rt Hon Lord Young of Graffham as Adviser to the Prime Minister on health and safety law and practice in June.

Lord Young’s brief was to undertake a Whitehall-wide review of the operation of health and safety laws and the growth of the compensation culture. He was asked to report to the Prime Minister this summer and, in particular, has been asked to investigate concerns over the application and perception of health and safety legislation, plus the rise of the compensation culture over the last decade. At the time, Mr. Cameron said: “The rise of the compensation culture over the last 10 years is a real concern, as is the way health and safety rules are sometimes applied. We need a sensible new approach that makes clear these laws are intended to protect people, not overwhelm businesses with red tape. I look [TUC]

U.K.: Turn to P23

ers, determine in more detail what the ‘proportionality principle’ contains or means and describe that in an effort to be more precise and fair to all insurers. And we are still working on the captive definition,” he said. In general the captive owners and the wider commercial insurance industry will have been pleased with the QIS5 technical specifications issued by CEIOPS. In its call for advice in the form of a letter to Gabriel Bernadino, Chairman of CEIOPS, David Wright of the Commission noted it had made a number of changes to the technical specifications following extensive consultation, all seemingly positive for insurers and their customers. Mr. Wright said that the Commission is aware that not all stakeholders or Member States are ‘totally satisfied’ with the choices made by the Commission in the technical specifications but stressed that it had done its best to reconcile the different positions and to test compromise approaches wherever possible. “As the Commissioner [Barnier] indicated, it is important to reach a balanced approach in QIS5 that takes supervisory as well as general concerns into account. It is very important to stress that QIS5 is a test. This point should be clearly communicated to the SOLV II: Turn to P23

FRENCH COMPANIES HIT RISK LEARNING CURVE AS CHINESE TRADE GROWS By Rodrigo Amaral ramaral@commercialriskeurope.com

[PARIS]—FRENCH COMPANIES MUST learn new ways to deal with the risks attached to trade with China as companies boost economic links with the country, according to experts gathered by AMRAE, the French risk management association, for a recent meeting in Paris. Experts at the event agreed that French companies are fast realising that it is necessary to do business differently to succeed in areas like ﬁling insurance claims and making suppliers accountable for eventual faulty products. To help French companies cope with the challenges, AMRAE has set up a China committee this year to promote knowledge about the speciﬁc risks French risk managers face when their companies embark upon Chinese adventures. CHINA: Turn to P23

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13/7/10 10:02:41

NEWS France

French risk managers take centre stage The updated legislation also helped risk managers to draw on an official source of what the principles are that their firms must follow to be in accordance with the law, said Mr. De Segonzac. “Before the 2006 law, there were no references about risk management, companies did it how they wanted it,” he said. During the conference, participants noted that it is no longer unusual to find financial directors or even CEOs of large French companies who take the initiative to ask risk managers on the possible consequences of a business decision. Events that have taken place outside Europe have also helped to boost awareness, they remarked. The damage made to BP’s finances and reputation during the ongoing oil spill in the Gulf of Mexico was often mentioned.

By Rodrigo Amaral ramaral@commercialriskeurope.com

EW REGULATIONS AND THE AFTERSHOCKS

of the global economic crisis have forced French risk managers to play a bigger role in their companies. As a result, they must be prepared to help ﬁrms to take business decisions and even to make money, said leading risk managers and other experts at a conference held in Paris on July 1. Experts gathered by the the Association pour le Management du Risque et d’Assurances d’Entreprise (AMRAE), the French risk management association, detailed how legal changes that give more responsibility on risk to boards, and higher compliance requirements imposed by European and French legislation, have raised the proﬁle of risk managers with the top echelons of companies. “Risk managers are becoming increasingly important in French companies, as they have to be ever more transparent about their risks,” said Bruno Dunoyer de Segonzac, the Vice-President of AMRAE and Director of Internal Audits and Risk Management at Bouygues Telecom, during the event that was co-hosted by business newspaper Les Echos. EUROPEAN LAW Such requirements come as a result of the transposition to French law of European legislation, such as European directive 2006/43, published on May 17, 2006, which dictates how companies are supposed to present their results. The Directive was adapted to French law in May 2008, concluding a process that had been launched some years earlier with a number of domestic bills focused on risk management. The French laws included the 2002 Financial Security Law and the 2003 New Economic Regulation Law. The Sarbanes-Oxley Act in the United States reached French businesses via companies that are listed on the other side of the Atlantic. “After the 2002 and 2003 laws, and in many cases due to the Sarbanes-Oxley act in the U.S. and numerous laws in other countries, risk management was mainly considered a compliance activity,” said Michel Dennery, French Director at FERMA and Enterprise Risk Management Director at GDF SUEZ. “Companies began

to do risk mapping and to talk about risk management, and by 2007 or 2008, we can say we had a stable set of activities in place.” The transposition of the European Directive and the eruption of the global ﬁnancial crisis a few months later in 2008 took risk management to yet another level on the list of priorities of boards, he said. “After the 2008 crisis, managers understood that risk management was not only a compliance issue. They saw it was an opportunity to reinforce decision making and new regulation came in to reinforce the need to do it,” Mr. Dennery told Commercial Risk Europe.

Michel Dennery, French Director at FERMA and Enterprise Risk Management Director at GDF SUEZ

NEW FRONTIERS “It is important to take into account the reputation of companies, and also the legal and penal responsibilities of managers,” said Mr. Dennery. “In the BP crisis, it was the first time when top managers were put immediately in front of the American Congress to talk about how they manage risks.” He also noted that the time has come for French risk managers to carry on assuming more responsibilities and to adapt themselves to the new expectations placed upon companies. “We have to move from the process of risk management to challenging the knowledge of risk by top management and how it is taken into account,” he said. “We need to help managers to know more about risk and about performance and efficiency. Our job is also to help managers to make money,” Mr. Dennery concluded. Panelists also stressed, however, that many companies still have a long way to go before fine words are converted into action on risk management. Peter Solloway, the Commercial Director for Continental Europe at FM Global, quoted a survey that TNS, a research firm, made for his company in 2009. It found that some 74% of Chief Financial Officers in large French companies say that risk management is a priority for them. But only one in every two firms had a dedicated risk manager to do the job. And only 24% of the CFOs surveyed said that their companies had created a committee to deal with the implementation of an ERM program.

Risk gospel must spread out as well as up–AMRAE By Rodrigo Amaral ramaral@commercialriskeurope.com

RENCH RISK MANAGERS MAY HAVE GAINED THE

ear of top management in recent times because of the financial and economic crisis. But they must still work hard to spread the risk management gospel out to the rest of the company, according to experts gathered for a one day conference in Paris by AMRAE, the French risk management association and Les Echos, the business newspaper. During the event, risk managers at some of the largest French groups shared their experience on the use of techniques like marketing and communication strategies to increase awareness about risk. Frédéric Desitter, the Chief Risk Officer at Aéroports de Paris, the airport management company, stressed that it is necessary to ‘convince rather than constrain’ employees of all levels that risk factors must be taken into account in their daily jobs. Mr. Desitter heads a network of 34 risk management coordinators spread around the company and makes use of marketing techniques to spread awareness of the subject. The CEO and the Executive committee of Aéroports de Paris are official sponsors of the risk management programme. Publications on the issue are distributed to the firm’s staff, and emphasis is given to the performance of the units in management of their risks, rather than simple compliance to risk management rules. “All managers need to become risk managers,” he said. The culture of risk has already arrived at the firm to

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the point that, today, all investment plans must identify the risks that may be created and how they will be mitigated, Mr. Desitter said. “But we still have room for improvement,” he concluded. Michel Dennery, French Director at FERMA and Enterprise Risk Management Director at GDF SUEZ, stressed the importance of proper risk mapping. Risk maps are a tool that, in his view, carry out for risk management the same role that accounting plays for finance. Mr. Dennery also said that risk managers must be creative and have a free spirit, because they often have to rely on their own judgement to make the right decisions. “Risk managers must not trust all that they are told...and cross-check different points of view: operational, legal and reputational,” he said. “And we have to be suspicious of those risk factors that we are more confident about,” he added. Mr. Dennery noted that the oil industry had the reputation of boasting some of the best industrial risk management practices before the BP oil spill in the Gulf of Mexico, and that risk management was seen as a major strength of the financial sector until the débâcle of Lehman Brothers in 2008. At Areva, the nuclear firm, a set of procedures has been created to deal with the particular issue of ethics risks, as explained by Olivier Loubière, the firm’s Business Ethics advisor. Areva uses an approach whereby the main columns comprise issues like respect for competition, the notion of human rights in business and the prevention of conflicts of interests, which Mr. Loubière has qualified as a major threat to the social cohesion of an organisation. Another important element in the case of a firm like

Areva is the adoption of nuclear non-proliferation principles. Breaches of the company’s ethical code could embroil the company in an international crisis, he pointed out. Areva has a system of internal reporting that is used to increase the likelihood that ethical slips come to the knowledge of compliance officers and that red flags, both in the company and in competition, are spotted and dealt with, Mr. Loubière said. He also noted that, for ethical risk to be properly managed, top managers must insist on its significance at every possible occasion. “It is necessary to stress it and to repeat it,” he stated. Pierre Rodocanachi, a member of the supervisory board at Vivendi, the media group, told delegates that his company makes it clear to staff that risk taking is also an essential element of the success of a business. In his company, he said, managers are incentivised to act boldly by a bonus system under which two thirds of the value is linked to the performance of their units. Another third is linked to decisions they have taken that were intended to achieve specific risk-related objectives. Mr. Rodocanachi said that Vivendi has yielded some very good results by not being afraid of taking risks, such as its acquisition of Canal Plus, its pay TV subsidiary and its purchase of the TV rights for Ligue 1, the French football league, a deal that currently amounts to about €460m a year, according to media reports. On the other hand, he said, the perception of excessive levels of risk convinced the supervisory board not to recommend the acquisition of Pages Jaunes, an online yellow pages service, in 2006. “We probably regret that decision today,” Mr. Rodocanachi told the conference.

15/7/10 17:26:52

Mobile phones research

NEWS

Link between brain tumours and mobile phones remains inconclusive: Study By Tony Dowding tdowding@commercialriskeurope.com

FTER TEN YEARS OF RESEARCH, conducted

in 13 countries, and costing approximately €19.2m so far, the largest control case study of mobile phone use and a possible link with brain tumours has concluded with a resounding ‘not really sure’. The Interphone Study Group published their results in the International Journal of Epidemiology, presenting the results of analyses of brain tumour (glioma and meningioma, two of the most common tumours) risk in relation to mobile phone use. Given that the latest figures suggest that, by the end of 2009, there were an estimated 4.6bn mobile phone users, or roughly two-thirds of the global population, the results were greatly anticipated. ‘NOT ESTABLISHED’ What the researchers actually said was: “A reduced odds ratio for glioma and meningioma related to ever having been a regular mobile phone user possibly reflects participation bias or other methodological limitations. No elevated odds ratio for glioma or meningioma was observed ≥10 years after first phone use. There were suggestions of an increased risk of glioma, and much less so meningioma, in the highest decile of cumulative call time, in subjects who reported usual phone use on the same side of the head as their tumour and, for glioma, for tumours in the temporal lobe. Biases and errors limit the strength of the conclusions that can be drawn from these analyses and prevent a causal interpretation.” Or as Dr. Christopher Wild, Director of the International Agency for Research on Cancer, which initiated the study, said: “An increased risk of brain cancer is not established from the data from Interphone.

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However, observations at the highest level of cumulative call time and the changing patterns of mobile phone use since the period studied by Interphone, particularly in young people, mean that further investigation of mobile phone use and brain cancer risk is merited. In other words, the results are inconclusive—there is no real evidence of a problem, but there might be a problem for heavy users, but difﬁculties with the evi-

[The study’s] methodology... has led to concerns over bias. Others also suggest that mobile phone usage has increased considerably, in terms of time spent on the phone, in the last few years...” dence means that we can’t really say for sure. The problem is the methodology of the study which has led to concerns (from the researchers themselves) over bias. Others also suggest that mobile phone usage has increased considerably, in terms of time spent on the phone, in the last few years. Jack Siemiatycki, a professor at the University of Montreal who collaborated on the study, said restricted access to participants compromised the validity of results of the study. “The ﬁndings of the Interphone study

are ambiguous, surprising and puzzling,” he said. He added that the flawed methodology of the study resulted in discrepancies: “If we combine all users and compare them with non-users, the Interphone study found no increase in brain cancer among users. In fact, surprisingly, we found that when we combine users independently of the amount of use, they had lower brain cancer risks than non-users. However, the study also found heavy users of cell phones appeared to be at a higher risk of brain tumours than non-users.” Many scientists have pointed out that many other smaller studies have also found no evidence of a link, and that laboratory research, including lifetime studies of animals, does not suggest that radiofrequency fields play a role in cancer development, all of which weakens the likelihood that there is a causal relationship. MIXED MESSAGE As a result of the mixed message coming out of the study results, it has been reported variously in the media as being either conclusively proving the link or saying it doesn’t exist at all. Mobile manufacturers and campaigners have each managed to take their own view on the results. As Martin Gledhill, Senior Science Advisor at New Zealand’s National Radiation Laboratory, explained: “Of course, the question to which we would all like a definitive answer is ‘Are cellphones safe?’. As an editorial in The Lancet pointed out a few years ago, this question is the scientist’s banana skin, and a Nobel prize awaits the person who designs an experiment to prove safety. A commentary in the same issue of International Journal of Epidemiology said that the question as to whether mobile phone use increases risk for brain cancers remains open: “The tired refrain ‘more research is needed’ fully applies in this instance: without more research the public’s question about the acceptability of cancer risk from mobile phones will remain unanswered.”

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13/7/10 10:01:56

COMMENT

NEWS Association News

Now is the time to act I

T HAS BEEN AN EXCEPTIONALLY BUSY TIME

for the team at Commercial Risk Europe over the last couple of months as we attended both the AIRMIC and NARIM annual conferences and the PolRisk seminar in Warsaw as reported in this issue. At the same time we kicked off our annual Risk Frontiers survey of Europe’s leading risk and insurance managers. This project, sponsored by XL, involves round-tables organised with the main risk and insurance management associations across Europe. So far we have held discussions with AIRMIC in the U.K., BELRIM in Belgium, NARIM in the Netherlands, ANRA in Italy and a group of leading Austrian risk managers who are keen to launch their own association. After the summer break we will hold meetings in Germany at the DVS conference on September 7-9, in France with AMRAE, in Spain with IGREA and in Switzerland with SIRM. We are also carrying out a series of one to one interviews with leading European risk practitioners to supplement the process. The national roundtables will be published in coming issues of Commercial Risk Europe in September, October and November. The findings of these national discussions will then be collated into one pan-European report that will be published and discussed at the Malta International Risk and Insurance Congress that we are this year organising on behalf of the Malta Financial Services Authority, on November 25-26. The survey covers four basic areas that are high on the agenda of Europe’s risk and insurance managers currently. These are: ■ What are the risks created by the economic recovery? How can they be most effectively risk managed and what role could and should the risk and insurance manager play in this process? ■ What are the major emerging risks faced by corporations in this environment and how can risk and insurance managers work more effectively with their brokers and insurers to make sure they are identified, measured, managed and efficiently transferred? ■ Is there currently sufficient insurance capacity for large corporate risks, what are the problem areas and pricing outlook and what impact will Solvency II have upon the market’s ability to deliver robust solutions? What impact will the new rules have on captives and what is the best strategy for captive owners?

EDITORIAL DIRECTOR Adrian Ladbury Tel: +44 (0)1202 764 834 [W] +44 (0)7818 451 882 [M] aladbury@commercialriskeurope.com

WEB EDITOR /DEPUTY EDITOR Ben Norris Tel: +44 (0)7749 496 612 bnorris@commercialriskeurope.com

REPORTERS

Garry Booth; gbooth@commercialrisk europe.com; Rodrigo Amaral; ramaral@ commercialriskeurope.com; Tony Dowding; tdowding@commercialriskeurope.com

■ Are insurance buyers happy with the level of service offered by brokers and insurers, particularly for emerging and cross border risks? How can global programmes be improved to deliver more consistency and certainty for buyers? So far one thing is absolutely clear: the recovery, if indeed there is one, has presented the European risk and insurance management community with an unprecedented opportunity to raise its profile and significance within corporations across the Continent. Boards are crying out for support and advice on how to best risk manage their way out of recession and take the right decisions when seeking to exploit opportunities with limited and very valuable capital. Enter the risk manager. But, and it is a big but, there are no easy answers about how the risk and insurance manager could and should seize this opportunity. There is no easily transportable model because the function remains so varied depending upon company structure, business line and model. There remains a very wide range of maturity of the function among risk managers and that is not necessarily linked to the knowledge and experience of the individual risk and insurance manager involved. More often the understanding and appreciation of the function by the CFO, CEO and other board members is what determines how important the function is within the organisation. And then there is the old insurance versus risk manager argument. Most seem to agree that if the manager remains firmly rooted in the insurance buyer box then they will never gain the level of respect and appreciation that would help them contribute so much more to the organisation. But it seems that the moment the manager emerges from this much more easily defined role into the brave new world of business risk management it all becomes a little vague, woolly and dangerous from a corporate survival perspective. The Risk Frontiers survey will focus very closely on this whole conundrum and hopefully provide risk and insurance managers with a clear set of ideas and solutions about how to actually take advantage of this opportunity and not commit corporate suicide in the process. At the very least, if we take the thoughts of Europe’s leading practitioners about how this opportunity can be seized and synthesise them into a few key messages it will have achieved a heck of a lot in what remains a very open and often frustrating debate.

PUBLISHING DIRECTOR Hugo Foster Tel: +44 (0)1580 201 783 [W] +44 (0)7894 718 724 [M] hfoster@commercialriskeurope.com

PRINTING Orchard Press Cheltenham Ltd. MAILING AGENT A1 Mailings Services Ltd. EDITORIAL ENQUIRIES enquiries@commercialriskeurope.com

ART DIRECTOR Alan Booth Tel: +44 (0)208 123 3271 abooth@commercialriskeurope.com

DESIGN & PRODUCTION: Calixa Creative Services Ltd. www.calixa.biz RUBICON MEDIA LTD. © 2010 All rights reserved. Reproduction or transmission of any content is prohibited without prior written agreement of the publisher

For advertising & sponsorship opportunities email hfoster@commercialriskeurope.com Subscribe @ www.commercialriskeurope.com or email subs@commercialriskeurope.com Commercial Risk Europe is published monthly, except August and December, by Rubicon Media Ltd.—Registered ofﬁce 7 Granard Business Centre, Bunns Lane, Mill Hill, London NW7 2DQ Whilst every care has been taken in publishing Commercial Risk Europe, neither the publisher nor any of the contributors accept responsibility for any errors it may contain or for any losses howsoever arising from or in reliance upon its contents. Editeur Responsable: Adrian Ladbury.

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FERMA names new team at the top

JULIA GRAHAM OF THE U.K. AND JORGE LUZZI OF ITALY HAVE been named as Vice Presidents of FERMA soon after the federation announced that Tamer Saka of Turkey and Günter Schlicht of Germany have also been named as new directors. It is hoped that the appointment of this high profile and experienced team will help President Peter Den Dekker and the executive staff at FERMA maintain the momentum built up in recent times that has seen FERMA raise its profile at the European Commission in particular. Ms. Graham is risk manager for London law firm DLA Piper and was Chairman of AIRMIC from 2008-2009. She remains a member of the AIRMIC Council and Executive Committee and was also Chair of the British Standards Institution Committee that published the British risk management standard BS 31100. She is also already involved with FERMA as a member of the organising committee for next year’s Forum in Stockholm, Sweden. It is hoped that Ms. Graham’s appointment and involvement with the organising committee for next year’s forum plus the fact that FERMA’s seminar will be held in London on September 28 and 29 this year in particular will help raise the number of U.K. delegates to the Jorge Luzzi Forum in Sweden. The U.K. has been markedly underrepresented in delegate numbers compared with other leading national FERMA members in the past. Mr. Luzzi is also current Chairman of the International Federation of Risk and Insurance Management Associations (IFRIMA) and an active member of ANRA, the Italian risk management association. He is currently risk manager for Pirelli and before that worked for a number of companies including Ciba Geigy (now Novartis), Deutsche Bank and Marsh & McLennan. Mr. Luzzi has wide international experience and has worked in Switzerland, Spain, Argentina, Brazil, Bermuda and Ireland. Mr. Luzzi is an active, highly regarded and well known individual within European and international risk and insurance management circles and would, in the eyes of many, be the natural successor to Mr. Den Dekker should he decide to step down after the Forum next year. Mr. Saka is risk manager with leading Turkish company Sabinci Holding and FERMA’s first Turkish Director. He is President of ERMA, the Turkish risk management association that became a FERMA member in October of last year. He is a faculty member of Istanbul University’s Faculty of Business Management and was previously a risk control and process improvement consultant. Mr. Schlicht is Executive Director and member of the board of the German risk and insurance management association, the DVS. He retired from these positions on June 30 but will retain a role at the DVS until the end of September. His appointment to the board will provide FERMA with greater executive support at a critical time as it grapples with a number of key issues at political level, not least Solvency II, Europe’s planned new capital adequacy regime for the insurance industry and the Commission’s review of the Insurance Mediation Directive (IMD). The federation has stepped up its lobbying efforts in recent times and the executive team of Florence Bindelle and Pierre Sonigo will no doubt welcome Mr. Schlicht’s experience and knowledge as the workload builds. Meanwhile, Mr. Den Dekker’s disappointment at the defeat of the Netherlands by Spain in the World Cup final will have hopefully been slightly softened by two personal wins for him last month as he was twice named Risk Manager of the Year. The first award was given by his national association NARIM during its annual conference in Noordwijk, Nethlerlands (see report on pages 12 and 13) where he was named Risk Manager of the Year by fellow Dutch risk and insurance professionals. Mr. Den Dekker is a past President of NARIM. Then a week later he was awarded Corporate Risk Manager of the Year by the judges of the annual ReActions magazine London Market awards in London. The awards recognise his tireless contribution to the risk management cause in Europe as the head of FERMA and as corporate insurance risk manager for the Dutch multinational industrial conglomerate Stork. The independent panel of judges for the ReActions awards, leading executives within London insurance and broking firms and professional advisers, described the FERMA President as an outstanding individual who has worked incredibly hard on behalf of the whole risk management community to ensure that its voice is heard at this critical time for the profession. Mr. Den Dekker was keen to stress the role played by the team at FERMA as he said: “These awards acknowledge the growing role and visibility of FERMA in representing the value of risk management and of risk managers at European level. This is the result of team work, especially by the board of FERMA and its staff.” ■ The risk manager-only FERMA seminar will be held at the London Hilton Metropole hotel on Edgware Road on Sept. 28-29 and risk managers can register at www.ferma.eu

15/7/10 17:27:45

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13/7/10 22:13:47

Conference report

HIS YEAR’S AIRMIC CONFERENCE IN MANCHESTER ATTRACTED A RECORD NUMBER

of delegates and was a lively event during which many core risk and insurance management topics were tackled. Over the next few pages we bring you the highlights from the event. For a fuller analysis of what was discussed see our dedicated AIRMIC conference newsletter at www.commercialriskeurope.com/special-reports

All rosy in the U.K. insurance buyer’s garden insurance buyers will have // U.K. left the AIRMIC 2010 conference in Manchester relieved to hear that the cost of coverage is unlikely to rise in the near future. Leading insurers told ADRIAN LADBURY during the event that the market is ever closer to turning, but one leading broker thinks this is wishful thinking

ORPORATE INSURANCE BUYERS in the United Kingdom need not panic about the spectre of a sharp increase in the price of coverage in the near future because healthy recent insurer results coupled with still low domestic losses and high competition will make sure it does not happen. The insurers are in fine fettle because domestic claims have remained relatively low and more importantly they weathered the financial crisis rather better than most commentators expected. Reserve releases have helped buoy results and the pot is now practically dry in most cases. But overall, balance sheets and P&L accounts look good. This is the basic reason why the hard market that was predicted at last year’s AIRMIC has not materialised and insurers have enjoyed a stabilisation at best. It is also probably the reason why insurance buyers have also not had to cope with an expected re-emergence of disputes over claims. And, during this year’s AIRMIC few predicted a re-emergence of a claims war, looking forward. As a result of the highly competitive corporate insurance market in almost all lines the leading U.K. insurers are busy attempting to differentiate themselves from the competition in any way but price and that can only mean one thing—better service and more new products. The biggest threat on the horizon remains therefore the old classic of the mega catastrophe [probably in the United States] or string of nasty ones as was experienced in the first quarter that would force a big capital shortage at both reinsurance and primary insurance levels. Make hay while the sun shines was the clear message to buyers. Emmanuel Nivet, CEO of AXA Corporate Solutions in the U.K., said that 2009 was a good year for his company and the sector in general. The downside for him was that a firming in prices was therefore only reported in isolated lines. “Last year was an interesting year for insurers. There were no major losses and insurers reported good results. Subsequently rates remained at the same low level as they have for the past four to five years. Whilst there were no strong trends we did however see some rate increases in motor, property and casualty, perhaps a move from minus to plus, but without a substantial change,” he told Commercial Risk Europe during the conference. Mr. Nivet does, however, expect the recent slew of catastrophes to have some impact. “This is likely to change in the near future as we face a more normal year in terms of natural catastrophes. We had the big hit in Chile and major reinsurers such as Munich Re and Swiss Re have recently upped their liabilities by about 30%, Munich Re from $700m to $1bn and it will now probably be an $8-10bn event rather than the $6bn event expected earlier. Whilst we at AXA Corporate Solutions remain on track, current market conditions dictate that there is likely to be less room for manoeuvre,” he said.

MORE FLEXIBILITY Mr. Nivet pointed out that U.K. insurers do enjoy a little more ﬂexibility than others in Europe because the renewals are not all bunched up at year end. This means that insurers do not have to wait up to a year to catch up with losses. Like many of his peers, Mr. Nivet believes that one more big event

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AIRMIC

would probably change the market. He also pointed to the recent report from Mactavish Consulting that suggested, even without a major event, it is likely that results will deteriorate because of a rise in attritional losses. These losses will hit loss and combined ratios as customers react to the fast changing economy with innovation, new processes and a reevaluation of supply chains, he suggested. “We are not there yet, but we do need to remain cautious. If you do not keep an eye on things then you can find it is too late,” he said. To control and manage this ‘attritional creep’, insurers need to move even closer to customers and fully understand what is changing within their organisations, he said. “Risk managers are being challenged by their board and we need to support them. You also have the potential impact of Solvency II and inflation which will affect capital levels and capital,” said Mr. Nivet. On the down-side for insurers, capacity remains plentiful, but buyers should not expect this to last forever, he said. “There is still plenty of capacity with new syndicates at Lloyd’s for example. Having said that everyone will need to be careful about how they allocate capital and generally capital may well become somewhat more scarce. This trend is unlikely to fatally injure the industrial insurance market but obviously groups have to consider where it is best to allocate capital given the regulatory framework. “We have been working on this [Solvency II] for the past two years and this work has identified the percentage return each line of business must achieve to ensure we are adequately remunerated. At the end of the day this needs to be clearly communicated to all our business partners, brokers and clients alike. In addition, Solvency II is likely to put upward pressure on premium rates,” explained Mr. Nivet. Given these strains it is perhaps surprising to many insurance buyers in the U.K. and elsewhere that insurers keep throwing fresh capacity at them. Mr. Nivet said that he sees new capacity announced ‘almost daily’ and in all lines of business, mostly for catastrophe, property and marine and it is fuelled by a basic desire for growth, in spite of the wider economic circumstances. But he still remains hopeful of a change. “This is because the insurance industry wants to grow and seeks new areas to maintain turnover. Globally, property rates are quite flat, in liability there are still opportunities to increase business particularly if clients have global exposures and they, and the brokers, tend to accept that increases are fair. Motor is picking up, even fleet motor. Increases are not high but they are coming,” he said. For its part, AXA remains disciplined and has been happy to turn business away if inadequately rated, said Mr. Nivet. “We have lost business in some lines because we considered that it was rated too low and we will do so again mainly in the property market because of competition which is exacerbated by the number of new players coming in to the market. As a result, I don’t see any likelihood of rate increases prior to year end,” he said. Mr. Nivet said that the market has to consider the impact of the new U.K. Government policy and added that the chance of a double dip recession should be taken into account. AXA s strategic reaction to this market has to be AXA’ to ‘remain close’ to clients because only then can Emmanuel Nivet the insurer find pragmatic solutions to the evolving needs of customers and work together on vital areas such as loss prevention, he said. “If this is not managed properly then the company can expect attritional losses to build in the captive and this will place extra pressure especially with the Solvency II requirements for captives,” he pointed out. Nigel Bamber, Head of Client Relationship Management at X.L. U.K., agreed that there is still enough capital around to ensure that this remains a buyers’ market for the time being. This is bolstered by the fact that most insurers have a dual strategy that means they aim for technical rates, but at the same time seek to win new business, he added. Mr. Bamber agreed that the reserve releases from prior years had boosted results and thus effectively elongated the soft market. But, he said that the ability to release reserves from previous years will become ‘more challenging’ in future and may help stabilise the market. “Insurance results have not been disastrous, even if combined ratios have recently been quite high. As a company we need to balance the needs of all stakeholders and nobody will benefit in the long run if we follow the market down to crazy levels. We will selectively compete for business in all lines,” he said. And, Mr. Bamber, for one, believes that the market may have just reached tipping point, particularly after the recent run of catastrophes in Chile and elsewhere.

““After some very large losses at the start of the year all insurers are looking at their exposures and prices are showing signs of firming. Most insurers feel that the market is getting to a level where it is not sustainable and cannot see it carrying on. It may only take a big event for all insurers to agree that it is time to draw a line in the sand and the market to turn.” Richard Taylor, Managing Director of HDI-Gerling, believes that the market will need a big shove or two to move rather than nudges. In an interview at AIRMIC just before the government announced its budget plans for the year including an increase in insurance premium tax, he said: “If the government increases insurance premium tax it could become an issue. I recall when this was first introduced at 2.5% and suddenly the brokers wanted to shift from commissions to fees on major accounts, and those still paying commission were expected to absorb the cost by reducing the premium,” he said. “Currently, we are seeing premium volume reducing by 5-10% because of pressures on rates and a reduction in insured values and turnover. Brokers are finding it relatively easy to meet their client’s expectations, but it will be interesting to see how the market reacts to any increase in IPT. It may be that more clients will go to market and this will create opportunities, but not necessarily based just on price. Larger customers may consider restructuring their programmes and this may create opportunities for markets like us,” continued Mr. Taylor.

GOOD LUCK He pointed out that before the last hard market, towards the end of the 1990s, companies reported combined ratios well in excess of 100% and some as high as 150%. “This lasted for almost 10 years! I would have to say that the last five years have been kinder to insurers and therefore there are currently no signs of a big change in rates,” he said. But, Mr. Taylor did remind buyers that insurers do have fixed costs such as staff, buildings and variable costs, mainly in the form of claims, which have remained relatively low in recent years. “This may have been as a result of improved risk management, underwriting discipline or just good luck. However, should costs increase dramatically and are sustained over several years, this will have an impact. If this were to happen, I think rather than a gradual increase of 5% in premium rates, we would see rates spiking by significantly more than 10%-15% on average. However, in order for this to happen, we will need to see a faster deterioration in profitability than the market is experiencing now,” he said. “The big question you have to ask yourself is: What would happen in the current market if one of the big insurers went bust tomorrow? When I asked a broker the answer was ‘I could probably place everything as there is so much available capacity,’” concluded Mr. Taylor. Julian James, CEO of privately-owned broker Lockton International, said that the outlook definitely remains rosy for buyers from a pricing perspective and he sees no reason why this would change, save a huge event or two. “It remains very, very competitive from a buyer’s standpoint and there is no real reason for the carriers to justify the argument that premiums need to go up. We are beginning to see a slight movement in commercial motor which is going up more than other areas. But, every business is facing really tough times and external pressures such as increased taxes. This is a tough economic environment and buyers are spending less. Therefore, any risk manager who goes to their CFO and tells them premiums will rise will not be very popular,” said Mr. James. “Without an extreme event, there is no compelling factor that is going to lead to an overall hardening in the market. Also, the market has lost some credibility because it talked up real rate increases this time last year, saying it was the end of the world and they would have to generate the income to pay for losses. But, rates did not go up and many of the insurers reported record results for the calendar year,” he added. It is difficult to find fault with Mr. James’ logic and, despite the fact that some of the insurers say that rate increases are inevitable this year they are not talking a very hard game, like this time last year. Solvency II remains some way off and the final impact on capital is very uncertain at this stage. As reported in the June issue of CRE the big insurers and reinsurers have plenty of capital currently and even if it turns out to be a busy hurricane season as forecast, a dramatic hardening 2002 style looks highly unlikely. For insurance buyers this will be welcome news as they continue to struggle with fixed or reduced budgets and smaller teams, apart from those companies that have decided to actually buy more coverage to protect against volatility in such uncertain times.

15/7/10 19:28:31

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13/7/10 10:01:36

Conference report

AIRMIC bangs the drum By Tony Dowding tdowding@commercialriskeurope.com

HERE WASN’T A CLOUD IN THE SKY over Manchester

during the recent AIRMIC conference, and the same could be said of the risk management world, judging by some of the talks and discussions taking place over the three days. Risk management is in the ascendancy and firmly in the spotlight, the soft market appearing to stretch on into the future, and a large exhibition hall offered all sorts of attractions: chocolates, cocktails, ‘grab-the-cash’ machines, Formula 1 racing cars, card tricks, even rugby stars Ben Cohen and Jeremy Guscott. But dig a little deeper and the concerns were there: Solvency II, departmental cut-backs, broker remuneration, non-disclosure, and emerging risks. The conference opened with a talk by Paul Moore, the whistleblower and former Head of Group Regulatory Risk at HBOS. At first glance, it might have appeared a strange choice of opening speaker—a risk professional whose warnings were ignored, who was sacked for speaking out against a ‘culture of greed, unethical behaviour and indisposition to challenge’, and who since then has been effectively shut out of the financial services industry as his reward, in effect forcing him into consultancy and the lecture circuit. But his aim was not to scare risk managers into silence with a ‘look what happened to me’ message, but to inspire them to do the right thing. After all, his message about corporate ethics and the role of risk management has been taken up by the media and is now out there in the business world. And the consequences for companies that don’t listen to their risk professionals are clear to see. All of which backed up the view, expressed at various times during the course of the conference, that risk management is finally starting to achieve the sort of recognition it deserves. The place on the board has always been a bit of a pipe-dream, but having the ear of the board, and the recognition of the importance of risk management to an organisation, is music to the ears of risk managers. Of course, risk managers have to make sure that they are not simply seen as the prophets of doom. “We don’t want to be seen as just the brake or a shackle on things,” said Paul Howard, AIRMIC Chairman. “We need to be seen as adding something to the business.” He added that this meant having good relationships in place. “But a lot of what Paul Moore we flag up can be unpopular and we need to have broad shoulders and not be thin-skinned.” The conference also heard from a number of insurance industry leaders about a variety of topics—not least the soft market, in which there was surprising agreement about, and acceptance of, the soft market continuing for some time. The insurance company leaders seemed remarkably relaxed about the fact. And they were equally relaxed about Solvency II. A number of themes kept cropping up and one was of course Solvency II. When there is uncertainty about the impact of a big regulatory change, it makes people nervous. And Solvency II could be a very big change…or not. It could do wonders for the European insurance industry, putting it on a firm foundation and giving buyers confidence that the insurance market will be there for them in a sustainable and productive way for years to come. It could also cause mayhem in the market, not least for captives. This is the sector that is perhaps most concerned about Solvency II, and yet ironically it is the sector that should be least affected by it. Given that it is driven fundamentally by a desire to improve policyholder protection, captives writing their own parent’s risks should not even be considered for inclusion within the Solvency II regime. AIRMIC has been working hard with other risk management and captive associations to ensure that there is at least an element of proportionality to Solvency II, if not total exemption. The President of FERMA, Peter den Dekker, was at the AIRMIC conference, and told delegates that they were working with AIRMIC and others to try and influence the debate about captives and Solvency II through extensive lobbying of the EU in Brussels about proportionality. Alan Fleming, the leader of AIRMIC’s Captive Special Interest Group, and a seasoned captive professional, both as an

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owner and later as a regulator, said that for AIRMIC members, another crucial issue was one of equivalence. He said there were arguments on both sides as to the benefits of jurisdictions outside of the EU, such as Guernsey and the Isle of Man, seeking equivalence. “There is just so much uncertainty,” he said, echoing the views of many on this subject. Non-disclosure was also a big theme. AIRMIC has been hearing from its members that insurers are increasingly using a ‘forensic magnifying glass’ when there is a large loss, and as a result, claims being turned down on the grounds of nondisclosure are a growing problem. John Hurrell, AIRMIC’s CEO, called this unacceptable: “We’re not talking here about people who have deliberately withheld relevant information. The legal framework is more than a century old and places an impossible burden on the buyer.” He pointed out, “We don’t want insurers underwriting the risk at the point of a claim,” adding that the U.K. has the most customer-hostile disclosure legislation in any western country.” In a press conference in Manchester, AIRMIC pointed out that although insurers might respond to all this by saying “Why should we change?”, the fact was that in some areas, such as on large Public Finance Initiatives, insurers frequently waive all of their rights. And when dealing with banks. And on many professional indemnity policies. AIRMIC clearly feels this is an area where they can exert some pressure on insurers to insert side agreements and clauses into contracts to deal with the issue, and so far, according to Mr. Hurrell, the feedback from AIRMIC’s insurer-partners has been ‘overwhelmingly understanding and supportive, but inevitably this is going to take time’. Also, AIRMIC members can expect a guide to dealing with the issue of non-disclosure in the autumn as the first step in tackling this issue. There are still many paradoxes and contradictions around risk management—not least the extent to which boards are engaging with the need for greater attention to be paid to risk. On the one hand, the impact of major events in the media, from the banking crisis to oil spills to volcanoes, ought to be focusing the minds of board members on the need to take risk seriously, particularly large risks. And yet the AIRMIC conference heard the surprising results of some research commissioned by the association from the Cass Business School which seemed to show that boards were not engaging on the subject and were failing to take ownership of risk. The research discovered that a third of those risk managers questioned said that they were worried that their firms was not taking risk seriously as a board issue, and half were concerned that their organisations as a whole had given insufficient consideration to large risks facing them. Either boards are placing far too much reliance on their directors’ and officers’ policies, or risk managers need to do a far better job in getting their message across at a very senior level. Or perhaps they are, and, as Mr. Moore found, board members are either too incompetent or greedy to take note. As in many areas, it is difficult to risk manage stupidity. The truth is, risk management is being recognised in a way that was unthinkable 20 years ago. It is discussed at board level and there are more chief risk officers, or those with responsibility for risk at board level. Apart from the fact that budgets are being slashed, thanks to the legacy of the financial crisis, it has perhaps never been a better time to be a risk manager. And AIRMIC is doing its bit through lobbying and working with other associations, regulators and insurers to ensure that the risk management message is heard loud and clear. Delegates to AIRMIC conferences in the past were always greeted with a shoulder bag full of goodies and pens and pads. This year, they were given a passport-sized guide to the conference. Not even a note pad. Of course, this was part of AIRMIC doing its bit for the environment. But it also reflected the new reality. We are living in austere times, and risk management departments have suffered as others have with a reduction in numbers and resources. But at the same time, the role and significance of risk management is growing rapidly. The delegate pack may have shrunk, but the conference delivered on content and in terms of numbers. And the sun was still shining in a clear blue sky as delegates left Manchester.

AIRMIC

Soft market set to continue says AIRMIC Forum panel By Ben Norris bnorris@commercialriskeurope.com

HE SOFT MARKET SHOWS NO SIGN of ending, according to experts on the AIRMIC Forum panel, who also questioned the added value that Solvency II will bring to buyers and its effects on captives. The AIRMIC Forum, described by AIRMIC as a ‘news-based debate about the state of the insurance market for risk and insurance managers,’ included some lively debate from the four European insurance industry leaders on the panel. The debate was chaired by Adrian Ladbury, editor of Commercial Risk Europe, who began by asking about the current state of the insurance market and whether the soft market would remain forever. Andreas Berger, CEO, regional unit London, Allianz Global Corporate & Speciality, said he didn’t believe in big bangs—the soft market is over, the market is hardening, and so on. He pointed out that the first quarter had seen a lot of major events, from natural catastrophes to air crashes, which were all signals for a hardening of prices in certain segments. But he said that at the more commoditised end of the market there was still plenty of capacity driving the soft market. “If there is a hurricane season that really hits the balance sheets, then a hardening of the market will happen, but not as a big bang—maybe slightly into next year or the year after,” he said. He explained that for insurers, if you keep your underwriting discipline and don’t write unprofitable business, then there is nothing for insurers to complain about. But the market needs strong, sustainable insurance companies. Richard Pryce, President, Ace U.K., said that experience shows that the market only moves significantly on balance sheet events and not on P&L events. He said that while profitability is down for most insurers this year, most were still in pretty good financial shape, so a change in the market would be some time off. “Insurers have kept their discipline in most cases better than the last cycle so maybe that will perpetuate the soft market.” He added that it is easier to differentiate on service than it is on price–customers want reliable service. Brendan McManus, CEO, Willis U.K. & Ireland, said that buyers are getting two stories from carriers. The first is that times are hard, but the second is ‘please bring your business to me.’ He said it was the drive for new business that was keeping the soft market going. “Clients will continue to see a slightly soft market, and it may get slightly harder in some product lines,” he said. Adrian Colosso, CEO, Heath Lambert, said he didn’t see any hardening anywhere. He pointed out that everyone is competing for business, and everyone is trying to cut costs, and added, “There is definitely no change on the horizon.” The panel were then asked about Solvency II. Mr. Berger said that there was a lot of talk but that no-one yet knows exactly what the outcome will be. “There is no clarity about what it means,” he said. Mr. Pryce pointed out that Solvency II was meant to be about improving policyholder security. “I think that policyholder security is pretty damn good at the moment, so really what this adds is questionable.” Mr. McManus questioned whether Solvency II would actually come to fruition. But as far as captives are concerned, he said it would depend on the rationale of the captive—if, as many captive owners do, it is set up to manage internal risk management, and ensure that individual operating divisions take responsibility for their risks, then even if they require more capital, they will still have their captive. For others, if there is a requirement for more capital, the reasons for having a captive disappear, he said. The panel were also asked about the issue of emerging risks. Ace’s Mr. Pryce thought that the insurance industry had a good record on responding to changing and emerging risks over the years. Willis’ Mr. McManus said that there will inevitably be a time-lag between the risk emerging and somebody being prepared to put the capital at risk—they have to be given enough time to understand it and assess it. “Overall, I think that risk managers need to be more open so that we can see what is happening in their business more easily, brokers need to apply more investigative skills, and the brokers and carriers need to be a little bit bolder in building new products.”

15/7/10 19:28:43

AIRMIC

Conference report

Willis CEO urges brokers to embrace transparency By Ben Norris bnorris@commercialriskeurope.com

WITH THE THORNY ISSUE OF BROKER remuneration still under consideration at the European Commission, as part of its review of the Insurance Mediation Directive, a leading broker has called for a swift resolution to the discussions and told brokers that they have nothing to fear from full transparency. Whilst risk managers in the AIRMIC space should already have full disclosure on any business placed, it is imperative that all remuneration is put on the table, debated and an agreement reached between broker and client in order to ensure full transparency, the AIRMIC Forum panel agreed. However, a leading insurer did warn that, with such a varied approach to transparency and

service levels across territories, a single European-wide approach to transparency and disclosure will be extremely difﬁcult to obtain. “It is inevitable that there is going to be some regulation around transparency so why don’t we just get over it and get on with it. It has not done our business any harm at all being transparent,” said Brendan McManus, Chief Executive Ofﬁcer of Willis U.K. & Ireland. “So I would say to any broker of any size in whichever segment they are working in you should be transparent. Put what you earn on the table because Brendan it forces you to display and demonstrate the value that you offer much more than when what you earn is hidden. So actually I think it is better for your business to be transparent and I do not think anybody has got anything to fear from it,” he urged.

As debate continues as to the future role of captives, in light of the potential impact of Solvency II and the credit crisis, the key concerns were discussed at a panel debate during the AIRMIC conference

Captives under pressure By Tony Dowding tdowding@commercialriskeurope.com

HE AIRMIC DEBATE attempted to look a short way into the future and examine the impact of the credit crisis and Solvency II on captives, and to provide some solutions to make captives a continuing and viable solution. James Donald, who leads the captives services team at Zurich Global Corporate, said that the combination of the credit crisis and its fallout, and Solvency II, which is threatening to put more cost and complexity onto captive programmes, is making the decision-making for treasurers and risk managers much more complicated around the future role of their captives and how it plays in their future risk management strategy. The panel then outlined a scenario looking forward to 2014 where there would be higher borrowing costs, as banking reforms have been implemented, and Solvency II has also been implemented. And any remaining tax beneﬁts of using a captive have now been completely eroded. ENHANCEMENT All the various governance and disclosure requirements as a result of Solvency II will result in increased operational costs, but as Kieran Stack, Director, Aon Global Risk Consulting, explained on a more positive note, “there will also be an enhancement to the underlying manner in which captives are managed and the risks that are underwritten within captives, and the underwriting performance of captives will be enhanced.” David Hill, Enterprise Risk Manager for Cadbury PLC, said there were two squeezes in respect of capital—accessing more capital, and demonstrating better use of that capital. “To be able to demonstrate better return on invested capital, you’ve got to have greater sophistication in

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your risk management and better communication as well. That has meant an increase in both in-house resources and outsourced services.” Back to the future scenario, and the panel looked at four issues affecting a captive’s financial benefit to a company—capital, operating costs, cost of LOCs and insurance rates. With the future scenario situation factored in, the financial benefit of a captive was dramatically reduced, even given an expected hard market. All of which shows that the case for the captive is likely to become much more difficult. What can be done in terms of mitigation strategies? Mr. Stack said that derisking any natural catastrophe exposures in the captive would help to deal with the increasing regulatory capital requirements in this area. He also said captives need to diversify risks flowing through the captive, with non-correlated risks or unrelated risks, such as perhaps employee benefits. OPPORTUNITIES Mr. Hill said that there were still a lot of opportunities for capital-based risk modelling, working on optimising the attachment point for captives. So deciding very objectively how we involve our captives in our total risk management programme. Other suggestions included changing underwriting appetite, loss portfolio transfers, and changing investment strategies. And trying to deal with the vexed issue of LOCs. The issue of equivalence for non-EU domiciles was raised and Tony Hulse, senior partner at KPMG, said that there was simply not enough clarity yet about the penalty, or perhaps in some respects the advantage, of non-equivalence. “It will be interesting to see whether jurisdictions perhaps look for a dual regime. Bermuda would very much like this—equivalence for some of the largest captives but not for the smallest. There is a huge amount we don’t know about the equivalence regime, the group’s regime, and what the cost of Solvency II will be to implement,” he said.

For Mr. McManus it does not matter whether the IMD review decides that brokers cannot take commissions or that remuneration has got to be paid in fees. But he wishes that the Commission would ‘just come out with the ﬁnal outcome so that we could all get on with it and stop debating the issue—as it is a distraction that we do not need’. The key issue is that all remuneration is made transparent and then debated between the buyer and the broker, continued Mr. McManus. “We need to say to a client this is McManus what we get paid, from you and from anywhere else…now let’s debate how much we retain and how much you pay,” he added. Andreas Berger, Chief Executive of Allianz Global Corporate & Specialty (AGCS) London unit, said that he is happy with the current level of transparency in the market place. And he

noted that in the cases dealt with by AGCS they have not come across any risk manager who did not know the exact details of any remuneration. “But at the end of the day it is important that risk managers take a conscious decision in whatever way they see the arrangements,” he said. “We have arrangements in place where we ask a client if they are happy to pay, say an additional 2.5%…the insureds need to know that this is part of the price, a fee that the client pays directly or part of the premium,” he explained. And Mr. Berger believes that a Europeanwide solution to the issue of transparency and disclosure could be problematical. “If we look into each and every territory and look at the remuneration levels there is a very diverse picture, and if you look at the service levels attached to remuneration it is even more diverse. So I think it is very difﬁcult to have a Europeanwide uniform approach,” he explained.

Reputational risk top concern for AIRMIC members

EPUTATIONAL RISK IS THE LEADING CONCERN FOR U.K. risk managers according to the annual survey of members carried out by AIRMIC. The last couple of years have been dominated by concerns over insurer insolvency, but this has now been overtaken by reputational risk exposures. Given the problems of BP and the disruption to airlines caused by the Icelandic volcano, it is not surprising that reputational risk tops the concerns of risk managers. But it has been high on the list of concerns for a number of years. The survey revealed that around a third (32%) of respondents said reputational risk was a great or very great concern. Insurer solvency worries appear to have abated a little, but still, 22% rate it as a major concern. “Risk managers increasingly take a broad view of their responsibilities, and it comes as no surprise to see reputational risk taking the hot spot now that events have reminded us of the need to protect reputation,” said John Hurrell, AIRMIC’s Chief Executive. He added, “The relatively low profile of insurer solvency is a tribute to the way insurers handled the financial crisis. Unfortunately, having the cash to pay a claim, and actually doing so, are two different things. This remains an enduring cause for concern and even dissatisfaction in some cases.” He was referring to another finding of the survey: risk managers reported facing continuing difficulties in getting claims paid, with 27% of respondents having had a claim declined in the past two years. And only 59% rated their lead insurer’s speed of paying a claim as ‘good’ or ‘very good’. The survey found that 43% of risk managers were more concerned than a year ago about multinational compliance issues, mainly about non-admitted policy issues. Indeed, no-one in the

POLICY WORDING AND COMPLIANCE THE KEY ISSUES FOR GLOBAL PROGRAMMES

S GLOBALISATION CONTINUES ITS MARCH AND organisations have to increasingly consider the issues surrounding global insurance programs, a workshop at the AIRMIC conference, entitled ‘International Programme Design focused on Compliance, Cost and Security’, tackled some of the main concerns. The workshop looked at the different types of global programmes: DIC/DIL (Difference in Conditions/Difference in Limits), Non-admitted/Freedom of Services (FOS) programmes, Admitted (using multinational insurers) and Fronting programmes. And of course there are advantages and disadvantages with each type of programme. One of the ﬁrst points made, by Karen Gorman of the Global Servicing Team at Jardine Lloyd Thompson, was that you can never have a totally compliant global programme— there is not a solution that means you are compliant in every place in the world unless you just let everybody purchase their own insurance locally. Tracey Clayton, also of the Global Servicing Team at Jardine Lloyd Thompson, looked at the patterns and trends of global programme purchasing over the last 12 months. Compliance is a great trend, she said. “If we had said ten or ﬁfteen years ago, how many people here had a non-admitted programme, the hands would have gone up. But as time has gone on, the regulators are getting a lot stricter, and the real problems with non-admitted can come in when a big claim comes in.” Indeed, when the buyers in the workshop audience were asked for the main priorities with regard to global programmes, it was policy wording and compliance that were the key issues. There are more admitted insurance classes, she said,

survey had seen any improvement in compliance issues with their global programmes. Risk management departments, along with everyone else, are clearly feeling the squeeze of the recession and its aftermath. Just over half of respondents (51%) reported having lower departmental budgets, while over a quarter (26%) reported staff reductions and 38% had seen lower bonuses or pay. But at the same time, work pressure on risk management departments is increasing, with over half reporting that their responsibilities had broadened while resources were being cut. On the soft market, risk managers take a pessimistic view, with the majority seeing the soft market running out of steam in all of the main classes, and anticipating rises in the next year or so. For property/business interruption, 29% predict an increase in rates, as opposed to 10% who expect a decrease. For employers’ liability, the figures were 34% expecting an increase, as against 10% seeing a fall. It was a similar story for public liability (31% versus 9%), D&O (40% versus 11%), and professional indemnity (41% versus 4%) while for motor third party 63% expected to see an increase in rates as opposed to just 6% who foresaw a fall. And finally, the survey tackled the vexed issue of broker remuneration. It has been a concern for risk managers for a long while, and it shows little sign of going away. The survey found that 40% of commercial insurance buyers have observed an increase in the number of brokers seeking remuneration from insurers for services not directly connected with the placement of individual policies. And more than a quarter (27%) said that they believed that the way their brokers are paid could give rise to a conflict of interest.

especially on the financial risks side, such as E&O and D&O. This used to be largely on a non-admitted basis but increasingly it is being bought on an admitted basis in many countries, said Ms. Clayton. There is also a move towards greater understanding of local regulations, both by risk managers, and brokers and insurers. Another trend she noted was central management and control-risk managers want to know what is going on in their business units. Costs are being rationalised and multinational pooling of risks is becoming quite popular, and she said that a number of clients were asking them to look into potential pools for their programmes. In the past, there was a tendency to have a different insurer for different classes of business, such as property, casualty or marine. Now there is a trend to bring it all together under one insurer—not necessarily under one multi-risks policy, she explained, but all the covers with one insurer. This is particularly important where a claim might go over two classes of insurance, such as, for example, casualty and E&O. Buyers are also purchasing higher local limits within their global programmes, especially on the casualty side. And finally, a growing trend is for the globalisation of insurers. Previously there was a limited market, but this has now expanded, either through offices or networks of partners. Ken McKenzie, Head of Dispute Resolutions, Davies Arnold Cooper, then took delegates through the difficulty of achieving the same cover across a variety of jurisdictions. In particular, he looked at some recent case laws, particularly on the reinsurance side, which provide a cautionary example of what can happen when different laws govern primary and reinsurance policies—the same principles apply where you have local and master policies reinsured under a captive global programme.

15/7/10 17:26:17

NARIM Conference 2010

BEHIND THE NEWS

IN CONFIDENCE: [From left] Ellen Rekker presents Peter den Dekker with his Risk Manager of the Year award during the NARIM Conference in Noordwijk, Netherlands. [NARIM]

Confidence in insurance industry undermined by Solvency II issues At the annual NARIM conference held last month key themes were member concerns over Solvency II and the need for risk managers to prove their value to senior management. ADRIAN LADBURY reports from Noordwijk CONFIDENCE IN THE INSURANCE industry following the high profile problems experienced by AIG and the impact of Solvency II upon its ability to meet insurance buyers’ needs were two key themes discussed at the annual conference of NARIM, the Dutch risk and insurance management association, in Noordwijk, Netherlands last month. “Confidence in the insurance market suffered a few serious blows again last year,” said NARIM Chair Ellen Rekker in her opening speech. “The only way to restore the lost confidence is to offer transparency. Not only when it is convenient, but truly transparent. Putting our money where our mouth is.” Ms. Rekker also said that Dutch risk managers are worried about the potential impact of Solvency II, Europe’s planned new capital adequacy regime, upon the industrial insurance market. “All in all, Solvency II means more work, higher costs and heavier capital requirements. A number of small insurance companies and captives will disappear. The year 2011 will be a transition year in the insurance market,” said Ms. Rekker. But while insurance costs may rise as a result of Solvency II, Ms. Rekker, said: “The premiums were relatively low last year and the market remained stable. This will change. The premiums are expected

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to increase because of the impact of Solvency II and the heavier capital requirements. “Having said this, we should see Solvency II as an opportunity rather than a threat. This new framework allows us to improve the image clients have of insurance companies,” she added. UNREALISTIC, UNREASONABLE AND EXAGGERATED FERMA President Peter den Dekker, who was elected Dutch Risk Manager of the Year during the

Conﬁdence in the insurance market suffered a few serious blows again last year. The only way to restore lost conﬁdence is to offer transparency. [And] not only when it is convenient...” ELLEN REKKER, NARIM CHAIR

conference, took the opportunity to make a stand against the heavy capital requirements that Solvency II imposes on insurance and reinsurance companies. He calls them ‘unrealistic and unreasonable’. Mr. Den Dekker stated: “Insurance companies did not cause the financial crisis. All in all, the European insurance market has survived the crisis reasonably well. This is what makes the heavy Solvency II requirements so unreasonable and exaggerated. The insurance market supports the economy as a whole. Without insurance, nothing happens at all. This is simply because a business cannot get anything done if important risks aren’t covered sufficiently. The insurance market plays a crucial role in encouraging the economy.” UNDER PRESSURE If the current proposals for new international capital requirements are fully implemented, European insurance companies will need to attract billions of additional Euros as capital and to keep it as a buffer, concludes Mr. Den Dekker. “The insurance sector is faced with a substantial problem. Solvency is already under heavy pressure. This is a direct result of the fact that insurers suffered major losses on their investments during the financial crisis. At FERMA we are doing our utmost to reduce the capital requirements as much as possible.”

15/7/10 19:31:33

BEHIND THE NEWS NARIM

Risk managers urged to extend frontiers RISK AND INSURANCE MANAGERS NEED to sell the value of insurance to senior colleagues to avoid corporate isolation, according to experts at the annual meeting of NARIM, the Dutch insurance and risk management association in Noordwijk, Netherlands last month. Michel Frommé, Global Head Insurance and Risk Management at Royal Philips Electronics, and Eddie McLaughlin of Marsh Risk Consulting urged insurance risk managers to emerge from their often self-imposed professional boxes during a joint presentation entitled ‘Risk & Insurance Management: Raising the Bar.’ Mr. McLaughlin carried out a poll of the audience that found that the majority (42%) of risk managers in the room reported to the CFO or Treasury department and 16% to the CEO. This he said was very similar to a poll he had just carried out at the AIRMIC meeting of U.K. risk managers earlier that week [see report on pages 8-10] and which he said was encouraging because of the relatively high proportion of reports to key decision makers. But, Mr. McLaughlin’s poll also found that the majority of those polled (39%) only rated the maturity level of risk and insurance management practised at their companies as established, with another 30% rating it as either basic competence or underdeveloped. This kind of maturity level typically can lead to insurance managers finding themselves excluded from key strategic decisions and their role—and insurance in general is undervalued—and overlooked as a result. The key question that faces insurance and risk managers is how to position themselves so that they are involved in strategic decision making and do not find out about the latest acquisition by reading a press release, for example, he said. “You have to ask to what extent are you involved in more difficult decisions, involved in major projects, contracts and mergers and acquisitions activity. To what extent does your organisation use insurance and risk management to support decisions,” said Mr. McLaughlin. “You have to stress that insurance is a source of capital not just a cost and even in a simple transaction it can make a big difference. You have to convey that risk management adds value and helps to manage volatility and ultimately the cost of capital so that risk and insurance management is not just about the negative aspects, there are positive aspects too. Make it forward looking and build a broader remit such as business continuity management, Ethics, corporate social responsibility and the like,” he continued. Mr. Frommé agreed that the profession does have to sell itself to the wider business,

if only because it is not a core part of the business. He reminded the insurance managers in the room that if they do a good job, the losses do not emerge and so they become ‘invisible’. “It is inherent. We have to work harder than other functions to obtain a profile,” he explained. Mr. Frommé said that a starting point for the forward looking insurance risk manager is to clarify their role. Mr. McLaughlin’s poll had found that 33% defined themselves as insurance managers, another 33% as risk and insurance managers, 10% as chief risk officers and 23% as ‘other’. Mr. Frommé said that there is clearly room for insurance risk managers to extend their remit. “It is important to be clear about responsibilities. You often see the job title risk manager but when you dig deeper they are actually an insurance manager. The position needs to be clarified,” he said. Mr. Frommé gave practical examples that showed how the function can be developed in the areas of insurance, claims and operational risk management. He also provided fellow NARIM members with a list of top tips to help them raise the bar and hopefully also further their careers. These were: ■ TALK THE RIGHT LANGUAGE—He said that it is critical to talk sense and ensure that insurance fits into the overall finance picture. “You have to make sure the CFO is aware of what insurance can do to protect earnings and cash flow and what it can achieve compared with other facilities. Remember as a finance tool it is rather relatively attractively priced,” said Mr. Frommé. He also advised his colleagues to avoid insurance slang at all costs. ■ BENCHMARKING—Mr. Frommé said that it is all too easy to hide from benchmarking exercises but actually if done proactively can be a really positive exercise. “Take the initiative yourself rather than the boss and enable yourself to set your own timelines,” he said. ■ COMMUNICATE—Mr. Frommé said that it is essential to reach out to other departments and be aware of changes that occur to the business and ensure that colleagues are aware of what coverage has been bought and is available. All too often events occur and management are not even aware that coverage was available, he said. ■ BE PROUD—Mr. Frommé said that this refers to the whole industry and not just the buyers. “I do not think there is high esteem in this industry. But remember we are operating in a very dynamic industry, it is international and fun to work in. It is crucial if we want to attract young talent that we make it clear that it is a fantastic industry to work in,” said Mr. Frommé.

Eddie McLaughlin of Marsh speaks during the NARIM conference. [NARIM]

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15/7/10 19:31:53

Conference report

POLRISK

Risk professionals must focus their efforts to help their organisations achieve their objectives and ensure that decisions on risk maximise opportunities and minimise threats, according to discussions held at a recent PolRisk event attended by ISO 31000 risk management standard Chair, Kevin Knight. BEN NORRIS reports from Warsaw

Insurance buying will not impress board concludes PolRisk event

RISK PROFESSIONALS MUST PROVE the added value that this role brings to an organisation and escape the idea that insurance buying will prove their worth to top management, Kevin Knight and PolRisk representatives agreed at a recent educational seminar organised by the Polish risk management association. Mr. Knight asserted that the term risk manager is no longer relevant to the role that risk professionals should play in the management of risk—as defined in the ISO 31000:2009 Risk management—Principles and guidelinesRisk management—Principles and guidelines. And, he noted that the holistic approach towards risk management taken by PolRisk is a good example to other more established risk management associations. The major difference between the ISO 31000 and previous risk management standards is that it first advises organisations to establish the principles and framework that highlight where the management of risk must take place. This is at management level, explained Mr. Knight, and the standard is very much focused on how its principles must be woven into the management system. “And critically the ISO 31000 needs to be tailored to meet individual organisational structures and systems. It is not a one size fits all document,” Mr. Knight explained. It was written in management terminology and should help them to gain a better understanding of risk management and thus enable risk professionals to more easily enter into dialogue with risk owners, Mr. Knight noted. It is as much a document for managers as traditional risk professionals, he added. “It is a better document for directors and senior officers to read and it now provides room for the risk champion to actually start a new conversation at a higher level. If you are the traditional risk manager the challenge for you is ‘can you make the leap from where you are now to talking to the bosses?’” Mr. Knight told Commercial Risk Europe during the meeting. And Mr. Knight believes that the ISO 31000 is already helping to raise the profile of risk management throughout organisations and at board level. “In Australia it is having that effect both in the public and the private sector and actually enabling risk professionals to restart the conversations around risk all over again at senior management level. Increasingly independent directors are becoming more concerned about how the organisation is managing its risk and requiring management to satisfy them that they understand risk,” explained Mr. Knight. The standard then places the risk process in its proper context, which is to allow for information to come from management and then, after being processed, be fed back into decision-making on objectives and risk, he added. The traditional role of the risk manager is evolving and will continue to do so under the guidance of the ISO 31000, he said. “I see the role very much as an advisor, a champion, a facilitator or coordinator. I am totally opposed to anyone being called a risk manager, just as I do not like safety manager or quality manager, because all of these activities are line management accountability,” said Mr. Knight. “Therefore the role of the risk professional is to help them manage risk and to coordinate reporting and to provide advice and service up the line to the risk management committee or board committee of management. They need to be able to have a good understanding of the business and be able to provide a lot of advice themselves or know where to get expert assistance from,” continued Mr. Knight.

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And increasingly, insurance is not the answer to the management of corporate risk, he added. It is just one treatment of risk and therefore is not dealt with by the ISO 31000 any further than to say it is just one part of risk sharing, he continued. “Because only 20-25% of your risk is capable of being covered or helped by insurance. Even business interruption insurance, for example, doesn’t necessarily mean you will survive a disaster—you cannot insure the retention of your customers,” he explained. So, for example, organisations need to work out how to protect their reputation if it cannot be insured, he added. “It is about how you look at risks, particularly when it comes to opportunities. How do you understand the strengths and weaknesses of your organisation so that you are able to leap in and respond when opportunity presents itself,” noted Mr. Knight. “And once you start to talk to boards and senior management about what they are doing to manage the risks to their organisation, rather than just providing an insurance function, you suddenly find they start to show a lot of interest,” Mr. Knight continued. Mr. Knight’s assertion that the term risk manager should be redundant, reflective of the management of risk as set out in the ISO 31000, and that the role should be focused on achieving objectives and formulating strategies was welcomed by PolRisk. “This is something that was a big surprise, but a positive surprise for me. The fact that you do not have to anchor on risk management control or insurance buying,” said Slawomir Pijanowski, Vice President of PolRisk and Director in charge of Identity & Access Management Program at Telekomunikacja. “If we narrowly think about risk it cannot be perceived by financial markets or strategic people. Our perception here is that risk management must be sold as enhancing management practice itself by leading to better performance results and better realisation of objectives. What is the added value if you buy insurance? Buying insurance is not going to get the board excited,” he added. Mr. Pijanowski stressed the need for risk professionals to prove the added value of Enterprise Risk Management to help achieve organisational objectives. “If we do not prove the concept of Enterprise Risk Management and the fact that it provides value it cannot work as it will still be perceived as a process that just produces paper and does not help to achieve company objectives,” he explained. “We have to show that risk management is helping to better formulate better strategies and help people to realise the risk of non-realisation of those strategies. This has to be reflected in the pricing value of a

company or on the stock exchange. If you cannot say that Enterprise Risk Management is a value driver for a company’s shares, the financial markets, and perhaps the CEO, will reject the concept,” Mr. Pijanowski added. Mr. Pijanowski acknowledged that changes to risk culture within organisations is likely to be a 3 to 5 year process. But he stressed that one really important issue is how to prove the effects and value of benefits of ERM in the short term. This is important as often chief executive officers have a contract for only 2 or 3 years and they are accountable for the delivery of value in that short time frame, he said. “And, we must prove that the concept is fruitful and can deliver pragmatic benefits after a short time period. Of course that does not mean that the culture will change after a quarter or six months, that is a long-term goal, but we can still influence and affect management decisions over this short period,” he continued. PolRisk’s holistic approach towards risk management is a good example to other more established associations, noted Mr. Knight. “They are focused on holistic risk management rather than insurance buying, which I think is a very good approach. They are looking at how they can work with risk management practitioners, whether they are insurance buyers, company secretaries or directors and owners of companies, to help people understand the need to manage risk. To understand risk in organisations and to manage it with the emphasis on maximising your opportunity whilst you minimise your threats,” noted Mr. Knight. “This is the position of our association. We thought we were going in the wrong direction because we are different from other associations, but it seems that our position is not so bad,” said Tomasz Miazek, President of PolRisk and risk manager for Telekomunikacja, the telecommunications company. And Mr. Miazek welcomed the new international standard and praised its role in creating a common risk language across the world and amongst organisations. “It is a good document because the borders between internal audit, risk management and other control functions were previously not very clear. I also get the impression that there was a lot of chaos in managing risk itself, its processes and terminology, and here is a chance for everyone to think and speak in the same language,” said Mr. Miazek. ‘This is important because if risk experts cannot work out a common language then how can we sell the idea of risk management to top management who are only interested in revenue and the bottom line,” he added.

15/7/10 17:25:20

There’s a lot more to Swiss Re than reinsurance. Isn’t it time you found out how much more? Don’t let the name mislead you; there’s a lot more to Swiss Re than reinsurance. Commercial insurance, industrial insurance, large corporate risks and specialty insurance. Insurance for aviation and space as well as environmental and commodity markets. Financial tools like insurance-linked securities and catastrophe bonds. Yet every service we oﬀer and every challenge we face for our clients receives the same commitment and the same hands-on expertise. Why? Because across all industries, risk is the raw material with which we work; what we create is opportunity.

See for yourself at www.swissre.com/insurance

15_CRE06_FPA.indd 15

13/7/10 10:02:17

Q&A: Philippe Gouraud

INTERVIEW

BUSINESS AS USUAL Chartis appears to have successfully ridden out the storm that battered parent company AIG in recent times. BEN NORRIS asked Philippe Gouraud, Head of Major Accounts Practice UK, about the state of the market, the outlook for European insurers and their customers and what Chartis must do to meet insurance buyers’ needs

BEN NORRIS: How are rates and terms in the corporate insurance market?

PHILIPPE GOURAUD: The general picture is that it remains very competitive and is more a buyers’ than a sellers’ market. But you do have some noticeable exceptions such as trade credit and now recently the offshore property market which are all reacting to certain loss experiences. We continue to underwrite every account on their own merit but observe a general trend of noticeable increases across these lines. Unlike the other lines where the market remains rather competitive. Which means that sometimes we regretfully have to walk away if we feel the pricing is not sustainable. BN: And what is the outlook for coverage? Are there any signs of the market hardening?

PG: The signs should point to a market hardening if you look at the results across the industry and the series of cat losses in the first quarter of the year. The combination of factors will start to hurt for some, and must result in rate adjustments, but timing is the issue. With losses particularly, it will take a number of quarters for these to percolate through the system and for the market to adjust. Corporate buyers are already expecting this however, as shown through a recent AIRMIC survey released at their conference last month. And on top of this you have the more interesting question of the potential implications of Solvency II. I think that will also have implications for corporate buyers in the years to come. Whilst everything is still very fluid around the impact of Solvency II, the trend anticipated is that, as insurance companies refine their capital allocation models, they will realise the impact of providing, for example, large net lines on specific risks. So I wouldn’t be surprised if some insurance companies will struggle to provide the same amount of net capacity per risk, and that is bound to have an impact on overall pricing. BN: Is there currently sufficient industrial insurance capacity for European risks and wider international markets? Or are there any restrictions?

PG: In general I would say that there is enough capacity. I am not aware of any risk that didn’t get placed because of a lack of capacity. However, there are instances where risks do not get placed because they do not have the proper lead underwriter. So whilst there is plenty of capacity around the market still recognises the value of having a recognised expert lead underwriter to underwrite and price. It is delivering the service and underwriting expertise and then delivering promises around areas such as multinational insurance programmes and claims handling that is key and sometimes missing. And you just don’t buy this overnight. And hence the market still looks at who leads programmes to ensure that the programme is put in place properly and that there is the ability to handle claims.

16_CRE06_Profile.indd 16

is beyond insurance capacity and price itself and more around insurance services –helping clients to better understand, control and manage their risks. On the trade credit example we have developed a tool called Global Limit Manager, which effectively allows clients to have a more precise view on how their portfolio receivables are evolving. We are looking to help clients have a better understanding of their receivable portfolio, but also allow them to better understand at what level they need to buy that catastrophe level of coverage. Swapping pounds at the lower level is inefﬁcient. The tool we provide our clients with gives them the comfort to realise how much of the risk they can actually retain and at what level they need to actually buy trade credit protection. This online tool can also calculate the premium required for their captive to take the working risk layer. BN: What are the emerging risks and how are they being treated by buyers and insurers?

PG: This is quite a paradoxical space. On the one side there is a lot of discussion about new emerging risks—cyber risk, data protection and all the regulatory implications around these subjects. But at the same time we see that our clients are really focusing on controlling their existing costs in the current financial climate. Also whilst there is an awareness of the significance of the financial implications that are emerging from these new risks I think everybody really struggles to fully understand and quantify them. Underwriters find it very difficult to underwrite these risks, because the risk itself is difficult to comprehend. It is also difficult to insure what you don’t understand. So it is a combination of the financial troubles putting these issues on the back-burner and because these risks are so difficult to fully comprehend and therefore insure. This means from a price standpoint there is an asymmetry of expectation between what a client is prepared to pay versus what insurers would require. BN: What are the major risks as companies emerge from the recession?

PG: The area that everyone will need to pay close attention to is how companies react to their commitment to loss prevention and loss mitigation through the crisis. Are we going to start seeing corners being cut and expenditure in these areas being cut? This is a debate that is now taking place in the public sector. Will all these spending cuts affect the quality of the risks? So as we emerge what shape will we be in? It is like your car. If you stop maintaining it, it is still going to be ﬁne for one year. But then it is going to start falling apart as you move forward and then it may be too late to do anything. It requires regular maintenance. And I think that is a good analogy in terms of whether insured risks will behave the same way going forward.

BN: Have there been any major changes to coverage offered?

BN: And how can insurers help companies to emerge from the recession?

PG: There have been no real new coverages but there has been coverage improvements and continuing innovation. At Chartis, for example, in recent months we have launched a new D&O wording that is very innovative given the low number of actual exclusions within it, so it is a simpliﬁed wording. We have also been innovating around trade credit insurance—adapting the offering to the clients requirements. They are walking away from the traditional way of buying trade credit insurance on a whole turnover basis and moving more towards buying trade credit insurance on an excess of loss basis, or utilising their captives. Likewise we have adapted our offering in relation to the Environmental Liability Directive. I think the major change in the offering of insurance

PG: Our role is to really stay close to our clients. By doing that we will continue to adapt our offering and allow clients to retain more risk or provide them with more ﬁnancial security. Because they actually tend to react in these two opposite directions. Some say I need to save costs so I am prepared to retain more risks. But the contrary view says that in the good years I could afford to take more risks myself, but now in the bad years I need more ﬁnancial protection. We see both reactions from buyers. Overall we need to stay close to our clients, adapt our offering to their needs, particularly when it comes to providing things beyond insurance such as loss control services and allowing them to have a better handling of their risk.

15/7/10 17:27:26

The

Malta International Risk and Insurance Congress

Risk management and transfer options in a fast-changing world Hilton Malta Hotel • 25th & 26th November 2010

Hosted by CRE Editor Adrian Ladbury the congress will: Identify the key risks to business and insurers presented by the rapidly evolving legislative, regulatory and legal environment in which they operate, not least Solvency II and the securitisation markets Evaluate the impact on organisation’s total cost of risk and investigate the latest methodologies available to measure and manage the risks

Analyse the existing and emerging risk transfer techniques available to insurance and reinsurance buyers in the traditional and alternative markets Who will attend this Congress? Risk and insurance managers l Brokers l Captive managers l Insurance and reinsurance company executives l Professional service providers such as law firms, accountancy and actuarial firms

THURSDAY NOVEMBER 25TH 8.45

9.00 9.30 10.00

10.30

12.00

Welcome – Adrian Ladbury, Editor, Commercial Risk Europe and Joe Bannister, Chairman, MFSA The big picture: Global risks, global challenges Futurist Jonathan Porritt, Forum for the Future (invited) Economics and Finance: What is the new European and world order? John Hassler, Professor, Institute for International Economic Studies (IIES), Stockholm University (invited) Debate and questions from the floor Survey results: The role of the risk and insurance manager in a fast changing world Adrian Ladbury and Peter Den Dekker, President, FERMA Followed by interactive debate on the matter with invited panellists Michel Fromme, Narim and Philips Gerard Lancner, Yves Rocher and President, AMRAE Jonny Merlot, Orange and AMRAE Nicola Harvey, Christies and Chairman, AIRMIC Daniel San Millan, Ferrovial and President, IGREA Carl Leeman, Katoen Naatie and BELRIM Jorge Luzzi, ANRA, Pirelli and FERMA Lunch

1.30 2.00

2.15 2.30 2.45 3.00 4.00 4.15 4.30 4.45 5.00 7.00

The European corporate insurance market: Up for the challenge View from the regulator – Gabriel Bernadino, Chairman, CEIOPS View from the insurer - speaker to be confirmed What is the outlook for capacity, terms and conditions for industrial insurance? Axel Theis, CEO, Allianz Global Corporate & Specialty The broker – speaker to be confirmed The reinsurer – Fred Kleiterp, Swiss Re Insurance & Specialty Division (invited) The debate Global programmes: Making sense of it all Broker’s view – Praveen Sharma, Head of Insurance Regulatory & Tax Consulting Practice, Marsh The insurer's view – Martin Strnad, Legal Council Europe, Zurich Financial Services The risk manager – Allesandro Del Felice, Head of Insurance, Prysmian and Board Member ANRA, Italy The insurer’s view – speaker to be confirmed Questions Gala evening reception

FRIDAY NOVEMBER 26TH Parallel session 1: Risk Finance for non-traditional risks – creative thinking for the financing of corporate risk

Parallel session 2: Environmental liability – the exposures and solutions created by ELD

8.30 9.00 9.30

8.30

Stephen Reulein, Life Division, Munich Re Speaker to be confirmed Martine Hecq, GDF Suez and FERMA (invited) Peter Klatt, BMW (invited) Pam Wadsworth, Vodafone (invited) 10.00 Questions Risk Finance for corporates: Solvency II killed my captive, what next?

10.45 11.00 11.15 11.30

Marc Mathijsen, President, BELRIM (Belgian Risk Management Association) and ING Jonathan Groves, Senior Vice President, Captive Consulting Leader, Marsh Matthew Latham, Head of Captive Practice, Chartis Insurance Evander Borg, Chairman, Malta Insurance Management Association

Valerie Fogelman, Consultant, Stevens & Bolton LLP Professor of Law, Cardiff University (invited) 9.00 Daniel San Millan, President, IGREA and Head of Insurance, Ferrovial 9.30 Phil Bell, Group Casualty Director, Royal Sun Alliance and Chairman, Cea’s General Liability Steering Group (invited) 10.00 Questions 11.45 12.00 12.15

1.15

The actuarial impact of the application of Solvency II on self-insured Speaker to be confirmed Questions Malta Market debate Adrian Ladbury will grill leading members of the Maltese insurance and finance market about what the island has to offer insurance buyers and the wider insurance market Closing remarks – Tonio Fenech, Minister of Finance, Maltese Government

Delegate fees Free of charge for chief risk officers and insurance managers from the international markets l ¤299 for local service sector & insurance managers l ¤599 for international insurance and reinsurance firms plus international service sector

Sponsor:

Commercial Risk Europe readers will receive the full programme with their September issue of CRE. To find out how you can participate as a delegate or exhibitor please contact Hugo Foster (HFoster@commercialriskeurope.com) Tel + 44 (0) 1580 201 783 Malta-FP-Advert-B.indd 1

16/07/2010 11:24

Q&A: Raj Singh

INTERVIEW

As corporate risk and insurance managers try to work out how to help their companies manage their way out of the crisis, risk managers within insurance companies face equally big challenges that are remarkably similar. ADRIAN LADBURY asked Raj Singh, CRO of Swiss Re, about the impact of the recent crisis on the future of risk management in the insurance industry, regulation and emerging risks

too many eggs in one basket then you need to get rid of some. It is as simple as that. You need diversiﬁcation and control over amounts of risk from a single source, whether that be a type of risk, counterparty or any other.

THE SOFTER SIDE OF RISK

RS: Swiss Re is the market leader when it comes to dealing with emerging risks and this is one of the things that the group is well known for. For example, we have a structured process for emerging risks called SONAR. Risk is something that we can take, it is what we do. But, you have to be careful and ensure that people have some skin in the game, that they retain an interest in the risk they seek to transfer. Remember insurance is not loss transfer, it is risk transfer. If the expected loss is higher than the premium then we are not going to do it. It is about a proper alignment of interest.

RAJ SINGH: The report focused on the softer side of risk management. A lot of recent discussion and focus has been upon harder matters such as the capital implications of Solvency II. But this can mean that you miss a lot of what is really going on and what matters on the softer side of risk management. One key message to come out of the report is that risk managers need to think well beyond normal scenarios and carry out more insurance-type analysis on wider risks. We need to think of the extreme events such as the World Trade Centre.

AL: Is Swiss Re ready for Solvency II and what impact will it have upon the way you manage risk and the group’s risk bearing ability?

RS: We, in Switzerland, are well educated in economic approaches to risk and capital management because of the Swiss Solvency Test (SST) that is similar to Solvency II and has already been introduced for Swiss insurance and reinsurance companies. The impact of Solvency II will really depend upon the speciﬁc implementation measures and calibrations. But, we have been using an economic approach for 13 years and have been regulated on this basis for two years now. The SST is therefore something of a precursor, but parts of Solvency II will be calibrated differently. So we are educated and well prepared here in Switzerland to the extent possible without knowing exactly how it will end up.

AL: What about the role of the risk manager itself?

RS: This was the other big topic to emerge from the survey report. It investigated the role of the risk manager during the crisis and how the ‘elephant in the room’ was ignored, how nobody talked about what was really happening with securitised products. The conclusion is that the risk manager needs to be in a position to bring the ugly topics to bear when the discussions are held. Also, if it is tackled three levels below the board it is no good as it will be overlooked at board level.

RS: It really depends upon the organisation. The CRO community is relatively small in ﬁnancial services, but there is just too much variety to generalise too much. Some were at the table, but the group as a whole was just not aware of all the potential problems and their interconnection. Others were simply not at the table. In some areas the risks were just not understood, for example with securitised products there was no real appreciation of the liquidity position and how bad it could get. AL: Was the change in technology, rise of new products and growth of business worldwide just too fast for all managers, let alone risk managers, to keep up?

RS: In a way yes because by the time the market realised the scale of the problem it simply could not sell assets, for example securitised products. The trouble was that the fundamental values attached to such assets were completely different to market values. Consequently, the fundamental calculations showed that they were not worth selling. But, the market had different messages and at the same time companies were taking mark to market losses on a daily basis. The big lesson from this was that the fundamental valuations need to be embedded in the business. AL: Is the risk manager making it to the table now?

RS: A number of European insurance companies have raised the risk manager to the executive table where they have an equal seat. You are also seeing a higher quality of person joining the sector and being elevated. I can’t speak for the banks, but it is certainly happening in insurance.

within ﬁnancial organisations, but in a risk taking industry you need people in charge who have grey hair because they have real business experience. People with real business experience are being appointed who can relate to the underlying business. AL: How do you manage risk? What is your risk management philosophy and structure?

RS: I have been in the job at Swiss Re for two and a half years now and it has really changed. The number one change that I have tried to introduce has been one of perception and the introduction of a more proactive approach. Risk management is not just about reporting, you also have to make recommendations and offer forward-looking risk information. Daily P&L information is important. But you need more stress tests and realistic stress tests. It is important to ensure that what you report is understandable and this generally means that it should be simpliﬁed. The risk issues need to be related to the book of business and above all risk managers need to think the unthinkable. It is not just about taking control of everything because you have to allow risk-taking. The risk manager should not see their role as to say ‘no’. It should be more of an enabling role. AL: How can this be made to work in practice?

RS: One of the things that I introduced was a system of three signatures that are required for all large transactions. The risk signatories are independent of the business that is underwritten and are not compensated for by volume in any way. But, this is only for large transactions. For the normal transactions we have guidelines. This is not eye of the needle stuff by which we try to make it very difﬁcult to do business. It is about monitoring risks in a consistent way.

AL: Does this mean that the day of the quant is over?

AL: How do you decide what risk to hold and what to transfer to protect your own P&L and balance sheet?

RS: To an extent yes. Quants are still very important

RS: There is no new technology for this. If you have

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AL: Do you think an industry initiative to help solve emerging risk problems would work?

RS: The reinsurance companies, particularly Swiss Re, already do a great deal of work in this area and we have been trying to build broader platforms for discussion such as the Chief Risk Ofﬁcers Forum. But, to be fair, we do not have a great deal of participation from industry itself and the corporate risk management community and it could be an interesting and fruitful forum to build.

ADRIAN LADBURY: You recently published a report entitled ‘Establishing a new risk management culture in the post crisis world.’ What were the main conclusions?

AL: Was the elephant ignored simply because risk managers were ignored or failed to make themselves heard?

AL: What is your strategy for dealing with emerging risks?

AL: What do you think of the political and regulatory reaction to the crisis globally and in Europe? Do the politicians understand the insurance sector and how can the market avoid Solvency II becoming more onerous than necessary?

RS: The biggest issue with Solvency II is the calibrations for risks because this has really evolved in recent times. The regulators and politicians appear to want to introduce more cautious regulations because of the ﬁnancial crisis. But, if they try to construct a system that is too cautious and that will guarantee no failure then it will be too expensive for the industry and policyholders to bear. Another question is whether the application will truly be even across the European Union. The creation of EIOPA [the empowered successor to CEIOPS] will undoubtedly help as it will have more power than CEIOPS. But, it is not yet fully clear exactly how this will work and we need to understand more clearly what EIOPA will do. National issues, how they are resolved between Member States and particularly how existing products with differing national characteristics are grandfathered and whether similar products are regarded as the same could be tricky. AL: Why have the politicians and apparently CEIOPS failed to recognise the fact that the insurance industry managed the crisis so much better and therefore does not deserve to be hit with much harsher requirements? What needs to be done about this?

RS: People are playing upon the extreme level of concern about what happened and the likelihood of it happening again. But, the fact is that the large insurance companies are using enterprise-wide risk management successfully and have de-risked already. We have to speak louder, more often and make sure that we are understood. We have about €6 trillion of assets held so we are not an insigniﬁcant group and our opinions and concerns should not be swept away. We need to explain our position again and again and remind people that risk management is our fundamental business model.

15/7/10 17:25:03

EXPERT VIEW Groves on Solvency II

Most attention on Solvency II so far has focused upon the capital requirements. But Jonathan Groves argues that risk managers ignore the so-called softer corporate governance requirements of the Directive at their peril

Don’t ignore the soft stuff

THE ADVENT OF SOLVENCY II HAS created a ﬁeld day for actuaries and their followers. This is because Pillar 1 of Solvency II has created a great deal of interest about the new capital

requirements. The potentially significant increase in solvency, in conjunction with the quantification of specific additional risks, is a complex task. Pillar 1 will yield a solvency figure with which the company must comply. Based on all the indications currently available, the solvency figure is likely to be significantly higher than has been the case to date. Indeed, the figure could potentially be up to three or four times the current level. Ultimately, as with any insurer, captives will make a decision about whether they can justify such a capital increase. In theory, that is a relatively easy decision to make, although getting the cost benefit analysis right will require effort. But the real heart of Solvency II is Pillar 2—the governance and risk management requirements that European Union insurers and reinsurers must adhere to. Within Pillar 2, the fundamental operation of the company is governed and with it, the ultimate decisions that it takes. Pillar 2 requires adherence in three areas; a company will have to: ■ Implement systems of governance to assess and manage the risks to which it is exposed; ■ Assess its capital needs and maintain that capital; and, ■ Adhere to the supervisory review process. What does this mean in practice? There are a wide range of areas that need to be covered [[see table, right]. This long list of processes, activities, functions and procedures that need to be adopted or created can seem quite daunting. And to a certain extent, until we see more detailed implementation measures, the market does not know exactly what will be required. But as can be seen by the summarised ‘intent’ of each article above, by looking at best practice globally and considering how more advanced regulators already approach some of these areas, it is possible to create a detailed picture of what the captive owner should plan for.

ARTICLE

INTENT

■ SUPERVISION OF OUTSOURCED FUNCTIONS AND ■ ACTIVITIES (ARTICLE 38)

Supervisory authorities (of Member State or intermediary) must have the required degree of cooperation in relation to the access of data and premises and the like with outsourced providers as if the function or activity remained in-house.

■ GENERAL GOVERNANCE (ARTICLE 41)

Create, review and sustain a robust organisational culture, procedures and responsibilities, with suitably qualiﬁed personnel and segregation of audit function. Ensure accountability, communication, safety and security of information, consistent application of risk management and maintenance of policies in line with the business strategy.

■ FIT AND PROPER REQUIREMENTS FOR PERSONS WHO ■ EFFECTIVELY RUN THE UNDERTAKING OR HAVE OTHER ■ KEY FUNCTIONS (ARTICLE 42)

Persons running the undertaking or key functions must be fit and proper, that is, qualified and of good repute and competent. The supervisory authority must be notified of changes of person.

■ PROOF OF GOOD REPUTE (ARTICLE 43)

Evidence of good repute of own and foreign nationals, as required by Member State.

■ RISK MANAGEMENT (ARTICLE 44)

There has to be in place a well deﬁned, documented and effective risk management system and a suitable own risk and solvency assessment (ORSA) process. Risk management is a continuous process embedded in the business and should cover all relevant risks and procedures and processes.

■ OWN RISK AND SOLVENCY ASSESSMENT (ARTICLE 45)

An undertaking shall maintain the minimum variables of ORSA, which is subject to the proportionality, scale, nature and complexity of the undertaking. ORSA forms part of the business strategy and does not serve to calculate a capital requirement. Solvency requirements only adjusted in accordance with certain articles.

■ INTERNAL CONTROL (ARTICLE 46)

Effective internal control is critical. It is a continuous set of mechanisms to help the organisation achieve speciﬁc objectives. It encompasses communication and monitoring and addresses compliance risk, reliability of information and creates a control culture.

■ INTERNAL AUDIT (ARTICLE 47)

Every activity and unit of the undertaking shall fall within the audit function’s scope. The audit function will be impartial and have complete access to information. There should be an audit plan for the year(s) ahead. Effectiveness of the function should be documented.

■ ACTUARIAL FUNCTION (ARTICLE 48)

The actuarial function is an independent, objective measure of quality assurance so that certain important decisions can be taken, and remedies suggested, based on technical actuarial advice. The actuarial function must consider the objectivity, reasonability and veriﬁability of management actions included in the calculation of technical provisions and it must explain any concerns it has about the technical provisions being sufﬁcient.

■ OUTSOURCING (ARTICLE 49)

All functions and activities can be outsourced (internally or externally) provided there is a written policy that considers impact. The undertaking remains fully responsible for outsourced functions and activities. Outsourced activities must be included in the undertaking’s risk management and internal control system. Boundaries of outsourcing will be elaborated in Level 3 guidance. Outsourcing should not impair governance, compliance, increase risk or impair service to policy holders.

There are ﬁve key areas to focus on: EMBED USE OF DECISION MAKING TOOLS ■ One of the critical areas of Solvency II is to ensure that boards are fully informed of the company activities and that, as decisions are made, they follow a robust process with well documented checks and balances. Their own risk and solvency assessment (ORSA) is a fundamental part of this. In many ways it is a central decision-making tool that combines both quantitative and qualitative perspectives. It is vital to embed such tools so that they become ‘second nature’.

understand, interpret and make reasoned decisions based on the information that is presented. With the increased complexity around capital determination and the associated review procedures, some board members will need to be educated in order to continue to participate in a meaningful way.

PREPARE AND IMPLEMENT RISK MANAGEMENT PROCESS AND REVIEW PROCEDURES ■ A captive is often a key tool in both the financing and management of risk and so it is commonplace for the captive itself not to have its own documented risk management framework. In part, this is practically implemented through the day to day decisions undertaken by a risk manager but Pillar 2 requires a more rigorous approach. Learning from the company’s own best practices as well as external standards such as BS 31000 will help create a documented approach that is appropriate for a captive. As an additional part of this, documenting the review of the risk management process so that it stays relevant for the captive is an integral part of the process. EDUCATION OF BOARD ■ Unlike commercial insurance companies, a captive’s board is rarely completely composed of individuals who all have an in-depth understanding of insurance, risk and modeling. Therefore, educating the board to comply with the ‘fit and proper’ regime is fundamental. The focus is sharpest on those individuals who are responsible for specific functions. But the board must be able to

19_CRE06_In_Person.indd 19

CAPTURING INFORMATION FOR REPORTING ■ The insurance industry has not had the best reputation for the capture of information and ability to analyse it in several different ways. In order to operate effectively within a Solvency II environment, it is a prerequisite that accurate information is collected on a timely basis to both assess risk and populate the relevant models. This extends to not only underwriting information but claims, investment portfolios and regulation.

Jonathan Groves is Senior Vice President, Captive Consulting Leader at Marsh based in the U.K.

VALUE OF REGULAR REVIEW ■ The inbuilt requirement to review and assess the implementation, effectiveness and appropriateness of procedures is central to Solvency II. Just as has been the case with other corporate governance requirements such as Sarbanes-Oxley in the U.S. and Turnbull in the U.K., treating it as a tick box approach will not yield signiﬁcant beneﬁt. It is vital that the review process looks for

opportunities to enhance operations to improve the overall management of risk within the captive. As captives contemplate the necessary changes and perform the vital gap analysis between their current status and how their operations need to function in the future, some companies will no doubt consider how they might mitigate the effect of Solvency II. The ability to limit the impact of Pillar 2 is limited. But some options exist to potentially reduce the impact of Pillar 1. These include areas such as operating on a reinsurance basis (versus as an insurer), limiting or no longer underwriting catastrophe risk, using an offshore structure (particularly for non EU risks) and the avoidance of unrelated business. The evaluation of such approaches as with the overall consequences of Solvency II, should encourage many captive owners to re-evaluate their captive. The process of doing so, a practice of good governance in itself, should help clearly demonstrate where the value of the captive is and document in a way that can be used by the captive owner’s board. Taking a proactive approach should greatly assist risk managers in the management of internal expectations and ensure that clear, coherent arguments remain to continue with the captive in a Solvency II environment.

15/7/10 17:24:23

IN PERSON : Tadaharu Uehara

THE HOT SEAT

THE LONG GAME

European insurance buyers currently enjoy plenty of capacity from established carriers and newer entrants, but there is a growing concern about the impact that Solvency II and other factors may have upon the level available over the next few years. ADRIAN LADBURY interviewed Tadaharu Uehara, CEO of Tokio Marine Europe, about its strategy for Europe and its recent decision to be one of the relatively ‘newer’ entrants for non-Japanese customers in Europe

OKIO MARINE IS NO NEWCOMER TO THE

European market. The Tokyo-based group was established in 1879 and it rapidly set up international operations in London, Paris and New York only a year later. Prior to the Second World War, Tokio Marine generated about one third of its group revenue from the United States. After the end of the war, however, the Group lost most of its overseas assets and was forced to start again. The rapid growth of the Japanese economy after it recovered from the ravages of the war meant that Japanese companies began to grow rapidly overseas from the 1960s onwards and Japanese insurance companies, such as Tokio Marine, benefited from this as they followed the business overseas. This strategy has changed completely since 2000, according to Tadaharu Uehara [[pictured, right]. “The Japanese economy was amidst a long and drawn-out period of stagnation and the domestic market itself was saturated and offered very limited growth opportunities, so the group naturally decided to look elsewhere for growth,” said Mr. Uehara. “Because of Tokio Marine’s talent and experience in overseas markets we decided to enter non-Japanese business areas to offer coverage to non-Japanese companies through a strategy of both acquisition and organic growth,” he said. The first natural step was close to home in other Asian markets, particularly as this region continued to boom at the time. In early 2000, the Group acquired several insurance companies in India, China, Malaysia, Taiwan and Singapore, and then turned its attention in 2008 to Europe and the United States. In Europe the push was focused on the acquisition of one of the leading and longest-established Lloyd’s managing agencies Kiln Plc in 2008. The Group then acquired Philadelphia Insurance in the U.S. also in 2008, a company that specialises in the sale of packaged policies for small businesses via a fully automated distribution system. The Group also set up a specialist reinsurance company Tokio Millenium Re in Bermuda in 2000 and Tokio Marine Global in London in 2005. Mr. Uehara explained that, apart from the long history of the Group overseas and the fact that a foreign outlook was ‘in the DNA’, the foreign push was aided by the fact that the President, Mr. Shuzo Sumi, had spent a period in London and understood the importance of the expansion plan for the long-term health of the Group. Between 2002 and 2009 the international portfolio of the Tokio Marine Group grew steadily so that it accounted for nearly a half of the Group profit in 2009, said Mr. Uehara. And, the Tokio Marine Europe book contributed its part to this success, with more than £260m in gross written premium income. Last year the Tokio Marine Europe business reported a ‘modest’ growth in top line after a difficult first half that also saw some big losses, said Mr. Uehara. But the profitability recovered strongly in the second half and the business reported a combined ratio of 91%, he said. “Last year was a tough year for Tokio Marine’s domestic business in Japan, but good for international business,” said Mr. Uehara. “The Japan market is very competitive and saturated for insurers, but the international business did well. We, as a group, weathered the financial crisis last year and have emerged in a strong position,” he said. Apart from the limited growth opportunities in the domestic market, the key reason for the international expansion was to gain diversification, said Mr. Uehara. “We need to diversify the business portfolio to optimise our return on equity and return on risks. Traditionally Tokio Marine’s return on capital has been relatively lower because it holds a large amount of equity. We need to allocate some of that capital to support growth in both emerging and mature overseas markets where we see good opportunities for profitable development. We have invested in Chinese and Indian

20_CRE06_Profile.indd 20

markets since early 2000, while Europe and U.S. were good options for us later in the decade,” he continued. Mr. Uehara does not believe, however, that Europe is an easy option by any means and he has to compete for ﬁnite Group capital with his colleagues in the other international hubs of New York and Singapore, by achieving better results. He recognises that, while European-based insurers enjoy freedom of services to underwrite across European Union Member States, it remains a very diverse group of countries. The Company, by using its well-spread regional network, focuses on the middle and large commercial markets in the U.K., France and Spain. Mr. Uehara does hope to expand the SME business deeper into local markets over time. “To develop more SME-type business we will need a more local presence. Our philosophy is to deliver safety and security and we are proud of the response of the regional brokers to deliver,” he said. Mr. Uehara believes that Tokio Marine Europe can make progress in Europe by focusing upon its traditional customer-focused philosophy that he says has served the parent group so well over the years in Japan and overseas. He pointed out that the company’s Spanish branch has recently won two awards from the Brokers Associations of Madrid and Barcelona because it demonstrated a ‘very user-friendly, agile and responsive’ approach to the business, backing its service commitment with a very strong balance sheet.

Tokio Marine Group ﬁgures as of 31 March, 2009 ■ Premium income of more than $31bn* ■ Ofﬁces in 36 countries ■ Total assets of more than $167bn ■ Stockholders equity of more than $18bn ■ 28,000 staff worldwide (on a consolidated basis) *Sum of net premiums written and life insurance premiums

SAFE HAVEN

Tokio Marine and Nichido Fire Insurance Co., Ltd and Tokio Marine Europe are both rated AA for ﬁnancial strength by Standard & Poor’s. “Buyers see us as a safe haven. Buyers also want to diversify their insurer panels and, given our high security, this means that we are an attractive alternative. Service is key to winning customer trust and it is the heart of our activity. We are taking the Japanese ethic to the local clients here in Europe,” said Mr. Uehara. Tokio Marine Europe takes claims service very seriously and this is one of the Company’s key differentiators, according to Mr. Uehara. “Once we receive a call our claims handlers try to respond immediately. It is not acceptable for us in our culture to have clients waiting too long for a response,” he explained. This claims service focus has delivered for Tokio Marine a network of experts in claims and loss prevention in key areas such as the automotive sector and cargo that has been used to support Japanese clients in Europe but is now available for all customers, he said. “We have worked with large Japanese auto

manufacturers for many years and now we are working with some of Europe’s leading auto makers. We have a deep expertise in marine business and have a core service company in Amsterdam, Tokio Marine Management Services, that specialises in marine claims handling and loss prevention services,” continued Mr. Uehara. Such services come at a cost, however, and Mr. Uehara concedes that its model does not allow it to compete with big European majors in the mass market currently because of this. “We cannot compete with the big companies like AXA and Allianz in Europe on an expense ratio basis because of the relatively smaller size of the business in Europe and high quality service we offer. I need to manage costs very carefully but we also need to offer those services which do cost money. But remember the services do contribute to a better loss ratio and this means both the insurer and the customer benefit,” he explained. Despite some of the advantages offered by the export of the Japanese style to Europe, however, Mr. Uehara does recognise that it cannot be transferred completely and simply. “The Japanese and non-Japanese business models are very different. If you are doing non-Japanese business you cannot just export the model that simply,” he said. Looking forward Mr. Uehara says that he will exercise caution despite the Group’s growth plans and healthy 2009. “I would like to grow but every analysis carried out in the last couple of months suggests caution and therefore my principle this year has been one of utmost discipline and agility. We need to be patient this year. We are not wasting our time because there is a lot to do. We need to increase productivity, improve the loss ratio and enhance the quality of our services,” he said. Mr. Uehara is also understandably cautious on the topic of emerging risks, a favourite topic among European insurance buyers over the last couple of years. Tokio Marine is willing and able to work with customers to develop coverage for new risks and its sister company, Kiln, in particular, is pushing the boundaries. But buyers should not expect Tokio Marine Europe to take big risks with newer lines of coverage that may threaten its security, which remains the number one priority. “We are a conservative carrier providing high security paper and good services. It is sometimes difficult to deal with emerging risks. Kiln certainly provides newer coverages like trade disruption, reputational or cyber risks and has very good products to deal with emerging risks and we are cross-selling these. We can do a lot of work with customers in areas like flood and natural catastrophe management and can bring in experts to help around the world thanks to the resources of the Group. Customers come to us for very good security and competitive products, supported by high quality claims and risk engineering services. If we do a good job they trust us and so look to build a mutually beneficial and long-term relationship,” concluded Mr. Uehara.

PERSONAL PROFILE

TADAHARU UEHARA studied economics at Hitotsubashi University and, like insurance leaders the world over, joined the profession because of the reputation of the company and opportunity to gain international experience, not because he had a burning desire to join the insurance sector. “I joined Tokio Marine back in 1979. It was traditional in Japan to work with the same company all your life and I was no exception,” he said. Mr. Uehara worked in captive management and global programmes business in Japan and spent a period as the labour representative for the union which he said is much more ‘amicable’ than in other countries and where ‘practical solutions’ are sought. He spent a period in New York, returned to Tokyo to work in the Corporate Planning Department before spending time working on the merger with Nichido Fire and Marine that began in 2002 with the creation of Millea Holdings Inc.(renamed as Tokio Marine Holdings Inc. in 2007). After the merger was completed in 2004, he returned to the Corporate Planning Department, responsible for Group Strategic Planning, M&A, Investor Relations and Corporate Governance. In 2008 he moved to London to head up the Group’s European operations.

15/7/10 17:24:42

EDUCATION

Q&A—Kevin Knight

Work in progress BEN NORRIS met Kevin W. Knight, Chair of the International Organization for Standardization (ISO) working group that developed the ISO 31000 risk management standard, while at his recent educational seminar in Warsaw organised by the Polish risk management association PolRisk. He asked the veteran Australian risk manager about the current state of education in the market BEN NORRIS: What do you think of the state of education within risk management in Europe and globally?

KEVIN KNIGHT: It is certainly not as good as it was. If you had asked me that question seven or eight years ago I would have said that it is actually starting to look pretty good, but with the passage of time we have seen things go backwards. The big problem that we have had in Australia, for example, is that the eight leading institutions, the sandstone universities, have suddenly become more concerned with research because that is where they get their government grants from these days. So whilst there are still some risk management subjects being taught there is no real centre of excellence. And in Europe it is the same. Good education centres and courses are more the exception than the rule. BN: How can the ISO 31000 be used within risk education?

KK: One of the things we have looked at in relation to ISO 31000 is to try and develop a model syllabus for a couple of base risk subjects that we could offer to universities. The natural home for those modules would be the school of management. So I would certainly like to see a couple of subjects taught as part and parcel of a bachelor of business course. I would also like to think that a couple of subjects could become compulsory subjects for an MBA or such like. One of my hobby horses for years has been to get some risk management subjects into management degrees. One beneﬁt of this would be that when somebody sits on an interview panel to employ a risk manager they would know what you, as a risk professional, are talking about. How many interview panels could you set up currently within your organisation where they would be able to tell if the risk professional knew what they were talking about? This is a major problem. BN: Is 31000 already being used in education anywhere?

KK: It is being used in Australia, where the Australian and New Zealand Institute of Insurance and Finance have an advanced diploma course in risk management that has been fully updated to meet the 31000 standard. The Griffith University also has a graduate certificate in risk management that has been upgraded. I would hope that Glasgow Caledonian in the U.K. is doing the same. So I would say that the 31000 really fits very comfortably in either a graduate environment or a management school environment. For example, Murdoch

Kevin W. Knight, Chair of the ISO working group

University in Perth has a couple of risk management modules as part of its MBA programme, which again have been brought up to the ISO 31000 standard. BN: What are the key drivers behind what appears to be an increased focus on risk management?

KK: I think the ﬁnancial crisis has really forced regulators and boards to pay attention to the issue. And increasingly, as we bring in regulation within the ﬁnance industry to address a whole range of corporate governance issues, then understanding the management of risk becomes the critical thing. I have certainly seen a number of Australian boards where the independent directors are becoming a lot more active in terms of management of risk. Because as they say ‘increasingly it is my house, my reputation and possibly my liberty that is at stake’. BN: How is the risk management community developing in your view and what role might the ISO 31000 standard play in its development?

KK: If we look at the national risk management conference in Australia there is a very broad canvas of people who now attend. This includes many who are not intrinsically insurance buyers. Even senior managers are attending. So

Take the risk out of training!

all sorts of interesting people from different backgrounds are becoming interested in the management of risk. It is not as though we have legions of people, but it is growing. And 31000, being written in management language, is a much more useful document which should help to broaden the appeal of risk management and make it more prevalent. That is the opinion I am certainly getting from the people who have read it. Also we are increasingly finding that accountants and lawyers are getting into the management of risk. I think this is, in part, because they already talk to directors and senior managers and so they are trying to take over some of the ground—a bit like the auditors. While they are experts in their fields they also need to develop an understanding of the management of risk. They are experts in their fields but they also need to come to an understanding of the management of risk. So in a lot of the things that we have been doing with ISO 31000, in workshops for example, I will have lawyers and accountants from some of the big firms coming along to increase their understanding of the management of risk so that they are able to apply their professional expertise in a more focused manner. BN: Is there the need for a purely risk management-based international course? Do you think it would be feasible?

KK: It is difﬁcult to get universities to work together at the best of times. So whilst it would be a great idea, I do not think we are going to see anything in the near future. FERMA has for years been working with European universities and having real difﬁculties in persuading them to get their act together. Progress has been slow. It is mostly because you are up against these monolithic bureaucracies within universities. They really are immoveable objects. BN: And what role are risk management associations playing in the education and development of risk management?

KK: I have been caught up in the politics of risk management associations since 1980 chaired the International Federation of Risk & Insurance Management Association for two years. The biggest problem that we have globally is that the vast majority of national risk management associations are predominantly insurance focused. Go to a RIMS conference and there will be 200 sessions telling you all about insurable risk. At AIRMIC or even FERMA conferences most of the sessions will be talking about insurable loss. With the ISO 31000 we are talking about the achievement of objectives and that is the difference with this new standard.

Over three decades the Malta International Training Centre [MITC] has built a worldwide reputation for industry education and training MITC provides its participants with internationally recognised qualiﬁcations and world-class training. Training schemes can be designed to suit the needs of the client. Specialist areas include Insurance, Risk Management, Financial Services, Investment and Regulation & Supervision. For further information please contact us on: E-mail : info@mitcentre.com Tel.: (0)356 2123 0831

21_CRE06_Education.indd 21

Fax.: (0)356 2124 4638 Web.: www.mitcentre.com 15/7/10 17:26:35

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Here to help your world. Zurich Insurance plc, a public limited company incorporated in Ireland Registration No. 13460. Registered Ofﬁce: Zurich House, Ballsbridge Park, Dublin 4, Ireland. UK branch registered in England and Wales Registration No. BR7985. UK Branch Head Ofﬁce: The Zurich Centre, 3000 Parkway, Whiteley, Fareham, Hampshire PO15 7JZ. Authorised by the Irish Financial Regulator and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request.

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NEWS

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U.K.: Whitehall-wide review of legislation

SOLV II: Hoping for proportionality

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forward to receiving Lord Young’s recommendations on how we can best achieve that.” Lord Young said: “Health and safety regulation is essential in many industries but may well have been applied too generally and have become an unnecessary burden not only on ﬁrms, but also community organisations and public services. I hope my review will reintroduce an element of common sense and focus the regulation where it is most needed. We need a system that is proportionate and not bureaucratic.” The deadline for comment was July 6. AIRMIC noted that it has already presented responses to recent consultations on health and safety matters and the handling of insurance claims. These included support for the recent establishment of the Employers’ Liability Tracing Ofﬁce (ELTO) and the Employers’ Liability Insurance Bureau (ELIB). The association said that it supports initiatives that seek to reduce the handling and legal costs of insurance claims, so long as they maintain the rights of injured persons to claim compensation ‘where injury or ill-health can be proved to have been caused by the negligence and/or breach of statutory duty of a company.’ AIRMIC added that it ‘strongly believes’ that it is ‘essential’ to reduce the costs, particularly legal, that are currently embedded within injury compensation claims. The association said that it also believes that the provisions of the Employers’ Liability (Compulsory Insurance) Act (ELCI) should be more strictly enforced. “It is unfair on the large companies that buy this insurance to be competing with smaller organisations that do not comply with ELCI. It is the opinion of many AIRMIC members that enforcement of this legislation is woefully inadequate at the present time,” stated the association. AIRMIC said that the same comments apply to the enforcement of health and safety legislation in general because it believes the rules are inconsistently applied across the range of business activities. “It has been recognised by the Health and Safety Executive (HSE) in their ‘sensible risk management’ campaign that the problem is not always the health and safety legislation itself, but it is often the manner in which some organisations interpret the existing laws—and transfer these interpretations into their own rules and procedures. AIRMIC believes that the sensible risk management message should continue to be promoted by HSE,” stated the association. But AIRMIC also warned against over-prescriptive rules and the increased and often unnecessary costs that these can lead to: “Common sense interpretation of existing health and safety laws should not result in overburdensome requirements, provided that HSE continues to

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advocate and enforce a sensible approach. On the other hand, the costs associated with insurance compensation claims have been allowed to spiral considerably in recent years,” stated the submission to Lord Young. AIRMIC said that recent Government consultations and reviews have failed to improve the situation in relation to case track limits and the claims process for personal injury claims. “There is considerable scope for claims to be handled in a much more cost effective manner and AIRMIC hopes that the Government will take this opportunity to review, simplify and thereby signiﬁcantly reduce claims handling costs,“ stated the letter that was signed by Paul Hopkin, Technical Diretor at AIRMIC. The Trades Union Congress, the federation of U.K. trades unions, was not so impressed by the review. When it was announced, TUC General Secretary Brendan Barber said: “This will not be an open and frank review aimed at achieving better regulation. Instead it is an attempt to undermine the already limited protection that workers have by focusing on the needs of business. We are also surprised the Government is addressing the ‘compensation culture’ again as successive reports show there is no such thing and claims have been falling over the past ten years.” Mr. Barber said that businesses are responsible for a working culture that injures a quarter of a million workers every year and makes a further half a million employees ill and the review should investigate that problem instead. “Rather than focusing solely on the ‘needs of business’, the Government should protect workers by increasing inspections and enforcement action against employers who put their staff at risk by ignoring existing laws, as well as introducing a legal duty on directors to protect their workers,” added Mr. Barber. The TUC also commented on the latest ﬁgures for workplace deaths published by the HSE which showed that 151 people died at work between 1 April, 2009 and 31 March, 2010, a decrease in previous numbers. Mr. Barber said that the fall in the number of fatalities at work is ‘very welcome’ but pointed out that it was probably the result of far fewer people entering the workplace during the recession. “Politicians and the press should focus on preventing such deaths rather than talking about health and safety regulations being a burden. None of these deaths were a result of over-regulation or risk aversion. In most cases they were caused by basic health and safety precautions not being taken,” he said. “We must remember that these 151 deaths are less than one per cent of the number of premature deaths caused by work. We must do far more to reduce the terrible toll from occupational diseases such as cancers,” added Mr. Barber.

participating undertakings,” stated Mr. Wright. He explained that the technical specifications should not be seen as a prejudgement of the final outcome of the discussions on the level 2 implementing measures. The intention of the Commission is to publish the proposal on level 2 implementing measures once the results of QIS5 are known to ensure that the final policy decisions are made on an ‘informed basis’, he said. Mr. Wright stressed that the Commission expects much higher participation in this impact study than before and particularly from smaller undertakings, such as captives. “The Call for Advice sets out an expected participation of at least 60% of insurance undertakings and 75% of insurance groups. It is particularly important that smaller insurance undertakings as well as reinsurance undertakings

and specialised insurance providers are included. We also need a representative geographical coverage throughout the EU and participation of insurance undertakings in all member states,” he said. To help ensure that this happens, Mr. Wright said that he welcomes recent efforts by CEIOPS to make its spreadsheets more user-friendly. Captive owners will be particularly pleased to hear that he told CEIOPS: “They should in particular not overburden small and medium-sized undertakings. I would also like to reiterate my support for your idea to develop a QIS5 user manual in order to help in particular those undertakings which are new to QIS exercises.” “I believe that a close cooperation between the insurance industry and supervisors is essential for the success of the QIS5 exercise. Supervisors should invite insurance and reinsurance undertakings to participate in QIS5 and provide ap-

propriate support, in particular through an efﬁcient question and answer procedure, seminars and where appropriate, communication through trade associations,” he added. FERMA and ECIROA are jointly developing a best practice document for captives that focuses on the Pillar II and Pillar III transparency and governance requirements along with captive management experts to help insurance managers prepare for the challenge. The impact of Solvency II on captives will be the subject of a session at the FERMA Seminar being held in London, September 29-30. The topic will also be debated in depth during the Malta International Risk & Insurance Congress in Valleta, November 25-26 by which time the QIS5 exercise will be completed and the work required by captive owners will be much clearer. To secure your place at the Malta event contact HFoster@commercialrisk europe.com.

CHINA: French ﬁrms must adapt their risk practice CONTINUED FROM PAGE ONE The committee has organised two discussion sessions for members on how to deal with the rising Asian economic powerhouse, the second of which took place in Paris recently. Organisers told Commercial Risk Europe that members of the association have shown strong interest in the subject, and up to 100 people took part in the events. “Culturally, China is very far away from France, and ever-more companies are working there,” said Anne-Marie Fournier, Vice-President and Risk Manager at PPR, the luxury group, and a Vice-President of AMRAE, in an interview with CRE after the event. “We decided that it was a good idea to have feedback from companies that operate in China, who could talk about their activities there and share their experience with other members,” said Ms. Fournier. The ﬁrst meeting, in January, was organised in partnership with Comité France Chine, an association linked to Mouvement des Entreprises de France, Medef, France’s business organisation. The France-China committee has a membership of around 100 companies. Ms. Fournier said that the workshops showed that French companies face plenty of challenges in China, not

least because of cultural and legal differences between the two countries. “For French companies, it is very different to operate in China than in the domestic market,” she pointed out. “We are used to the Roman law system and therefore we put much value on contractual relationships and contractual negotiations. We stick to what is written. In the Chinese culture, from what we’ve seen, it is very different. Everything can vary, and things can change according to the moment when a decision is made, if conditions have changed too.” Ms. Fournier stressed that for French companies it is a tough task to adapt to these kind of attitudes, certainly more so than for Anglo-Saxon ﬁrms, that tend to be used to custom-based rules. “Typically, in the insurance side we have a contractual relationship, and it really leads us to adapt to the ways that different countries work,” she remarked. “If we take enough time to discuss things and if we respect the counterparties, trying to understand them, then we can ﬁnd a common solution. The relationship with the Chinese can be very fruitful and very valuable in the end,” said Ms. Fournier. “It is certainly possible to have a successful negotiation in China if you know the approach. It is absolutely key

to respect the people you deal with,” pointed out Laurent Barbagli, Director of Risks and Insurance at LAFARGE, the cement group, who was also one of the speakers at the conference. One of the things that Western risk managers have to adjust to when they do business with Chinese clients or insurance companies is that negotiations should not be seen as a win-lose situation, he said. “It is important that every party to a deal gains something, both the insurer and the insured,” he explained. In addition to cultural differences, technical aspects of a complicated sector like the insurance business can also be a source of misunderstanding and Western risk managers must make adjustments, he stressed. “Many technical aspects of large insurance claims are new for them, so that is an important difference to the way things are done in other markets,” Mr. Barbagli remarked. “For instance, when you are a member of a group of insurers, in the case of a major physical loss, you have to pay an interim payment to support rebuilding operations and reduce business interruption impact. The fact that this interim payment helps to reduce business interruption is not naturally linked. Chinese insurers don’t understand that at the beginning,” he said.

VIVENDI: Class action claims may be voided CONTINUED FROM PAGE ONE pour le Management des Risques et de l’Assurance de l’Entreprise (AMRAE), France’s risk management association, and newspaper Les Echos. After the decision by the American Supreme Court, made public at the end of June, the need for reserves could be considerably lower, releasing money that, in the future, Vivendi could employ for other uses. “We have to make a decision about part of that money,” Mr. Rodocanachi said. “For the moment, we’ve decided not to touch it.” The firm is likely to postpone a decision until the American courts reach a final ruling about its own case, he said. Vivendi had previously announced that the class action could cost it up to €800m, if the company was finally found guilty. In January, a judge in New York had

already ruled against the firm, concluding that investors were indeed misled in a period where the value of their shares dropped by up to 90%. Jean-Marie Messier, who was the chairman of Vivendi until 2000, is standing trial in France as a consequence of the events that led to the American lawsuit. Under his guidance, Vivendi, originally a water and sewage firm, aggressively expanded its media business by the acquisition of companies such as Universal Studios in the US, in 2002. He faces a sentence of five years in jail if found guilty of manipulating stock prices, misappropriating company’s funds and other accusations. At a recent seminar in London hosted by law firm Barlow Lyde & Gilbert LLP risk managers were warned, however not to relax too much about the legal threat from the U.S., particularly on Directors &

Officers exposures. BLG partner Roderic McLauchlan, who chaired the seminar, said: “In the wake of the National Australia Bank decision of the U.S. Supreme Court, the exposure to civil claims for the D&O insurers of non-U.S. companies may have decreased. But the risks of business practice proceedings, like bribery prosecutions and other investigations by government agencies like the SFO, SEC and U.S. Department of Justice, are growing rapidly. These are becoming a significant cause of claims on D&O policies for non-U.S. companies. Moreover, the marked increase in cooperation between agencies from different countries in such investigations raises novel issues of procedural and insurance coverage, and significantly increases the complexity and expense of such matters.”

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