Commercial Risk Europe - June 2015

www.commercialriskeurope.com

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Volume 6

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#05

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June 2015

AIRMIC 2015 PREVIEW

RISK FRONTIERS—SWITZERLAND:

CRE takes a closer look at the issues set to dominate the agenda at this month’s Airmic Conference 2015 in Liverpool . . . . . 8-12

The Swiss risk management contingent are up next in this year’s tour of roundtables in CRE’s annual EUROPEAN RISK FRONTIERS survey—. . . . . . . . . . . . . . 13-16

UK INSURANCE ACT.

CAPITAL MARKETS.

Airmic sets out sample Insurance Act endorsements

Capital markets here to stay but emerging risk transfer options limited: expert

Ben Norris bnorris@commercialriskeurope.com

‘FUNDAMENTAL REFORM’ “The new law was passed in February and represents fundamental reform of the laws governing commercial insurance, including crucial safeguards for policyholders,” said Airmic.

The association recommends that members begin speaking to their insurers and brokers now about the Act and its implications. Insureds should consider taking advantage of the Act before it comes into force in August 2016 and ensure they comply with its requirements to reap its full benefits, Airmic said.

“The new legal framework has significant advantages for business insurance policyholders and we urge INSURANCE ACT: Turn to p26

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Adrian Ladbury aladbury@commercialriskeurope.com

[ST JULIAN’S, MALTA]—THE CAPITAL markets are in the insurance and reinsurance market for the long term and will continue to evolve and develop innovative new risk transfer opportunities for the international risk markets.

A rising number of corporate risk managers are interested in the opportunities presented by the rise of new risk-bearing capital and some risk managers have told Commercial Risk Europe that they are actively investigating the market (See related articles on pages 13 to 16).

[ST JULIAN’S, MALTA]—JOHAN WILLAERT, CORPORATE RISK

Manager of Agfa-Gevaert in Belgium and next president of Ferma after Julia Graham [far right] steps down at the Venice Forum, told delegates at CRE’s Malta International Risk Congress in early June that the big risk that he believes tops the agenda for Europe’s risk managers is still the difficult macro-economic situation. Mr Willaert added environmental risks and regulation to his top three.

Mr Willaert continued that reputational risk and cyber,

‘NOT ON CARDS’ Extending cover to loss of profit or revenues as a result of reputational damage is currently not on the cards. “For now, balance sheet protection is unlikely to work.

This is a difficult risk to articulate, so focusing on extending existing policies to cover costs is a good first step,” said Mr Hurrell.

Airmic does, however, recognise that some insurers have been looking to develop more innovative standalone covers. “We are pleased to see individual underwriters

DO THE MATHS But do not expect a flood of deals between large corporates and the new capital in coming months as the basic economics currently do not add up for institutional investors, pension funds and hedge funds in this space.

These were the key messages delivered by Dirk Lohmann, founder of Converium, board member of Talanx Group and managing partner of Secquaero Advisors AG, the Switzerland-based advisory firm he formed to advise investors on how to invest in the insurance and reinsurance market. He made these comments during a keynote speech at CRE’s Malta International Risk Congress at the start of this month held in association with the Malta Financial Services Authority (MFSA).

The alternative capital market is certainly booming. Mr Lohmann estimates the size of alternative capital market to be in the region of $60bn to $75bn Dirk Lohmann and rising fast.

Only the day after Mr Lohmann’s speech, a placement with a notional principal of $700m was announced through the existing catastrophe bond shelf programme, Alamo Re, to benefit the Texas Windstorm Insurance Association (TWIA).

This is the largest 144A catastrophe bond completed to date in 2015 and the second time that TWIA has used the cat bond market to manage its

REPUTATION: Turn to p26

CAPITAL MARKETS: Turn to p24

often so closely related, are other big concerns for risk managers currently. Ms Graham agreed that cyber is a critical risk and urged fellow risk managers to focus on crisis management and education of the top team to help manage the exposure. Helen-Clare Pope [centre], outgoing chair of Airmic and Head of Insurable Risk at Tesco Stores, told delegates also not to forget more traditional risks such as catastrophes and fire that can wreak havoc with supply chains. ■

PHOTO: Ray Attard

[LONDON]—AIRMIC HAS PUBLISHED a technical briefing paper that includes a series of sample wordings and endorsements to help insureds with insurance contracts governed by English law take advantage of some of the benefits afforded them by the 2015 Insurance Act before it comes into force next year.

The paper was written with law firm Herbert Smith Freehills and aims to help insureds amend their existing terms and conditions to replicate some of the Act’s key reforms.

The endorsements cover key elements of the Insurance Act relating to basis clauses, breach of warranty, breach of terms unrelated to the actual loss and remedies for non-disclosure.

The endorsements do not John Hurrell cover aspects of the law relating to duty of fair representation or fraudulent claims.

These issues will be tackled later in further Airmic guidance.

The Airmic paper is available and applicable to both its members and non-members. It is relevant to all buyers, including those in Europe, that take out insurance contracts governed by English law, including those in the London market.

The 2015 Insurance Act was passed into law this February. It replaces the Marine Act 1906 that Airmic has long since argued was unfair on buyers and outdated.

REPUTATION.

Airmic calls for broader reputational risk cover CRE spoke to for this article welcomed Airmic’s initiative and news@commercialriskeurope.com would be prepared to work with the association on reputational risk [LONDON]—INSURERS SAY THEY transfer. are willing to work with the UK However, difficulties in defining risk and insurance managers’ and quantifying reputational risk association Airmic as it looks to have so far limited the insurance broaden the scope of industry’s response to reputational risk coverage. growing demand from At its annual risk managers for risk conference this month, transfer solutions. Only a Airmic is launching a guide handful of insurers offer to understanding and standalone reputational evaluating reputational insurance, and even fewer risk. “After the report cover the loss of profits or is launched at the revenue.

John Scott conference in Liverpool, Airmic accepts that we will sit down with insurers some aspects of reputational risk and ask them how far they may be are challenging for insurers. As a willing to go in offering a broader result, it will initially work with range of reputational risk transfer insurers on extending existing products,” said John Hurrell, Chief insurance to cover the costs of Executive of Airmic. mitigating a reputation-damaging All of the insurers and brokers event.

Stuart Collins

“The quickest and easiest route is to broaden cover under existing policies,” said Mr Hurrell. “At first this could be for restricted limits and agreed reparation, such as the cost of crisis management,” he said.

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NEWS Use of Data

3

Data analytics set to boost risk mitigation strategies Stuart Collins news@commercialriskeurope.com

[ZURCH]—ADVANCES IN RISK ANALYTICS CAN AID board level decisions on risk and strategy, as well as deliver more effective insurance purchasing.

Big data is a hot topic among consultants and statisticians, but for everyday risk and insurance managers it often seems a world away.

However, large insurers and brokers, that have been using data analytics to manage risk appetite and capital for a number of years, are beginning to offer new data sets and analytic services to corporate clients.

According to Jörg Bertogg, Chief Operating Officer at Zurich Global Corporate, risk and insurance managers have started using data and analytics. They will do so more and more in the future, he added.

“The complexity in today’s business demands data and analytics to manage risk, for example to better understand the risk of supply chain disruption,” said Mr Bertogg.

Data analytics is a topic that is likely to become increasingly important for risk managers going forward, according to Chris Holden, Chairman of Airmic’s Financial Institutions Special Interest Group and Vice President Group Insurance at an international banking group.

“Shareholders and regulators are demanding more information on risk while other stakeholders, like senior managers, are growing more sophisticated and are asking more questions. As a result, there is a growing need for quality data on risk,” he said.

Risk managers can use data analytics to better understand their organisation’s risk profile, to manage and mitigate risk and compare their risks to peers, explained Mr Bertogg.

The main benefit of using risk analytics is the ability to make data-driven decisions, according to Mr Bertogg.

“Risk managers tell us that they are increasingly using data analytics to support discussions on risk with senior management,” he said.

‘PRESENT THE FACTS’ “When speaking to the CFO or CEO, risk managers need to present the facts to justify risk management decisions.

For example, analytics enables risk managers to quantify the impact of risk mitigation, showing the expected loss improvement for a given investment,” Mr Bertogg said.

Analytics can also help with the visualisation of risk exposure, explained Mr Bertogg. It can provide exposure data to help risk managers understand risks and others in the organisation to consume such information, he added.

“We also see more risk profile benchmarking against industry peers, showing how a company is performing to its peers in terms of risk management,” he added.

Insurers and reinsurers have increased their use of analytics significantly, especially in the property catastrophe reinsurance market and the motor insurance market. But analytics are now coming into play in the large corporate space, explained Brian Kirwan of Allianz Global Corporate & Specialty (AGCS).

“The modelling of risks for large corporates is being driven by wider discussions on risk at board level.

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The board and CEO are used to describing certain risks in a certain way, such as in terms of probability distribution and hedging. This is being applied to wider risks, like operational and insurable risks,” he said.

“It will become common practice for large corporates to use analytics, but developments will be led by insurers and brokers. It is only logical that large corporates will follow their insurers and use the same methodologies and tools when making risk and insurance decisions, while most companies are unlikely to invest money in their own risk analytic capability,” said Mr Kirwan.

There is a growing expectation that risk managers should be able to use data to improve their analytical capability and present risk to the market more persuasively, according to John Hurrell, Chief Executive of Airmic.

“But often, some of the necessary data has not been collected historically or the sample sizes within an insured entity might be too small to achieve improved statistical validity,” he said.

“Risk managers are enthusiastic about developing and using better data but it has not really changed the landscape of the risk manager’s job to date and is unlikely to do so in the foreseeable future,” he argued.

INSURANCE PURCHASING One area in which analytics is beginning to make a difference is shaping risk transfer and captive retention strategies.

For example, large brokers are now bringing ‘big data’ techniques to insurance purchasing, according to John Davies, Managing Director, Risk Finance at Marsh.

Marsh is using ‘tried and tested’ stochastic modelling to better understand how risks behave and how insurance programmes respond, helping risk managers purchase the optimal insurance programme, he explained.

The broker is combining its ‘deep pool’ of premium, price and claims data with clients’ own exposure and claims data to gain new insights, according to Mr Davies.

Last year it ran over 1,000 of these analytics for clients, a number that is growing exponentially, he said.

“The ability to deliver an optimised insurance structure based on real premium and claims data is a significant improvement on the historical actuarial analysis of premiums,” said Mr Davies. “It gives clients a better understanding of the volatility of their risks as well as the ability to understand how the structure of an insurance programme adds or detracts value,” he said.

“The latest analytics allow clients to calculate the true cost of risk retention, including aggregation and captive retentions. It also enables companies to understand the cost of retaining uninsured tail risk and arrive at an economic cost of risk,” said Mr Davies.

Clients using analytics have gained a number of insights, according to Mr Davies. For example, many have been able to demonstrate that their existing insurance programmes offer value relative to the cost of using their own capital.

“We have had cases where buyers have undergone a fundamental redesign as they look to arbitrage the lower cost of insurance—some have bought more cover, reduced deductibles and used their captives less,” he said.

“Companies have also reengineered their risk appetite, buying zero deductibles in some lines of business and focusing their risk appetite in other areas,” he said.

Marsh is also seeing more interest from the C-Suite in understanding tail risk and resilience. “The board want to understand unlikely shock events that go beyond regular insurance limits and what financial resources would be available to them. There is a lot of interest in this area, particularly around whether they can use insurance capital to cover tail risk,” said Mr Davies.

“Companies want to know what their optimal insurance programme is. This is good insurance governance and enables a risk manager to demonstrate that their insurance programme is robust,” said Mr Davies.

“Analytics is not a panacea but there is increasing appetite in the financial community for more robust decision making around how you allocate your own capital and that of insurers,” he said.

MORE TO COME The next generation of analytic tools will be more accessible to risk managers, requiring less interaction with third parties, according to Mr Davies. He believes that buyers will soon be able to plug their own information into a model and run it alongside brokers’ big data.

In ten years’ time, risk managers will have access to much better tools and insights to do their jobs, according to Mr Bertogg. “At the moment they are using mainly internal data, but in the future, with developments in areas like language processing and external data, they will be able to make much better decisions based on data,” he said.

Risk managers will be able to access a much wider base of risk data in the future, said Mr Kirwan. For example, they will be able to make loss estimates, not only using their own data but global and industry-wide data provided by brokers and insurers, he said.

“The modelling is improving all the time, but the key is the data. You need your own data but increasingly you need external data to put it in context,” said Mr Kirwan.

Insurers and brokers will be able to provide that contextual data—such as industry loss data—as well as the modelling tools needed, explained Mr Kirwan.

Analytics could also help insurers meet demands for product innovation and the need for more bespoke insurance solutions.

“Buyers will be able to purchase insurance in a much more tailored way, rather than the products or terms and conditions offered by insurers. Buyers will know what a ‘good’ programme looks like before they go to market, putting them in a more advantageous position. This will also be good for insurers because they can spend more time focused on the terms required by clients, rather than working on lots of options,” said Mr Davies.

Data will also become available in ‘real time’ and come from both internal and external sources, predicted David Wong of PricewaterhouseCoopers. “The insurance industry has always been a data heavy industry, but the quantity of data will become greater and from more sources,” he said.

“If companies can invest in real time monitoring of risk, this will affect the price of insurance and the products insurers make available,” said Mr Wong.

8/6/15 16:10:33

4

Malta International Risk Congress 2015

NEWS

Don’t expect regulators & formulas to manage your risk says Van Hulle Hulle said that the prevailing philosophy of supervision was represented by a statement in the Turner report that was published by the UK government on the causes of the financial crisis.

It stated that many people argue that in theory: “Market forces and market disciplines keep both the economy and individual regulated firms broadly on track and the senior management and boards of regulated firms have a strong and long-term interest in firms performing well.”

This of course does not work perfectly in practice.

“We believe that markets are efficient and we have ‘homo economicus’ but unfortunately that is not the case,” said Mr Van Hulle.

Adrian Ladbury aladbury@commercialriskeurope.com

[MALTA]—REGULATORS AND FORMULAS DO NOT manage risk but rather people and firmly entrenched risk cultures that have the backing from top management, Karel van Hulle, former head of pensions and insurance at the European Commission and the ‘father’ of Solvency II, told delegates at the Malta International Risk Congress 2015 at the start of this month.

“It is very important that risk management is part of the culture of the organisation and tone has to come from the top. If it is not perceived as coming from the top it will not work. The role of the CRO is very important and where they sit and what reporting lines are used is very, very important,” he told delegates during his keynote speech at the event, organised by Commercial Risk Europe in partnership with the Malta Financial Services Authority (MFSA).

It is also critical for organisations and their management to understand that risk cannot be ‘regulated away’, it has to be actively managed within the regulatory framework, said Mr Van Hulle, now professor at the university of Leuven in Belgium and the International Center for Insurance Regulation at Goethe University in Frankfurt.

“Risk cannot be managed through regulation alone.

Do not expect your regulator to do your job. Good risk management is the underlying objective of all the reforms in the last few years but businesses need to manage their own risks,” he said.

Business leaders and managers have to understand that formulas do not manage risk, they are simply tools used to help in the process of risk management, warned Mr Van Hulle at the event sponsored by Aon, ArgoGlobal SE, Allied World, Atlas Insurance and Royal London.

“People can be blinded by formulas,” he said. “Some people seem to think that if risk is captured in a formula then it is under control. It is not. Risks do not get taken away by formulas. The more you go into the origins of formulas the clearer this becomes. The quantification of something is very fluid,” said Mr Van Hulle.

RULES IN THEIR PLACE Despite his central role in the creation of Solvency II, Europe’s new capital adequacy framework for the insurance industry, Mr Van Hulle was crystal clear that regulation is part of, but no replacement for, effective risk management.

“Regulation usually comes the morning after. In booming times, regulators are criticised when they come up with projects to regulate exaggerated ‘risk-taking’,” he said.

“Capture of risks in a formula (standard or internal) carries the risk that people are ‘blinded’ by the formula.

The predictive value of risk models is more and more questioned. Risks cannot be controlled through regulation,” stated Mr Van Hulle.

The regulation expert asked if capital is the answer and clearly concluded again it is part, but by no means all, of the answer.

He then asked if supervision provides the answer and again stressed that there are no ‘magic wand’ solutions in this imperfect world.

“Are supervisors capable of supervising a global, highly complex financial services sector? Do supervisors have adequate resources? Can supervisors operate in a principles-based regulatory environment? Can supervisors digest the massive amount of data submitted to them?” he asked.

Taking a more macro perspective, Mr Van Hulle also wondered whether the regulatory action in response to the financial crisis would actually achieve the goals of those that demanded reform.

He said that a great deal of importance, for example, had been attached to group supervision but he does not underestimate the challenge of actually making this work in practice.

Another nagging problem that has yet to be fully addressed is that of procyclicality by which the models effectively force the market to move in one direction at just the moment when counter-cyclical action is needed, thus deepening a crisis.

“Is the VaR (value at risk) approach by itself creating

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procyclicality? Does market consistent valuation lead to procyclicality?” asked Mr Van Hulle.

The financial crisis also laid bare the risk of regulatory failure itself.

Discussion since the crisis of 2008 has focused on ‘financial repression’, by which governments hold interest rates artificially low in order to try and repay their debt, and ‘regulatory capture’, where a regulator created to act in the public interest instead advances the concerns of the industry or sector it is charged with monitoring.

Mr Van Hulle also pointed to the problem of the ‘regulatory cycle’ which can lead to ‘too little, too much, too late’.

He pointed out that reform will often only come after a crisis or scandal and then can lead to the risk of regulatory ‘overshooting’.

Moreover, the wider economic cycle inevitably persuades business to demand less regulation whether during boom or bust.

Regulators come under pressure in boom times because people do not want to ‘kill the goose that lays the golden eggs!’ said Mr Van Hulle.

At times of slower growth there is obviously demand for less regulation to help enable economic recovery, he said.

Financial repression is very much a current topic in Europe as the European Central Bank continues to pursue its low interest rate policy in order to try and kick-start recovery.

Mr Van Hulle said examples of financial repression are the low interest rate environment, quantitative easing and zero capital charge for investment in government bonds, despite their obvious riskiness in the current sovereign bond environment.

The key question for Mr Van Hulle is how to overcome this regulatory capture.

First, better regulation is needed that involves costbenefit analysis, public consultation, proportionality, transparency, enforcement, monitoring, public oversight and periodical review.

Second, stronger supervisory authorities, the bodies that actually make sure the regulations are implemented, are needed.

Mr Van Hulle said that these bodies need to be sufficiently independent of government as well as the regulated industry and be clear about the way they intend to ‘give effect’ to their legal mandate.

Mr Van Hulle alo said that the supervisor must act as it says it will act. Empty threats will backfire with regulated companies just as they do with children, he said.

The supervisor must also be staffed with people that have the appropriate mix of personal ‘character and experience’, he continued. It must be adequately funded and staff must be rotated, he added.

On the risk of collective intellectual failure, Mr Van

Possible remedies according to Mr Van Hulle are that: ■ Society needs to decide what it wants the financial sector to look like and ditch the ‘false debate’ about the choice between financial stability and economic growth.

■ More attention needs to be paid to macro-prudential oversight.

■ Market participants and policymakers need to recognise that not all risks can be anticipated and that resilience needs to be built to cope with risks once they do materialise, so-called recovery and resolution plans.

At this point Mr Van Hulle went further on how important it is to recognise the limits of quantification and the importance of active enterprise-wide risk management.

He pointed out that there is a welcome increased importance attached to governance including board responsibility and a shift from implicit to explicit governance.

Then he stressed again the need for clarification of the risk management function, embedded risk culture and tone from the top.

RISK APPETITE Mr Van Hulle said that it is important to properly and clearly define the organisation’s risk appetite and appreciate the important role that needs to be played by the CRO. Remuneration policy needs to be part of the debate.

“Remuneration policy should promote sound and effective risk management,” said Mr Van Hulle.

The former head of the EC pensions and insurance unit said the challenges that lie ahead for both supervisory and regulatory authorities should not be underestimated.

The challenges for supervisors he summarised as follows: ■ Increased complexity of regulation that will have an impact on resources, outsourcing, enforcement, data collection and handling.

■ Development of a more ‘mature’ relationship between the supervisor and the supervised entities. “Dialogue is not a monologue,” he said.

■ Preventive supervision that means the anticipation of risks and ensuring that action is taken in advance to mitigate and eliminate risks.

Regulatory challenges he summarised as: ■ Principle-based versus rules-based regulation.

■ Top-down versus bottom-up approach.

■ Proportionality and level playing field.

■ Respect of the insurance business model.

■ Integration of international regulatory developments into the national regulatory framework.

■ Learning from each other by which he meant bilateral and multilateral cooperation in the development of national regulation.

■ Fair treatment of consumers.

Mr Van Hulle concluded that ‘we will continue to live in a risky world and we do not know the origins of the next financial crisis’.

He said that regulation can only play its role when all stakeholders understand its limits. Regulation should be principles-based, flexible and not lead to a ‘tick the box exercise’, he added.

“Supervisors should engage with supervised entities and not hide in their fortresses. Supervised entities should consider their supervisor as their friend and be willing to entertain a real dialogue,” he said, stressing, however, that they ought not to ask too many questions as it can lead to unexpected and unwelcome answers!

8/6/15 16:12:25

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09.10.2014 8/6/15 12:24:52 15:57:46

COMMENT

6

NEWS Association News

Time to raise the fear factor

I

T IS BECOMING INCREASINGLY CLEAR

to anyone who bothers to think about risk management that it simply makes good business sense and should not be adopted purely to keep the regulators happy.

This, of course, will not come as hot news to Commercial Risk Europe readers who are largely insurance managers who find themselves increasingly turning into risk managers, whether they like it or not.

One of the key messages to come out of this year’s CRE European Risk Frontiers survey however is that while individual ‘risk managers’ may find themselves taking on a more proactive risk management role, unfortunately this is not often planned.

It seems that main board directors and other managers still do not really get the benefits of active risk management and only really start thinking about the function when something bad happens to them or somebody else in the same sector.

Worse still, it seems that, based on our survey, the bulk of board members still find it difficult to disassociate risk management from box-ticking.

The evidence gathered by the Commercial Risk Europe team sadly finds that in the minds of senior management, corporate risk management still somehow belongs with audit.

The reason for this is quite clearly because most business leaders are naturally more concerned with raising profit margins and expanding to new markets to satisfy shareholder demand and win their bonuses than running perfectly risk-managed companies.

As was made clear during the closing debate on the future of risk regulation at our Malta International Risk Congress at the start of this month, it appears that fear is the risk manager’s greatest ally: fear of being caught failing to

comply with rules; fear of looking daft in the press and, ultimately, fear of facing financial or other penalties.

Fear, of course, is not a great starting point for the profession and you can be sure that a module on how to effectively spread fear throughout an organisation will not be the first that risk managers encounter when they take the new Ferma certification programme.

The federation’s leadership and the rest of us would rather hope that senior management would invest in risk management because it is good for the business, protects its reputation, prevents management from making unwise decisions and helps them make the right choices.

But in these testing economic and financial times it seems that the profession needs help from the regulators, the law and governments to spread the word.

If this is the case then the next question that needs to be tackled is whether the current level of fear engendered by the rules and regulations is high enough.

One speaker at our event in Malta certainly did not think so and made a very compelling argument for seriously upping the fear factor.

Joe Vittoria, CEO of corporate governance and reporting advisory firm Cordium/Mirabella, said that in a world of mind-bogglingly high bonuses and benefits for business leaders, the stakes need to be significantly raised.

He said that the penalty for corporate wrongdoing and risk management failure should not be an embarrassing rap on the knuckles and fine that could be easily swallowed by last year’s bonus (or indeed D&O insurers) but penury, total financial loss.

Commercial Risk Europe says ‘bring it on’— and let’s start with a collection of former FIFA executive committee members.

EDITORIAL DIRECTOR Adrian Ladbury aladbury@commercialriskeurope.com

ART DIRECTOR Alan Booth—www.calixa.biz Tel: +44 (0)20 8123 3271[W] +44 (0)7817 671 973[M] abooth@commercialriskeurope.com

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

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AMRAE’s new president promises to boost standing of profession Rodrigo Amaral

ramaral@commercialriskeurope.com

[PARIS]



BRIGITTE BOUQUOT, DIRECTOR OF INSURANCE AND RISK Management at aerospace group Thales, was elected as the new president of French risk management association AMRAE during its general assembly in Paris last month.

She has a mandate for three years and can be re-elected for a further two-year term in 2018. Ms Bouquot replaces Gilbert Canaméras, risk manager at mining and metallurgy group ERAMET. He led the association since 2011.

AMRAE’s new president told Commercial Risk Europe that during her time in office she plans to increase the recognition of risk management in France, develop the association’s education initiatives and spread its activities further to the French regions and beyond.

“One of our main goals is to give continuity to the work started by Gilbert Canaméras and his team,” Ms Bouquot said. “We will carry on focusing on the validation of the profession, on the sharing of information and on our international activities.”

Strengthening the risk function and improving its standing is the number one priority for Ms Bouquot.

“We will keep risk managers at the heart of our association,” she told Commercial Risk Europe. “We will work for the profession to be more widely acknowledged in France’s economic world.”

“We want risk managers to be better known, which is not necessarily the case today,” she added. “Some people still see us as insurance buyers and do not fully understand all the facets that the risk function can bring.”

Immediately after her election Ms Bouquot created a new vice-presidency position at AMRAE with the specific task of promoting the risk profession. François Malan, AMRAE board member and director of risk management at property group Nexity, has been appointed to the new post.

Mr Malan’s mission is to spearhead AMRAE’s efforts to spread the risk management gospel among companies, government bodies, decision makers and other stakeholders in the French economy.

Mr Malan becomes the fourth vice president of AMRAE alongside Kering’s AnneMarie Fournier, GDF Suez Energie Services’ Marc de Pommereau and BNP Paribas’ Philippe Vienot.

AMRAE’s new president also wants to place continuing emphasis on AMRAE’s education and formation activities to help risk professionals show their value and take ever more responsibility within their organisation.

“It is important that risk managers are well-formed, so that they are able to participate in strategic decisions taken by their companies,” said Ms Bouquot.

Another priority for AMRAE under her leadership is spreading its activities deeper into the French regions. In recent years the association has made an effort to acquire members from outside the Paris region. It has set up new regional offices in the south west city of Lyon, in Nantes and Niort in the west and another serving Marseille and Nice in the south east. A new regional office is planned to open in Lille, an industrial town in the north east of France.

“Regionalisation is important because France is a big country and much business growth comes from its regions,” Ms Bouquot said. “There are many young, dynamic companies spread around the French regions. They need to manage their risks, and we must help them with this task.”

Under Ms Bouquot’s guidance AMRAE will also continue to extend its reach to overseas companies—particularly those in French-speaking countries in Africa and elsewhere—in a bid to boost risk management across supply chains. This is a project that started two years ago.

“It is very interesting for French companies that all partners in their supply chains, including small and medium firms, develop a risk culture,” Ms Bouquot remarked.

AMRAE will also continue to focus on its annual Rencontres, which gathers more than 2,000 participants every year to discuss the latest trends in risk management and insurance.

“The Rencontres constitute a very important opportunity for risk managers to network and share knowledge about the market, and to brainstorm like a big think tank,” Ms Bouquot said.

In addition to the new president, AMRAE members have also voted in two new board members—Anne Piot d’Abzac, VP Chief Risk Officer at pharmaceutical IPSEN Pharma, and Giles Maindrault, Director of Risks at Groupe La Poste, the mail company.

Ms Piot d’Abzac has previously worked at ERGET and at Yves Rocher, where she was director of risks and audit from 2008 to 2011.

Mr Maindrault has developed his career at Groupe La Post. He became the group’s director of risks in 2009, which encompasses risk management, audit and insurance-related activities.

Mr Canaméras has been appointed as an honorary member of the AMRAE board.

8/6/15 16:12:14

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AIRMIC 2015: David J Bidmead

8

BEHIND THE NEWS

Marsh’s Multinational Client Service (MCS) brings together more than 400 offices in over 100 countries to help multinational organisations manage their risks. Currently serving more than 20,000 multinationals and their subsidiaries, it brings an international perspective to a wide range of issues such as emerging risks, local market nuances and other elements that influence multinational and intra-regional risk management and insurance solutions. Commercial Risk Europe’s BEN NORRIS spoke to MCS’s global leader David J Bidmead about the changing role and needs of risk professionals and the knock on effects for their transfer partners

The changing

face of risk management & transfer service

A

CCORDING TO DAVID J BIDMEAD, Global Leader of Marsh’s Multinational Client Service, the roles of risk managers, brokers and insurers are in flux as operating and market pressures open up new opportunities but create new pressures.

Firstly, Mr Bidmead believes that demands on and expectations of risk professionals have greatly increased, particularly since the global financial crisis of 2008. This brings both opportunity and threats for the profession, he said.

“I think those titles of risk and insurance manager and their potential value to the organisation have inextricably shifted. It produces opportunity and threat. The opportunity is risk professionals get to redefine what they are capable of and their value to the organisations they work for. The threat is risk professionals now need to be seen as all seeing and all knowing across a risk spectrum that is perhaps far broader than it has ever been in their careers,” he said.

Secondly, the broking industry is adapting to help service the growing demands on its clients and their resultant need for better insights and improved services, he said.

As such the broking industry needs to spend more time in ‘discovery and trying to identify the things that clients deem important and valuable’ and less time ‘trying to sell products and services and hoping that something that it throws up against the wall sticks’, he added.

And thirdly, the major global carriers are having to increasingly differentiate on other areas than price in the ongoing soft global insurance market, said Mr Bidmead. This includes an increased focus on flexibility and innovation.

He said Marsh has seen some ‘really powerful’ examples of insurance companies prepared to challenge convention and do things that five years ago, by their own admission, they would have deemed too difficult.

“This is a great thing for our clients and a good thing for us,” said Mr Bidmead.

CHANGE = CHALLENGES But for insurers, brokers and insureds alike this rapid change and innovation does throw up challenges. The market needs to ensure that carriers remain vigilant and their business model sustainable as they execute new solutions and programmes.

“It is a balance between creativity and problem solving that we are seeing at the moment and the fact that no one, particularly in the current financial environment, wants a nasty surprise. Volatility is something that nobody appreciates,” said Mr Bidmead.

For insureds this means not necessarily pushing the envelope too far in pursuit of new and untested solutions that could come back to haunt them.

“The message has been conveyed to us time and again by clients that they just don’t want any unbudgeted surprises. So you would do well as a risk professional to avoid the temptation to be a hero today and press the boundaries too far and then become a villain tomorrow,” said Mr Bidmead.

Mr Bidmead noted that risk professionals are today being asked to do more with less resource than probably at any point in their careers. This demands risk managers develop new skill sets and rely more heavily on strategic partners such as their broker.

“Risk managers have to deal with a trajectory of risk that is probably unprecedented. The risk professionals that we do business with and represent are charged

08-CRE-Y6-05-BTN-Bidmead.indd 8

modelling and, more recently, stochastic modelling.

It now uses insurance company quality statistical analysis to help clients make informed decisions about programme design and risk treatment efficiency, he said.

Today’s clients demand far deeper insights from their brokers to help with risk assessment and treatment, said Mr Bidmead. They want to understand lessons learnt from claims or near misses that have affected companies in the same industry and want more than just data, he said. The brokers’ role has changed for the better as a result, he added.

“It is all about what can we share with our clients that helps them make informed decisions about risk.

That has been a real change on the insurance broking side in the last few years. Gone are the days when we would propose to send clients a white paper, they would read it and a decision would be made from there. There is an appropriate expectation that we are going to understand the impact of a change or event on a client’s industry or business and propose next steps for them.

This is a good thing for the industry,” said Marsh’s MCS global leader.

LISTEN & ADAPT

with not only anticipating that change but making sense of it. Not only is that tricky I think it requires a new skill set. Clients are therefore seeking more valuable input from their service providers including brokers and Marsh,” said Mr Bidmead.

“We find ourselves in a position where we are supporting risk professionals to make sense of a shortage of risk capital. Part of the responsibility of risk professionals is to have an input in how their organisations uses what, in some quarters, is scare risk capital to produce a return. So they want input in terms of how do we as brokers see things, how do the companies that we have partnerships and alliances with see things and then how do risk managers provide advice and guidance to their stakeholders in a form that influences informed decision making,” he said.

He noted that Marsh clients have long expected their broker to be able to place effective insurance programmes around the world. But they are now seeking a partner to help them use data, powerful analytics and industry specific insight to make informed risk decisions.

“So whether it’s risk treatment, prevention or financing they want additional help and there are several ways we can do that. For the risks that are known and knowable we can use historical data, both of the individual client, its peers and the relevant industry,” said Mr Bidmead.

But for previously unseen, unknown and what some say are unknowable risks clients need more urgent help, said Mr Bidmead. To help with such risks Marsh is spending a lot more time on scenario analysis.

The demand from risk professionals for more input from service providers has seen brokers and insurers invest heavily in data and analytics.

According to Mr Bidmead, Marsh has developed from a very simple approach to benchmarking and programme design comparison to deterministic

Insurers are also better listening to client demands and adapting their services, said Mr Bidmead. They and other service providers are in competition with brokers to provide topical and relevant insurance information and data that goes beyond pure knowledge and transforms messages into actionable intelligence, he said.

The challenge facing the risk transfer industry is how it further adapts to the growing needs and expectations of its clients.

“The real test for me is what changes and developments we make to our business as a product of the input of our clients. We need to ensure that as a product of all our contact with clients we do things differently, or will do next year, to create more differentiated value. Clients are demanding, they want to know what they will get out of being our business partner,” said Mr Bidmead.

He also said that clients increasingly want to see a tangible return on their loss control and prevention investments. They expect their efforts to be reflected in insurance premiums and want help to maximise potential benefits.

“Clients want to satisfy themselves that there is a return, not only in their current markets but how that is valued in the mind of potential credible alternatives.

Even clients that enjoy good, strong and enduring relationships with big carriers are asking us to test the efficacy of those relationships, particularly on how the insurers evidence a credit for the investment we have made on loss control,” said Mr Bidmead.

Another important issue, particularly for multinational companies, is a growing demand for consistency or repeatability in their risk management programmes and, when achieved, reflective insurance pricing.

“Risk managers want help to achieve centralised command and control even though they are operating in dozens of different countries and a consistency in the way they approach risk-based issues. Our collective ability to evidence that to the insurance companies is key and the ability of the insurance companies to not only understand the consistency but acknowledge and value it is really what we are seeking as broker and insured,” said Mr Bidmead.

8/6/15 16:12:06

BEHIND THE NEWS AIRMIC 2015: John Hurrell

9

Bridging the gap to the board Stuart Collins news@commercialriskeurope.com

U

K RISK AND INSURANCE MANAGERS face some big challenges and opportunities as boards finally wake up to risk, according to Airmic CEO John Hurrell.

Speaking to Commercial Risk Europe ahead of the association’s annual conference in Liverpool, Mr Hurrell said that boards of UK public limited companies are feeling vulnerable as they navigate today’s business environment.

Globalisation is taking senior management out of their comfort zone and into new and unfamiliar markets, while rapidly changing technology and the rise of intangible risks in today’s ‘virtual’ world is another major challenge, he said.

These macro trends are compounded by the growing speed and reach of both traditional and new media. If things go wrong there is now far more ‘transparency’ due to social media and legal discovery, putting a company’s ethics, brand and actions under increased scrutiny, explained Mr Hurrell.

Against this backdrop, risk and insurance managers are being challenged to raise the profile of risk management and insurance at board level, according to the Airmic CEO. While board interest in risk is growing, many companies do not yet have a joined-up risk function linking senior management to grass-roots risk management, he explained.

In an Airmic report launched in May entitled Tomorrow’s Risk Leadership: Delivering Risk Resilience And Business Performance (see story on page 9) the association said that all too often risk management remains siloed and detached from strategy.

The report recommends that businesses consider appointing an executive risk leader who reports directly to the board. This individual should take a corporate-wide view and help boards cut through the vast amount of risk information and focus on the most important and strategic threats.

“Boards feel vulnerable but don’t have a clear view of what they want from the risk leadership function, so there is an opportunity for risk and insurance managers to lead and guide them,” according to Mr Hurrell.

As risk becomes more relevant, senior managers, board executives and risk managers will require guidance and tools, he added.

“Raising the profile of risk will be a challenge for risk managers, and not all of them will be ready for it,” said Mr Hurrell. “The leadership of the risk team may come from another function, but risk and insurance managers can make a significant contribution or lead,” he added.

TWO FRONT WAR Airmic members have historically been drawn from the insurance buying community but already are taking on more risk-related responsibilities. At the same time the association is attracting new members with a ‘pure risk’ background, including those in senior risk positions and audit, according to Mr Hurrell.

“Raising the profile of risk will not be achieved overnight, but we are waging a war on two fronts,” explained Mr Hurrell.

“The air war is about big ticket research needed by boards of companies to create risk context at board level and demonstrates the value of risk management and insurance. The ground war will see Airmic produce technical papers, guidance and training to give risk and insurance managers the ammunition they need,” he said.

Airmic is now planning a number of reports and guides aimed at helping risk and insurance managers engage with the board and raise the profile of risk and insurance.

For example, at this year’s Airmic conference, Airmic is publishing a guide to creating a dedicated risk function to provide board risk oversight and give insight on how risk managers can add value at a strategic level.

The association is also publishing implementation advice on the new Financial Reporting Council (FRC) guidance for listed companies on risk management, internal control and

09-CRE-Y6-05-BTN-Hurrell.indd 9

related financial and business reporting.

On the insurance front, Airmic has joined with PricewaterhouseCoopers to produce a guide to help companies target their insurance spend. The publication should make companies think about the criteria behind insurance buying decisions.

It will not simply focus on price and will consider the importance of insurance to business and protecting the balance sheet.

“Boards are increasingly interested in risk and Airmic is trying to respond to that. If organisations put risk higher up the agenda, we want to help them respond in a more comprehensive way,” he said.

“On the pure risk side, we are suggesting that boards need additional lenses to view risk. We need to go beyond the pure event-driven view of risk and consider other perspectives, such as the critical risks and threats to the business model, strategy or reputation,” explained Mr Hurrell.

“Most organisations are not precise enough at understanding what underpins their business model, but this is an area our members can help with, identifying what are the threats and what contributes to the success of an organisation,” he added.

While Airmic is focusing more of its resources on risk management, it also continues to work on improving the relevance of insurance.

Many of the top risks identified by companies are not insurable, leading some risk managers to question the industry’s response to emerging risks. For those risks that are insurable, concern remains over the efficacy of contracts and the reliability of policies in the event of a large claim.

Airmic is currently working on initiatives to encourage innovation in areas like cyber, supply chain and reputation, explained Mr Hurrell.

At this year’s conference, Airmic will release a guide to evaluating and managing reputational risk. The association also plans to begin discussions with insurers about extending some traditional coverage to include the cost of dealing with reputational damage.

Airmic has also started working with the International Underwriting Association, Lloyd’s and the Lloyd’s Market Association to promote innovation in the London insurance

market. The bodies have agreed to focus their initial efforts on business interruption and cyber risk.

“To a large extent innovation is down to the buyer,” believes Mr Hurrell. “Historically brokers have driven product innovation but this is not happening rapidly enough. The market needs to respond to the growth of intangible risk and the increasing dependency of business on technology. But this starts with buyers being able to identify and articulate their risks,” he said.

On a more immediate level, risk and insurance managers can work on making existing insurance contracts more efficacious by raising standards of placement and making use of recently passed insurance contract law, the 2015 Insurance Act. “The efficacy of insurance is perhaps the easiest issue to fix.

It’s important and is within every policyholder’s grasp. If they have the right resources, risk and insurance managers could fix this at their next renewal,” said Mr Hurrell.

‘PURE RISK’ BACKGROUND Airmic published its guide to implementing the Insurance Act just before its conference in June. This includes the release of several clauses and wording suggestions that will help companies achieve the benefits of the act ahead of the August 2016 implementation date.

The Act does not place new duties or responsibilities on risk managers, according to Mr Hurrell. As with the Marine Insurance Act—which will be replaced by the Insurance Act—buyers are still required to make effective discovery and disclosure.

However, the Act does aim to raise standards of disclosure and the governance of insurance contracts, which will require buyers to start their renewal in good time and work more closely with their insurers at the pre-inception stage, Airmic says.

“We are urging members to spend more time on stress testing, placement and contract due diligence,” said Mr Hurrell, who believes insurance contracts should be treated with the same deference as other multi-million pound contracts.

“Many risk managers already meet the requirements of the Insurance Act and demonstrate best practices in placing their insurance. However, some will not, and they should be thinking about this now,” said Mr Hurrell.

“ Most organisations are not precise enough at understanding what underpins their business model...”

8/6/15 16:11:54

AIRMIC 2015: Risk Leaders

10

BEHIND THE NEWS

Airmic and business leaders

extol virtues of risk leadership Commercial Risk Europe takes an in-depth look at a new report from Airmic and business leaders that argues organisations need to appoint executive risk leaders to better tackle the modern operational landscape, BEN NORRIS reports [LONDON]

L

AST MONTH AIRMIC, THINK tank Tomorrow’s Company and Good Governance Forum members published a report that called on organisations to consider appointing an executive risk leader because boards are failing to cope with an increasingly complex risk landscape.

The report, entitled Tomorrow’s Risk Leadership: Delivering Risk Resilience And Business Performance, says risk leaders need to be able to draw knowledge from across an organisation and communicate at all levels.

However, it makes no assumption about the background of the risk leader. They could come from the world of risk management and insurance buying or from other areas, it says.

According to the report, the risk leadership role is not about removing the responsibility for risk from board members.

Rather the aim is to support the board in managing the risk agenda.

The report says that risk leadership is achieved through being able to challenge, enable and educate an organisation. The leader must be fully empowered to help the business gain a deeper appreciation of the relationship between risk, reward and strategy to enable better and more informed decision making, it argues.

EMBED RISK CULTURE The risk leader needs to embed a risk culture to help organisations proactively deal with risk issues and dilemmas across and beyond the enterprise, it continues.

In order to be successful the report says risk leaders must be able to see and integrate an organisation’s entire risk agenda and ensure it is aligned to the business model. This needs to be carried out with independence and assurance, it adds.

It notes this involves having a strong, forward-looking and external focus that scans the business environment for risks and opportunities that can impact business performance.

The report identifies four key components of the leadership role. These are strategic thinking, executive leadership, development of culture and organisational capability.

It says the five key qualities of a risk leader are an ability to navigate the organisation and needs of all stakeholders, courage, communication skills, integrity and credibility. The risk leader should report directly to the board and be in a position to influence the strategic direction of the business, says the report. This will require independence, assuredness and broad business knowledge, it adds.

The research was published by global business think tank Tomorrow’s Company

10-CRE-Y6-05-BTN-Risk-Leaders.indd 10

in collaboration with Airmic and Good Governance Forum members CIMA, IHG, Korn Ferry, PwC and Zurich.

According to John Hurrell, Chief Executive of Airmic, companies are usually expert at managing their core risks, but all too often risk management remains a siloed operation, detached from strategy.

“What we are recommending in this report, is that companies consider appointing an executive voice of risk to give a corporate-wide view and help boards to cut through the vast amount of risk information and focus on the most important and strategic risks,” he said.

Speaking at the report’s launch, Judith Hackitt, Chair of the UK Health and Safety Executive, said there needs to be a ‘step change’ within organisations to build resilience.

Ms Hackitt was recruited as a risk leader from outside the world of risk management over 20 years ago. Back then she was given a group-wide risk management remit and noticed her strategic, risk leadership role was significantly different and broader than most of her peers.

“Disturbingly, 20 years later the status quo remains and little has changed,” she said. “This begs the questions why is this risk leader approach not firmly embedded in corporate thinking.”

Discussing the report, a range of experts were keen to stress that key leadership skills are needed to fulfill the role. They agreed that the risk leader does not necessarily need a risk and insurance background.

According to Mr Hurrell: “Risk leaders can, do and should include Airmic members.

But we recognise that not every member is ready to step up into this role. We also don’t say you have to be an Airmic member in order to do a job in this role. There will be other people who are currently in leadership positions or from other disciplines who will take on this role.”

He added that risk professionals must make sure they have the skills and qualifications to rise to the challenge and meet these higher expectations. “Risk professionals, whether they are leaders today or are new in their careers, will increasingly need broader business awareness and to be mindful of how risk decisions impact and are impacted by corporate strategy,” he said.

According to Ms Hackitt: “There is no doubt in my mind that risk resilience is a necessary mindset for today’s and tomorrow’s company. It is about horizon

scanning, seeing the need for change before hard lessons have been learnt by mistakes. It is also about truly learning from mistakes when they are made…it is about prioritising and focusing on real risks, not stuck in the trivia, or stuck in your own silo and refusing to look outside of your area of expertise. It is also about seeing this as an agenda full of opportunities and success.”

She said that in her role as a regulator all too often she sees a silo mentality when it comes to risk management. This means the key risks are neither seen or owned by business leaders, she added “We need to encourage a holistic approach and the ability to see the big threats through risk leadership,’ said Ms Hackitt.

Good companies with the right culture understand the interdependency of risks and manage them holistically rather than splitting them into separate categories such as financial, safety and environmental risks, she continued.

“Companies that manage risk well know how to prioritise and discern the risks and issues that really matter. This is only possible if they have a good view of all of the risks and their interconnectedness, but boards can only do that if they are properly informed and have a consistency of language and thinking across the organisation. This very much requires an executive voice of risk,” she said.

“Being a risk leader is an exciting and proactive role. As a necessity you must have access to and understand all aspects of the business. You must be able to think outside of the box. You are charged with continuously improving the culture and building the risk capability and capacity of the organisation. You are not shouldering the entire burden of those risks by yourself.

You need to create the means for the organisation to measure its performance by creating leading indicators to help the

organisation to manage risks before the worst happens and not allow complacency to creep in,” added Ms Hackitt.

According, to Amelia Stubbs, Senior Client Partner, Head of Audit and Risk, EMEA at executive recruitment firm Korn Ferry, risk management has a historic reputation for being a box-ticking exercise and business blocker, but there is now clear evidence that risk and its management is evolving.

Risk leaders are developing from the risk profession to take up broader and more influential roles, she writes in the report.

“Whilst many will not want to make, or be capable of making, the shift from technical guru to executive leader, a small group of individuals is now emerging,” she explained.

She said risk management is also attracting individuals from business or other functional leadership roles ‘enticed by the opportunity to make a difference through changing the approach and view of risk’.

At the report’s launch some experts said that risk and insurance management isn’t necessarily the best training ground for risk leaders.

John Scott, Chief Risk Officer, Zurich Global Corporate, said: “Technical stuff is not the criteria, it is leadership. In fact I would rather the risk leader have a broad business experience, somewhat like a chairman or good chief executive. You have to know how the business works and have these key leadership qualities.”

John Ludlow, SVP & Head of Global Risk Management, IHG, said that risk leadership and enterprise risk management (ERM) is a completely different job to the secondary oversight role that many risk managers fulfill today.

CROSS-POLLINATE “When I look at my corporate ERM people they have completely different skills sets to my second oversight teams. Can they go from one to the other? Yes they can, if you develop their leadership competencies and they are exposed to different experiences,” he began.

“But are risk leaders likely to come from those secondary oversight teams?

Absolutely not. They need genuine exposure to other disciplines and genuine exposure to general management. So I am not saying they can’t but it is unlikely for a lot of our secondary oversight teams to step up,” he added.

According to Richard Sykes, a partner at PwC who specialises in governance, risk and compliance, risk leadership is needed to drive the correct culture within organisations.

“At the end of the day people are the biggest risk and opportunity for an organisation. I think for too long the risk discussion has been embedded in systems and processes as opposed to people and culture that are the biggest risk,” he said.

“How does one get an organisation behaving in an appropriate manner for its risk appetite on a consistent basis across a geographical spread where the environment is complex? The only way you can do that is through leadership. Unless we get the right risk leadership around that board table, the executive committee and through senior management, whatever else is taking place is going to struggle. So this is all about driving the right behaviours and driving that through the organisation,” added Mr Sykes.

8/6/15 16:11:46

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AIRMIC 2015: Helen-Clare Pope

12

BEHIND THE NEWS

View from the

top

of the risk profession Helen-Clare Pope, outgoing chair of Airmic, told Stuart Collins risk managers to grasp the opportunities presented by growing board recognition of risk and a desire to understand and manage a growing number of threats

new levels of qualification or certification for risk managers?

and the International Federation of Risk and Insurance Management Associations (Ifrima).

[HP]: In the UK we are fortunate to have the Institute of

[SC]: Are there moves to solve the compliance

Risk Management (IRM) and the Chartered Insurance Institute (CII), as well as a number of universities offering masters degrees in risk management. The situation in Europe is different, which is why the Federation of European Risk Managers (Ferma) is working on a certification model. However, qualifications may need to expand to ensure that risk managers are fit to take a senior position and move away from being focused on technical skills to include strategic thinking.

STUART COLLINS [SC]: This year’s Airmic conference

problem long-term?

[HP]: Airmic has been involved in talks, initiated by Zurich

Insurance, to harmonise insurance rules, or at least get a consensus view on the use of Difference in Conditions and Difference in Limits (DIC/DIL) endorsements. We would like to see an arrangement similar to the EU passporting rules, in which a policy regulated in one country would be sufficient to comply with the rules in other jurisdictions.

focuses on raising the profile of risk. How is recognition of risk management developing at the highest level?

[SC]: What has been your biggest achievement during

HELEN-CLARE POPE [HP]: Boards are taking risk much more

the multinational insurance programme compliance database for Airmic members developed with Axco. It was launched last year and the database is now more or less complete having been expanded to 90% of the countries relevant to most risk managers. It took over six years to get off the ground, but it has been an amazing achievement.

brokers and representatives of US and European insurance buyers (Ferma and RIMS). We have yet to approach the International Association of Insurance Supervisors (IAIS), the representative and standard setting body for insurance regulators. We will only get one bite at the cherry—this issue is not a priority for insurance supervisors, who are more interested in consumer protection—so we need to make sure we get this right.

[SC]: What now for the multinational insurance

[SC]: Do you expect it to be successful?

your year as Airmic chair?

[HP]: That would be the launch of Insight Risk Manager,

seriously, a trend that will be further reinforced by the Financial Reporting Council’s (FRC) recently published guidance to listed companies on risk management and internal control.

[SC]: What does this mean for the risk management

profession?

programme compliance database Insight Risk Manager?

[HP]: In most organisations the risk management

framework is there, but it needs elevating to board level. In financial services the role of chief risk officer is enshrined in regulation, but in other sectors it is still not typical to see a senior position dedicated to risk. As a result, there is often a disconnect between high-level risk regulation and governance and operational risk and insurance management.

[HP]: The uptake among risk and insurance managers

has been good and we now have well over 100 using the database. This is an impressive number given how many multinational companies there are in the UK. The database will continue to develop and be updated to deliver the latest information and expanded as new topics develop.

[SC]: Does this mean risk and insurance managers

should aspire to a board position?

[HP]: In many organisations, risk and insurance managers

are not as connected to the board as they should be, so there is a need to join up the dots. While the risk position at board level does not necessarily have to be filled by a risk manager, the risk department needs a leader with a good grounding in risk management.

[SC]: Would you encourage risk managers to bridge

the gap between the board and the risk function?

[HP]: It’s a big challenge to make that leap to senior

management and the C-Suite, but risk managers should aim to be at that level. This is a huge opportunity for risk and insurance managers that want to progress their careers and Airmic is looking at ways to support them.

Risk professionals will have to up-skill and demonstrate the same skills as other directors. In that way risk management is no different to other professions.

[SC]: As boards take risk more seriously, how will

this affect the day-to-day work of risk and insurance managers?

[HP]: The challenge for risk managers is the speed at which

information is now needed. Risk managers are often asked to use their crystal ball and horizon scan, and are under increasing pressure to head off the next crisis. So you need to make sure that you not only look at risks inwardly but also consider external risks.

[SC]: Does board engagement with risk require

12-CRE-Y6-05-BTN-Clare-Pope.indd 12

n Helen-Clare Pope is the outgoing chair of UK risk and insurance managers’ association Airmic and head of insurable risk at retail group Tesco Stores Ltd

[SC]: Will it be open to non-Airmic members?

[HP]: Initially the database was made available to

Airmic members, but Insight Risk Manager is going global. There has now been an agreement with the US risk management association RIMS to make it available to their members, while there are also talks in progress to extend the service to members of Ferma

[SC]: How are these talks progressing?

[HP]: So far discussions have been limited to insurers,

[HP]: We are getting traction on this issue with brokers

and insurers and I hope that it will come to something in the future. All going well, we will one day see a freedom of services agreement for DIC/DIL excess layers.

[SC]: Next year will see the introduction of the UK’s

Insurance Act in August 2016. What is your one piece of advice to Airmic members?

[HP]: Make sure that you are prepared. This is a big

change for insurers and insureds and it will be wise to be up to speed and prepare early.

[SC]: What will the Act mean for insurance buyers?

[HP]: It will no longer be sufficient to rely on your broker

for your renewal. You may need to start your renewal earlier and spend more time on it, and it may pay to agree with your insurer in advance what they see as a ‘fair presentation’ of the risk and the information they will need.

[SC]: Another focus of Airmic’s work has been

to encourage innovation with the insurers.

Is the industry making progress?

[HP]: We are seeing movement. The announcement that

the International Underwriting Association and Lloyd’s will work with Airmic in this area has been an important step. Underwriters are now prepared to sit down with their customers and ask what they need, rather than just make assumptions and produce products that they think we need. This is a welcome change in approach and recognition that insurers need to talk to their customers.

SC: As your year as chair draws to a close, do you have any parting comments?

[HP]: Professionally, look to raise your profile and beat a path to the C-suite. Try to help the board understand the value of insurance. It is sometimes forgotten how fundamental insurance is for most companies.

8/6/15 16:11:13

RISK FRONTIERS Switzerland

13

Risk profession needs to move onto front foot and sell value Adrian Ladbury aladbury@commercialriskeurope.com

[ZURICH]—ACCORDING TO THE MEMBERS OF SIRM who took part in this year’s Swiss roundtable that forms part of our European Risk Frontiers survey, one of the biggest risks currently faced by risk managers is a lack of recognition of the true value of risk management at boardroom and wider management level.

Despite the sharp focus on risk management since the onset of the credit crisis in 2007 and the raft of riskrelated rules and regulations that came about as a result, it seems that non-financial corporations still do not always understand the positive benefits that risk management can bring to an organisation.

The Switzerland-based risk managers agreed that to an extent this is because European companies in all sectors continue to struggle to hit their margin targets. There is still a very sharp focus on cost control and thus limited resource for the risk management function is available, they said.

Front line managers and board members generally realise that risk management is important and should be on the agenda. But they simply do not have the time to add another, still rather loosely defined and largely misunderstood, function to their ‘to do’ list.

The risk managers conceded that the lack of formal, internationally recognised risk qualifications and a truly joined up effort from the risk management profession to sell its benefits does not help.

The good news is that progress is being made.

Each of the risk managers who took part in this year’s Swiss discussion has added wider risk management responsibilities to their core insurance function in recent times.

This occurred either because the individual risk manager identified a need or was called upon during a crisis when senior management finally woke up to the requirement for active risk management.

Unfortunately, it seems that when the crisis abates, the interest in risk management also fades away. Risk management remains a relatively hard sell in the corporate sector and a more proactive effort to promote the profession at an individual and collective level is clearly needed.

The danger is that the remit for risk management falls into the lap of internal audit, becomes a tick box compliance exercise and loses all potential value.

Stuart Martin, Head of Group Operational Risk & Insurance at Bombardier Transportation Financial Services, the Canada-based global transport and engineering group, said that his primary responsibility is insurance.

He is, however, naturally becoming more involved in enterprise risk management (ERM) because of his dual role as operational risk manager and previous experience within UK FTSE companies managing the risk management process.

CORRECT ROLES

He stated that within Bombardier Transportation, ERM sits within the audit function which, in his opinion, does not deliver a proactive approach but a compliance procedure.

Sabrina Hartusch, President of SIRM and Global Head of Insurance at Triumph International, one of the world’s leading underwear and lingerie firms, said that there is no formal or holistic risk management operation within her firm. This is not unusual, she said.

Ms Hartusch has found herself taking on more and more responsibility for risk management simply because nobody else does. She has volunteered when she believes she has the time, resources and expertise to help out.

“I recently set up a travel risk management system and am now working on an outsourcing risk management system for the IT services department after my CEO asked about it. This is good for me. I simply raise my hand and can then put things in place,” she explained.

Dominik Ebneter, VP Risk & Insurance Management at Swissport International Ltd, the global airport service provider, said that he similarly has also taken on a rising role in risk management through natural evolution rather than a mandated decision from above to set up a formal structure and ERM programme.

“We are getting there but it’s not perfect. This is a step-by-step process. You have to develop a culture

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and a mindset. If you do not push it at all, it could go nowhere. What you learn in university about having to set a framework, policy and processes and put it all in place from the top down—that just does not happen as straightforward in reality. You have to fix things and fine tune them as you go in a pragmatic manner,” he explained.

That is of course until something goes wrong and then risk management springs right up to the top of the agenda, pointed out Mr Martin.

Mr Ebneter said that in this environment it is very often up to the risk manager to educate fellow managers and the board about the value of risk management. But it is not easy in such a tight market, he added.

“I have managed to increase awareness and people do get that this is important. But when it comes to resourcing or investment into a proper tool people tend to say let’s think again. We are in a low margin market and the focus is very much on the cost base,” said Mr Ebneter.

Mr Martin said that the risk management profession and its representative bodies have failed to take advantage of a series of major manmade and natural catastrophic events over the last 20 years to really ram home the value of risk management.

“There have been a number of big events over the last two decades that have really brought risk management to the forefront, but then it has been downgraded again. I probably blame the various risk management institutions for this. There have been opportunities to get on the front foot but the profession failed to take the opportunity and it fell to the auditors and became tick box rather than strategic,” he said.

Mr Ebneter agreed with Mr Martin. He pointed out that overcoming this challenge is not easy because risk managers always have to compete and deal with other, seemingly more pressing, day-to-day corporate concerns.

Hans Mazenauer, Managing Director of European Risk Frontiers project sponsor HDI-Gerling in Switzerland, said one of the reasons why risk management is not an easy sell to the board or other managers is because it can be perceived as being all about risks and costs rather than opportunities.

Mr Martin said that this was an important point and stressed the need for risk managers to sell the upside as well as the downside of risk management.

“The old adage that there are two sides to a coin is relevant here and these sides are risk and opportunity.

If you are analysing a risk then you should also see opportunities. If you cannot establish the right balance and relationship between risk and opportunity then you will always have problems and just be asked the question: Is it insured?” said Mr Martin.

One of the key messages for risk managers to convey to their colleagues and bosses when attempting to explain the value of the discipline is that they are facilitators not risk owners. This point has to be stressed over and over again, they agreed.

“I always explain that every manager is a risk manager because every decision has to be based on an evaluation of the pros and cons, opportunities and weaknesses before action can be taken based on an educated decision. It needs to be clearly understood that the risk manager is the facilitator of this process, supporting management and helping them make the right decisions,” said Mr Ebneter.

CHALLENGE OTHERS

Ms Hartusch added that risk managers also need to be prepared to play devil’s advocate and challenge decisions made by colleagues and bosses.

Maurizio Micale, ERM and Insurance Management Director of STMicroelectronics based in Geneva, agreed with his colleagues that the profession appears to have failed to take advantage of the ‘opportunity’ presented by the crisis of 2007. It has allowed risk management to become viewed as more of a tick box tool than the ‘fully embedded’ management resource it should be, he said.

He pointed out that a potential barrier might be a perception among management that the ERM process can be a ‘threat’ because it could be used to apportion blame after an event. “It can be viewed as a double-edged sword because if a risk has not been identified and treated properly then risk management can be blamed…so it can be tricky to ‘sell’ the profession,” said Mr Micale.

The Switzerland-based Italian said that he refuses to blame lack of resource for any lack of understanding of the value that risk management can bring because it really ought to be embedded in the culture of the company.

“I say it is not me that has to identify the risk and assess it. I am there as the enterprise risk manager to facilitate the process and bring the discussion at the high end to help managers find solutions. You have to be prepared to make people think. Management has to understand that risk management is here to help them think outside the box and conceive the unconceivable,” said Mr Micale.

In his opinion the understanding of the true value of risk management will come in time. “For sure, in five years time there will be more maturity. There is a lot of pressure from shareholders, regulators and other stakeholders for business to be managed on a risk basis. Look back 10 to 15 years and you will find a lot of things have changed,” he said.

8/6/15 16:09:38

Switzerland

14

Contract MANAGEMENT CRITICAL AS CUSTOMERS AND SUPPLIERS TRY TO SHIFT risk

Adrian Ladbury aladbury@commercialriskeurope.com

[ZURICH]—CONTRACTS HAVE ALWAYS BEEN a critical part of risk management as they are supposed to ensure that project risks, ongoing relationships and supply chains are fairly and properly apportioned and managed.

The stresses and strains brought on by the global economic downturn since 2007 and sharp focus on costs has, perhaps not surprisingly, persuaded many companies to try and manage their operational costs and liabilities by trying to shift as much as possible onto customers, partners and suppliers.

Risk managers are finding themselves increasingly dragged into the heart of this battleground and need to take a keen interest in this matter.

Sales and marketing teams under intense pressure to hit targets will look for any incentive to win a key deal and will not necessarily understand the level of risk to which they are exposing their company by giving away too much in the contract terms.

“We can be seen as the bad boys because on the one side you have the commercial teams pushing for new business and new contracts and on the other side there is risk and insurance management that can be seen as the show stoppers. One of my biggest issues is that we as a company stick to the liability and indemnity provisions set out in the industry’s standard agreement defined by IATA. But airlines are pushing hard to increase our liability exposure which would happen if we did not hold the contractual line,” explained Dominik Ebneter of Swissport International.

“This is always difficult to explain to the

RISK FRONTIERS

commercial team. They want to sign the contract right away because it means growing revenue and the top line for them. What they do not tend to look at is the bottom line which looser contract terms could wipe out in a second,” continued Mr Ebneter.

Stuart Martin of Bombardier Transportation agreed that contracts have become a much more important part of his role as insurance and operational risk manager in recent times. He said that the key is to help find the right balance.

“You have to try and keep the customer happy and then transfer risk to suppliers and of course they push back. The sales team just want the contract signed to secure the revenue and we probably could, but ultimately it would cost us. We are working in the rail components sector and suppliers will have €1m of cover that is just not acceptable when we are buying limits of up to €140m,” explained Mr Martin.

Mr Ebneter agreed that it can be difficult to explain the concept of the total cost of risk that a one-in-twenty or one-in-fifty-year event can have to colleagues, particularly those in sales who have a natural focus on revenue generation.

“Sometimes there is a problem simply understanding why we cannot accept the terms because we have insurance to cover the risk. But we have to think about the longer term. Insurance is in place and is not a problem but we also need to control the total cost of risk in the long run. There is a lack of understanding that insurance is in place to take the volatility out of the balance sheet and not just a short-term fix and that the total cost of incurred losses or claims has to be financed over time by the insurance premium we pay,” he said.

Insurance background holds back risk management

T

HE SIRM MEMBERS AGREED that the job of selling risk management is not made easier by the fact that risk managers within corporations still almost overwhelmingly come from an insurance background.

This can hamper the wider corporate view of what risk management is all about and the value it can bring.

For this group, risk management education should actually be more about educating the board and other managers rather than the risk managers themselves.

“There is certainly a lack of understanding of the role of risk

management,” said Dominik Ebneter of Swissport International. “For me I do not think the key challenge is training and capabilities for individual risk managers, developing the job title or growing your individual profile, but rather improving the understanding of what risk management should be in every company,” he continued.

“Our role is to facilitate risk management. What risk management can really do for a company needs to be understood by the board and driven down from there. It is necessary for highlevel managers to be better aware of the risk management function and how it

can benefit them,” said Mr Ebneter.

The fact that the vast majority of European risk managers come from an insurance background does not help board members and other managers truly appreciate risk management, according to this group.

“Board members need to ask how a risk manager can be better used and not just thought of as an insurance manager.

That perception is still there. Insurance management is a very important part of the risk management process, but ultimately insurance is a form of risk financing and hence is one of the tools a risk manager has available at the end

of the day. It is not the sole answer or a process. It is just a tool,” said Mr Ebneter.

Stuart Martin of Bombardier Transportation agreed with his SIRM colleague. “A lot of risk managers come from an insurance background and grabbed the title of risk manager when they were really just insurance managers.

This makes it more difficult to build a standalone risk management profession and profile. Airmic in the UK used to be the association of insurance managers in industry and commerce and has now added risk management. So maybe we have come at this from the wrong direction,” he said.

—Adrian Ladbury

Process improvement should be number one focus for insurance market [ZURICH]—THE SWISS RISK MANAGERS AGREED THAT PROCESS IS THE KEY

area for improvement when asked what the insurance market needs to focus upon to up its game.

The risk managers also agreed that improved contract certainty, transparency and a global footprint to service international risks are critical in today’s market.

Stuart Martin of Bombardier said: “Processes, policy, wordings and invoicing are the key words. I want my policy in 30 days not 120 and when I make a payment I want it to happen immediately. The back office needs to be as flexible as the front office.”

“I need coverage quickly for things like intellectual property, which is becoming increasingly important for all of us,” said Sabrina Hartusch of Triumph. “Why can’t existing insurers include this quickly? This is about flexibility and treating customers more as customers and not taking a line of business approach,” she added.

Dominik Ebneter of Swissport International agreed that process is key and flagged up the need for a more industry-specific and flexible approach from insurers.

“For the past five years I have been calling for more flexibility in the process. The insurers need to amend the coverage for key areas such as contingent business interruption to the specific industry. Our industry is different to other industries and so insurers need to find better solutions.

But if we take it up with our insurance partners it usually works out well,” he said.

“We recently had a claim that involved big discussions about whether we were covered or not because half a sentence was missing. Because

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of that the insurer tried to avoid writing out the cheque. This really is a relationship question and about buying power and negotiation. If you have the power then things suddenly go the way you want it to and should have gone from the start,” continued Mr Ebneter.

Maurizio Micale of STM said that he had always tried to clarify clearly what he was buying because of the relative lack of contract certainty inherent in insurance.

“In my opinion, the insurance industry should be more efficient. We need more certainty of coverage and ultimately more transparency on policy wordings. For instance, business interruption coverage is quite a grey area and hopefully it should be standardised. Today, corporations are obliged to file balance sheets according to US GAAP and/or IAS/IFRS accounting standards and principles which have been designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. So I do not understand why the insurance industry finds it so painful to clarify BI and CBI adopting global accounting standards and principles,” he said.

Mr Ebneter pointed out that a form of standardisation has been available in the London market for many years for large capacity risks such as aviation. However, he added that he has moved away from the London market because the primary liability market was not set up for his needs because of a lack of a global network. He said he needs support in 48 different countries for this coverage. He still uses excess capacity on a standard wording basis in the London market.

Mr Martin said that he was surprised by Mr Ebneter’s problem with London as he knew of other aviation programmes placed in

London with similar global footprints.

Mr Ebneter said that the problem was that the broker had to find local coverage in each territory covered as well as the central coverage in London. He had to pay 100% of the premium to the London market and then the subsidiary had to pay 100% to the local insurers. Then the broker had to collect the balance from the local insurer and pay it back to him which made it all very time-consuming and costly.

Both Mr Martin and Mr Ebneter agreed that the best solution to this problem was to use a big international insurer with offices on the ground across the world.

“Footprint is more and more critical. Global insurers are able to give direct access to new markets such as India, or they have a fronting partner so you can go straight there. We do not want to use a local insurer that has no credit rating or an odd approach to paying claims. One problem that this creates, however, is that you can only really use one of two brokers and they are both as bad as each other!” concluded Mr Martin.

HDI-Gerling is as aware as its rival insurers that it needs to expand its global footprint and meet the demands of major customers. It has recently invested in emerging markets such as India.

Hans Mazenauer, head of the firm’s Swiss office, said he recognises that the insurance industry has significant potential to improve its servicing efficiency.

“We can certainly further digitalise, but at the same time there will always be the need for individual and tailored products especially in the large account area,” he said.

—Adrian Ladbury

8/6/15 16:09:59

RISK FRONTIERS Switzerland

15

Emerging risks demand solutions not products Adrian Ladbury aladbury@commercialriskeurope.com

[ZURICH]—THIS YEAR’S PANEL OF SWITZERLANDbased risk managers agreed that emerging risks such as cyber are proving difficult to crack partly because insurers, and to an extent brokers, are trying to squeeze them into products.

The reality is that such broad-based risks are very difficult to pigeonhole in such a manner and require a more holistic approach that involves services and consulting support more than risk transfer, argued the risk managers.

More fundamentally, business strategy should not be based upon the availability or otherwise of insurance, agreed the risk managers.

“If you look at the top 10 risks identified in surveys, at the end of the day always four or five of these risks, and usually the most important ones such as reputation, compliance or demographic change, are not insurable.

There is no insurance solution. Do we really believe there is only insurance coverage for a risk as broad as cyber?” asked Maurizio Micale of STM.

CYBER SYSTEM

Stuart Martin of Bombardier Transportation agreed.

“This is where we keep letting ourselves down. We keep looking for insurance solutions such as in cyber. I am on the customer advisory board of the one of the biggest corporate insurance groups based in Europe and we recently had a meeting to discuss cyber. We asked how this risk can be quantified and received a set of blank stares in return! How can insurers be expected to come up with coverage that really works if they don’t know how to quantify it? Especially when the customer asking for the insurance product doesn’t know how to quantify it himself or herself,” he said.

Mr Micale said that the current range of cyber risk products available look more like marketing efforts that do not have a great deal of substance.

This is a concrete example of how insurers will find it increasingly difficult to sell products to diverse and complex multinationals in a manner that fits their historic business model over time.

“The reality is still that the insurers and brokers struggle with corporations’ needs and expectations. There

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are still a bunch of risks that are not fully insurable.

Ultimately, what corporations need are suitable solutions.

In my opinion, over time insurance shall combine risk management IT professional services with financial capacity and the coverage will become much more of a commodity business and insurers will differentiate themselves for the global proposal they might offer to meet corporate market demands and needs,” said Mr Micale.

Dominik Ebneter of Swissport International agreed with fellow participants that it is dangerous for risk managers, brokers and insurers to think that complete solutions can be found in such complex and diverse areas such as cyber. However, he does not think the market is completely wasting its time on cyber, but is rather just finding its feet.

“To just focus on what is insurable is completely wrong, it is ‘putting the cart before the horse’ as you say in England. Insurance is a risk financing tool, it is just a potential mitigation tool and not the answer or right tool for every risk. You have to assess and evaluate the exposure first then consider the risk financing options along with other risk mitigation measures available to the company. That is not to say that elements of the risk are not insurable. It is a soft market and insurers need to look for new products. We had a similar situation 20 years ago with D&O and now everyone buys it. The insurance market is doing the right thing,” he said.

Mr Ebneter also said that the insurance market needs to focus its efforts on industries that have real exposure to cyber risk and not try and sell cover to everyone.

“We have made an assessment of our exposure and decided that our industry is not exposed to cyber risk. The insurance industry needs to think what business clients are in, what cover is relevant and focus on areas like IT and financial services where companies are dealing with sensitive customer data on a daily basis. Other companies may need to look at technological solutions rather than insurance to protect the risk,” he said.

Hans Mazenauer, Head of HDI-Gerling in Switzerland, said that cyber insurance is an area ‘under development’ and has some way to go before it is perfected. This is clearly one risk area that needs true partnership between risk managers, brokers and insurers, he said.

“Of course it is an interesting business opportunity for us. But we have not ‘made up the risk’. It is there and more and more visible,” said Mr Mazenauer.

“The fact is that many customers are looking to their insurance providers as sparring partners to support them in the analysis of the risks and share some of the experience we have. So it is about getting the process started, we can help there,” he continued.

Such discussions are not only confined to cyber. The risk manager needs to go through the same evaluation process for all of his or her company’s risks.

EXPANSION EASE?

Mr Ebneter said that his company, like many others currently, is expanding to new markets in potentially politically unstable parts of the world such as the former Soviet Union, Africa and the Middle East. His job is to assess the risks attached to this expansion and, as part of that process, investigate whether political risk insurance is a viable option.

“Political risk insurance is possible to help mitigation but we may decide to retain the risk on the balance sheet.

As a risk and insurance manager I have to carry out a proper evaluation and prepare for a conscious management decision. It is not just about buying insurance and thinking the risk has been managed,” he explained.

Mr Martin agreed. “You have to remember that there are three options—manage, transfer or finance the risk.

There can be a tendency to just go straight to insurance but you need to ask first if there is a better alternative.

You have to ask whether the coverage you buy in some parts of the world is worth the paper it is written on and whether you would simply be better managing the risk,” he said.

Sabrina Hartusch of Triumph added that it is important to present the analysis and options to management so that informed decisions can be made when expanding.

“There are a lot of big companies moving to Africa.

This is a pure business decision. One of the main drivers cannot be whether it is easy or difficult to find insurance. I never see myself as holding up expansion,” she said.

Mr Micale agreed. “Any company business model should never be based on insurance. Insurance is an option to help manage to mitigate the residual risk and the risk appetite as self-insurance retention. Over the last 20 years, the insurance industry has contracted severely on a number of occasions following major losses and so it cannot be relied upon. Managers have to build the business models without insurance!” he said.

8/6/15 16:10:08

16

Switzerland

RISK FRONTIERS

Capital markets offer viable option for large corporations Adrian Ladbury aladbury@commercialriskeurope.com

[ZURICH]—CAPITAL MARKETS COULD PLAY A DIRECT role in the management and transfer of risk for large corporations, agreed the Switzerland-based risk managers who took part in this year’s European Risk Frontiers survey.

But it is unlikely that such capital will be simply and easily put to work. This potential market will take some time to come of age, if at all, they said.

Dominik Ebneter of Swissport International is actively looking at the options. He said one risk that regularly sits towards the top of the exposure list is a pandemic. A genuinely global pandemic would bring air travel to a standstill and thus hammer Swissport’s business.

“We would struggle severely to deal with such an event. The interruption of revenue would be incurred immediately. In addition many airlines across the world could go out of business and this would increase our credit exposure immediately. We have discussed this with our insurance partners but currently insurance for this exposure is untenable.

The accumulation risk would be too high…the Ebola crisis showed just how exposed the insurance industry would be to such a global pandemic.

Insurers would also be exposed if they have a life business too. This is a problem for the insurance industry,” said Mr Ebneter.

ILS EXAMINATION

“One solution that I am looking at is a catastrophe bond. We are at a very early stage but there is a possibility of creating an insurance-linked security (ILS), backed by the capital markets and not the insurance market, that would protect our balance sheet,” he continued.

Stuart Martin of Bombardier said that he understood why Mr Ebneter would consider this option but asked whether it would not be more cost effective to use a captive to retain and manage the risk and build up the fund over time.

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Mr Ebneter agreed that this would be a potential route but pointed out that if 25% of the group’s annual turnover of CHF3bn was hit by a pandemic then the capital needed to fund the captive would simply be too high.

Mr Martin said, however, that on the same basis, the cost of the catastrophe bond would presumably be very high. He wondered whether this would be a risk that governments should consider funding on the same basis as Pool Re in the UK or TRIA in the US whereby the state backs a terrorism pool.

Sabrina Hartusch, current president of SIRM and risk manager for Triumph, the Switzerlandheadquartered underwear and lingerie firm, said that she could see how a capital market instrument might work for her firm because its demand is dependent on the weather.

“The fashion industry is also highly driven by the weather, particularly the beach season. If I went to the CEO and said if I can predict what will happen with demand because of the weather so you can invest more accurately in production and this is backed up by a risk transfer solution I am sure it would spark interest. I just think that nobody has raised this question with the CEO,” she said.

One big problem with the whole alternative risk transfer market, however, is the focus placed on it by past New York attorney general Eliot Spitzer who campaigned fiercely against the use of products such as time and distance policies.

This attracted the attention of accounting bodies such as the Financial Accounting Standards Board (FASB) in the US. They ultimately determined that such products were not actually insurance but really revenue smoothing tools. Also, more recently, US tax and insurance regulatory authorities have been taking a long, hard look at the transfer of US risk from US-based insurers to reinsurers in the same group based elsewhere such as Bermuda.

“A lot of people were bitten by Spitzer and so backed away from this part of the market because it was deemed to be profit smoothing and many companies were fined. People are now more reluctant to play in ‘grey’ markets such as this.

When I was working for National Express Group

my captive was investigated by the US regulatory authorities, along with many others. Our ART programme run through the captive met all of the compliance requirements set. It still rang alarm bells. People do not want such headaches and are backing away, which I think is a shame because some of these solutions are genuinely valuable,” said Mr Martin.

Mr Ebneter pointed out that he does not see a problem with the latest capital market solutions. He said that, as with the fashion industry, his company is also heavily exposed to the weather, if only because it is responsible for de-icing its customers’ aircrafts.

SEASONAL FACTORS

“This is a very seasonal business. If we have strong winters then that is good for us. If they are mild then it is not. There is a natural hedge because we are active in this market in both North America and Europe but it is not perfect. Therefore we are looking at a weather derivative-type solution.

Treasury takes care of financial-related hedging such as interest rates and currency, but this is operational risk and that is why it is with me,” he said.

“This compares with insurance that is nothing other than a put option that hedges a company’s P&L and balance sheet against the financial downside an insured event otherwise would have,” added Mr Ebneter.

Hans Mazenauer, Managing Director of Risk Frontiers sponsor HDI-Gerling’s Swiss operation, said that it is difficult to make a direct comparison between what is offered by the insurance and capital markets.

“Insurance should not only be reduced to the role of providing capacity. We also provide a number of services that are appreciated or even demanded by the market such as claims handling, policy issuance, fronting, risk engineering and the like,” he said.

“We are operating in areas that are very transactional, sometimes with relatively small deductibles, and these are areas that are not attractive to capital markets,” added Mr Mazenauer.

8/6/15 16:10:25

BEHIND THE NEWS Narim 2015: Risk Manager of the Year

17

Commercial Risk Europe hears from Narim’s risk manager of the year Otto Bekouw and takes a look back at the key message from the association’s annual congress

Narim’s risk manager of the year NARIM CONGRESS 2015

Nicholas Pratt news@commercialriskeurope.com

O

tto Bekouw, Head of Insurance and Risk management at technology firm Royal Philips, was presented with Narim’s 2015 Risk & Insurance Manager Of The Year award at the association’s annual congress in Utrecht.

A former vice president and board member of Narim, Mr Bekouw is a familiar face in Dutch risk and insurance management circles. In addition to the many years spent organising the association’s annual conference, Mr Bekouw also participated in Narim’s collaboration with the Young Insurance Initiative whereby experienced risk professionals mentor young talent in the industry.

Mr Bekouw also co-established a Narim working group for captives in 2009 to help with the implementation of Solvency II. “The group acts as a forum for us to share ideas and to act as a conduit to the Dutch Central Bank so that we are dealing with the regulator as a group rather than individually,” he told Commercial Risk Europe.

More recently Mr Bekouw and his risk management team at Royal Philips have been focused on cyber risk. A new insurance solution was put in place at the beginning of the year after a 12-month planning process. The programme was placed in both the Dutch and London markets.

“We took a very extensive look at our exposures. We worked with a large group of internal stakeholders to get an understanding of the risks and to build a risk profile. We also spent much time selecting the right broker and a suitable panel of insurers,” explained Mr Bekouw.

“We wanted a policy that best matched our specific needs, our own manuscript wording and a pre-agreed claims process.

Cyber risk requires a very different type of approach compared to traditional lines so it was important that we had all the

[FROM LEFT] Otto Bekouw and Dirk van Tijk right people around the table and that we fully understood the risk before we obtained the sign-off to purchase the policy. It is vital that we know what is and especially what is not covered by the policy,” he added.

Much of Mr Bekouw’s focus for the rest of this year will be on the impending restructuring of his company. In September 2014, Royal Philips announced that it would establish two separate operating units, one for the lighting—Lighting Solutions—which will probably be the subject of an initial public offering next year and another for consumer and healthcare, which will be rebranded as Philips HealthTech.

For Mr Bekouw and his nine-strong insurance and risk management team there will be a similar restructuring. “We have to get ready to have two teams, two separate insurance programmes and ensure that all the policies are fit for purpose.

A new captive structure will also need to be implemented. The knowledge transfer between the two teams and the allocation of the colleagues to both businesses will be a challenge and we will have to rethink some of our internal and external processes,” he said.

The theme of this year’s Narim Congress was Risk Awareness: Top Of Mind. Addressing delegates, the Dutch risk and insurer manager association’s vice-president Ronald de Vos said that despite the progress made by the risk profession there is still a long way to go to ensure risk management is at the forefront of colleagues’ minds.

The Narim Congress heard from several experts who stressed that although risk managers have focused on getting their voice heard in the boardroom over recent years, the work floor presents the biggest barrier to embedding risk management throughout an organisation.

A poll of audience members at the Narim Congress revealed that 64% consider the work floor the hardest part of the organisation to convince of the benefits of risk management, compared to management (19%) and the boardroom (17%).

“If you have the confidence of the work floor, it will convince the boardroom and you need that boardroom support to get a project started. But once you do, you need to keep improving and affecting change in the behaviour of colleagues. You have to add value and create incentives. That is where our role is changing—from traditional risk and insurance management to operational risk manager and a trusted adviser,” said Mr De Vos, who is also corporate insurance manager & legal counsel at Nutreco NV. Narim’s attention will now turn to next year’s congress that will mark the association’s 20th anniversary. It will be held over two days on the 26th and 27th of May at the Hotels Van Oranjes and Beach Club in Nordweg.

WHAT ARE THE ODDS

of no surprises?

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8/6/15 16:09:26 6/4/14 10:22 AM

Matt Cullina, IDT911

18

BEHIND THE NEWS

Matt Cullina, CEO of identity theft and data breach protection company IDT911, talks to BEN NORRIS about the difficulties European insurance buyers face in navigating the developing but complicated cyber market and best risk management practices to tackle what he believes are still underestimated cyber threats

Navigating the

cyber conundrum [SCOTTSDALE, ARIZONA]

A

CCORDING TO MATT CULLINA, European insurers are warming to cyber risk. Better transfer solutions are developing with further progress on the horizon, but a lack of data is still holding back the market, he added.

Insurers are in the process of building out coverages and networks of IT specialists to help insureds transfer, measure and deal with the consequences of European cyber risk, said the IT specialist. He believes further progress should come comparatively soon.

He pointed out that while it has taken 15 years for cyber products to develop in the US and become a mainstream coverage for insureds, it took just five years to get to a similar point in Canada. The hard work carried out in the US means that the European cyber market will develop much more quickly, he argued.

However, while insurers are making progress on European cyber risk they are still held back by a ‘pretty major information gap’, primarily caused by a lack of loss data on which to base cover, said Mr Cullina. He pointed out that currently there is no central source of cyber data in Europe.

Modellers remain a way off from supplying answers to cyber risk, he said. “Over time predictive modellers will bring everything together but I think that is still years away.”

Mr Cullina explained that the lack of uniformity and many exclusions in cyber coverage means risk managers face a daunting task to decipher the merits and value of transfer options. He advised risk managers to ask their brokers for help but also challenge their intermediaries on any advice given.

EXCLUSIONS COMMON “There is little uniformity in these programmes from a coverage standpoint. These policies have the same sections but there is a lot of conditional language and a lot of exclusions. So if you are a risk manager trying to sort all this out it can be pretty daunting. There is a big gap in knowledge here. It’s not like commercial liability insurance where risk managers know what to look for,” he said.

He said exposures and coverage get particularly murky for what are known as zero day events—the digital version of a catastrophe.

For example, if the power grid of a major city is taken down or a payment processing firm servicing a huge swathe of the business community has system failure, cyber coverage is often excluded, said Mr Cullina.

“There is a lot of conditional language in those policies whereby if the event is once removed to a vendor you are working with or you yourself have a catastrophic event there may be no coverage. It is that kind of investigation that is needed rather than a trivial look over the application. The risk manager needs to review the policy and challenge the broker on what is covered and what is not because on some policies it is pretty restrictive,” he explained.

According to Mr Cullina, every survey he has seen or his company has conducted reveals that many businesses have a false sense of security over cyber risk.

“Most organisations don’t think a breach is going to happen to them, they think they are bullet proof, but in reality are as exposed as any other business.

When you ask the follow-up question of what have you done to invest and train to avert a breach the usual answer is not much,” he said.

He believes this attitude is prevalent because

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Matt Cullina

many organisations don’t properly monitor cyber attacks and breaches. “It is only once you start paying attention and monitoring this stuff that you start to see intrusions—it is all about best detection and response,” he said.

Those firms that adhere to best practice cyber risk management and detection tend to uncover a higher frequency of breach than they initially expected, said Mr Cullina. But because of the mitigation work carried out the severity of these breaches is usually low, he added. However, Mr Cullina said that those organisations that don’t properly manage or track cyber risk are much more likely to be hit by the catastrophic loss.

In order get on top of cyber risk, organisations need to decide who is in charge of this oversight, continued the IT expert. This task shouldn’t be left to the IT department, he added.

“This is the biggest conundrum for companies.

The IT folks serve a role but they shouldn’t be overseeing information security practices. They should be at the table but not in charge. Companies must decide whether to hire a privacy officer and use a compliance approach or handle all this within the risk management department and strategy. That person needs to have independence,” he said.

He advises risk managers and their organisations

SNAPSHOT: IDT911 ■ IDT911 IS A US FIRM SPECIALISING IN IDENTITY THEFT AND DATA BREACH protection. It works with the insurance industry to develop cyber coverage and its services are often supplied to insureds through insurance products. The firm also works directly with organisations to help them prepare for and respond to identity threat or data breach.

IDT911 has previously focused on the US and Canadian markets but now plans to expand in Europe.

In March the firm opened a call centre in Galway, Ireland to serve as a hub in Europe. It will serve large companies through to small enterprises. The new Galway operation will create a multilingual contact centre and team of cyber experts.

IDT911 plans to begin its work with insurers and corporates this side of the Atlantic in the UK and Ireland and then expand into continental Europe.

In continental Europe it is targeting France, Germany, Spain and the Benelux countries.

to test cyber response plans. This approach is increasingly common for mid- to large-market firms, particularly in the US, and produces excellent insights and tangible benefits, he said.

“People run war games and bring people round a table to discuss how they would respond in particular instances. Those are fantastic and really worth investing the time and effort at least once a year.

They allow everyone to know their role in the process and make everything more tangible and real,” said Mr Cullina.

TO ERR IS HUMAN IDT911 has handled over 3,000 breaches and sees human error as the main cause. Mr Cullina said around 40% of breaches are related to human error.

“It is really an issue with people letting their guard down or just not being aware. We also see rogue employee situations, but the biggest issue we find is a lack of education at ground level and employee level,” he said.

So although investment in technology is important for data protection, employee training goes a long way to bridge the gap between secure and unsecure data, he said.

Mr Cullina noted that organisations do face exposures when operating in the cloud. Companies’ relationship with cloud vendors is critical to manage any exposures that do exist, he added.

“There is an exposure in the cloud. All of the regulatory regimes talk of you having ownership and oversight of any vendor exposure that exposes your customers’ data. You are the custodian of that data whether it is in your shop or the cloud. Usually those cloud agreements are very one sided and vendors don’t accept any liability for any data exposure in the cloud. So companies need to scrutinise those things but don’t have a lot of leverage, even if they are a large business. Therefore companies must carry out appropriate due diligence,” he said.

However, Mr Cullina noted that the risk of operating in the cloud is generally low because vendors take cyber security extremely seriously.

“In reality data storage for cloud computing companies is their business so they put a lot of time, effort and money into data security. So the risk is low but you just need to be aware of it,” he advised readers of CRE.

8/6/15 16:11:05

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8/6/15 16:00:40

INTERNATIONAL PROGRAMME NEWS

20

» THE BEST OF IPN Commercial Risk Europe’s International Programme News (IPN) is a monthly web-based service that delivers news and analysis on risk transfer and financing developments at international level. It examines initiatives from insurers, brokers and captive managers to help risk and insurance managers improve the way they manage and transfer their cross-border risks. Below is a leading article from last month’s edition.

You can access the full IPN newsletter at http://www.commercialriskeurope.com/ipn-home/ipn and sign up to receive the monthly email alert at http:// www.commercialriskeurope.com/ipn-signup.

AON SURVEY REVEALS

GLOBAL PROGRAMME TRENDS

A

ON’S 2015 GLOBAL RISK Management Survey has identified a trend towards less central control of insurance purchasing at all levels, even at the largest multinationals. The survey finds a small drop in the number of multinational firms using corporate headquarters to control procurement of all insurance programmes— including global and local coverages—and an increase in local units making their own arrangements. However, central control remains by far the most popular option.

The biennial survey also reveals that fiscal compliance—the ability to pay insurance premium and related taxes—has become an increasingly important factor for insureds placing multinational programmes.

General liability and property coverage continue to be the lines of business most frequently purchased on a multinational basis.

However, there have been significant increases in the number of survey respondents purchasing multinational programmes for other lines, including D&O liability, workers’ compensation, employers’ liability and crime.

Aon’s Global Risk Management Survey 2015 polled 1418 risk professionals, C-suite executives and ‘others’ across the globe. Each of these three groups accounted for roughly one third of the total responses. They were spread across the regions of Asia Pacific, Europe, Latin America, Middle East & Africa and the US. Although globalisation itself has fallen four places in the survey’s top-level risk ranking from 2013 to number 36, it remains a consistent theme for companies pursuing improved operational results. Of the 20 top risks identified by respondents, almost three quarters can be tied directly or indirectly to international exposures, said Aon. As in previous surveys, the Aon research asks respondents about how they control risks and place corresponding insurance. The number of multinational firms controlling all insurance from corporate headquarters is down by 4% from 2013 to 45%. This percentage has fallen across nearly all types of multinational organisations—from those operating in just two to five countries to those active in over 51 countries.

At 45%, complete central control of

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insurance purchasing remains the most popular option for multinationals. 44% of respondents said corporate headquarters has control over some lines while leaving local offices to purchase other areas of cover. The remaining 11% said local operations are left to buy their own insurance with no coordination from corporate headquarters. This is up from 8% in 2013.

Aon said this was a ‘significant’ increase.

It pointed out that such arrangements are most frequently employed by multinationals with operations in two to 10 countries. It happens in just 7% of firms operating in 26-50 countries and 6% of firms present in over 51 countries. However, with both figures rising from 4% in 2013, the findings suggest a trend towards less central control even at the largest multinationals.

Once again coverage certainty— understanding what is included in the programme—is seen as the most important factor in multinational programme purchase decisions. As in 2013, this is followed by costs and whether multinational programmes are the most economical option. Statutory compliance—access to locally admitted coverage where non-admitted is prohibited—again ranks third.

But fiscal compliance—the ability to pay insurance and related taxes—has leap-frogged programme performance. This suggests that ‘regulatory compliance has trumped service for this group of respondents’, said Aon. Consistent with prior year results, general liability (81%) and property damage (79%) are the most frequently purchased multinational programmes. These percentages are roughly in line with 2013.

The next three most popular lines—D&O, marine and workers’ compensation/employers’ liability—are increasingly placed in global programmes, according to the survey.

The number of respondents buying global D&O coverage has risen to 73% in 2015 up from 63% in 2013. Those placing marine has climbed to 49% from 43%, and workers’ compensation/employers’ liability has jumped to 48% from 39%. The number of respondents placing global crime policies has also risen, up to 42% from 32% two years ago.

Speaking on the survey’s findings, Aon said that as regulatory controls dictate how and what

insurance coverage is to be procured, along with what taxes or fees are to be paid for risk transfer in a given geography, ‘there continues to be a need to review how multinational risk finance programmes may respond to a claim’.

This includes how and where indemnities may be paid and what, if any, costs may be due depending on the structure of the programme placed. In addition, companies should look at the financial design and allocation of related premium costs across the firm, Aon added.

It noted that as regulatory controls have increased, become better defined and more strictly enforced, market offerings have also evolved.

In some cases, these changes create greater opportunity for multinational firms to align their risk finance structures to address countryspecific regulations, said the broker. In other cases, market offerings are more clearly defined as to how, where, and on whose behalf a policy may or may not respond, it continued.

“These market developments mean insurance buyers need to consider how and what they may be purchasing. Their final purchase decision will have to balance the local needs of far-flung operations against the efficiency of centralised acquisition of coverage,” concluded the broker.

—Ben Norris

» CAPTIVES GAIN MOMENTUM The soft market has not slowed the global march of captives, according to Marsh.

Emerging risks and emerging markets are fuelling growth in captive use around the world, according to a new benchmarking report published by Marsh entitled The World of Captives: Growth and Opportunities Without Borders.

Captives are increasingly used by businesses to provide cover for non-traditional risks, and a growing number of US captives are taking advantage of the newly extended Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA), the report says. Meanwhile, Latin America and China are expected to see sustained captive growth as risk management takes hold.

The report found that the number of captives writing non-traditional coverage lines rose overall by 11% in 2014. The biggest increase came from political risk, where captives that include political risk rose 83% in 2014.

Additionally, the number of captives writing cyber liability grew by 18%.

“It is expected that the number of captives underwriting non-traditional coverage risks

will grow as captives develop within the middle market, due to the large catastrophic lines of coverage underwritten by small captives and the need for mid-size clients to self-insure certain risks, all making them natural fits for a captive.

We have also noticed traditional captives are more eager to expand their business by including lines that were previously uninsured,” said Marsh.

It noted that political risk, or foreign investment risks, are increasingly included in captives around the world, especially in captives in the communications, media, and technology industry, where 9% of the companies included some political risk coverage. The broker explained that this type of programme is used to protect companies that export or have operations in foreign countries, mostly in emerging markets, against the volatility and risk derived from the interaction with those markets.

It also pointed out that since political risk coverage looks at the parent company’s balance sheet and provides protection to that balance sheet, a captive can write a parent risk without needing to do business in each local country.

This eliminates concerns regarding the admitted and non-admitted rules in each country.

“As more companies use data and analytics to better quantify their emerging risks and optimise their retained risk, the utilisation of a captive to finance retained traditional and emerging risk is a logical next step,” said Christopher Lay, President of Marsh Captive Solutions.

Following the newly extended TRIPRA, the number of captive owners taking advantage of the government programme is expected to rise in 2015, according to the report.

It found that only 83 (22%) of the 374 US captives under Marsh management currently access TRIPRA by writing either conventional terrorism coverage for property damage or the excluded nuclear, biological, chemical and radiological perils.

“One of the surprising findings from this year’s report is that more captive owners are not taking advantage of the US government programme, which essentially gives companies a backstop to their property and/or general liability exposures for terrorism risk,” said Mr Lay. “Now that concerns over TRIPRA’s reauthorisation have been resolved, we believe growth will resume and more captive owners will investigate the value of adding TRIPRA coverage to their existing captives.”

Businesses in Latin America, Asia and the Middle East are all exploring the use of captives as risk financing becomes more sophisticated.

—Tony Dowding

8/6/15 16:10:52

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8/6/15 15:59:18

E-NEWSLETTER

22

» THE BEST OF THE WEB Commercial Risk Europe reports the leading news stories of relevance to Europe’s risk and insurance managers every week in its electronic newsletter.

Below is a round-up of the most popular articles published last month.

To sign up for the free CRE weekly newsletter please go to http://www.commercialriskeurope.com/ more-information/newsletter/sign-up-here

» ISO 31000 MAY FACE IN-DEPTH REVISIONS TO MEET NEEDS OF MULTINATIONALS AND GOVERNMENTS THE CURRENT REVIEW OF ISO 31000 AND accompanying Guide 73 has revealed the need for a high-level document or standard that better reflects the way risk is managed in multinational organisations and national governments.

This could demand a full technical revision of 31000 or take the form of a separate ISO risk management standard.

ISO 31000:2009 Risk Management—Principles And Guideline and the accompanying Guide 73:2009 Risk Management—Vocabulary are going through a mandated five-year revision process.

It was expected to be a limited review of the two documents. However, following a consultation process, the ISO working group managing the process has decided that there is the need for a ‘high level’ ISO document that aligns with the needs of multinational organisations and governments.

ISO says these requirements could be included in ISO 31000. This would demand a full technical review of the standard and see the revised document delayed until late 2017.

Alternatively, ISO could carry out a limited review of 31000 and then move on to develop the high-level standard on risk management.

This option would likely see ISO 31000 revised by the middle of next year.

ISO/TC 262/WG 2—the working group responsible for developing core risk management standards—gathered from 3-9 March 2015 in Paris to discuss necessary changes to ISO 31000 and its accompanying guide.

These were expected to take the form of a limited review, explained Kevin Knight [pictured, above], Chair of ISO/TC 262 on risk management, in an interview published on the ISO website. But many stakeholders have taken this opportunity to seek greater changes that reflect the needs of major corporations and governments for a high-

22-CRE-Y6-05-BoW.indd 22

level risk management document, he said.

“The widespread use of ISO 31000:2009 has prompted a variety of questions to various experts, with national standards bodies and ISO seeking clarification on certain points of the standard. These points, combined with feedback from the national mirror committees, indicated a need to provide greater clarity in some areas,” said Mr Knight on the expected limited review.

“A need was also expressed by risk practitioners, especially in the G20 economies, for a high-level document that reflects the way risk is managed in multinational organisations and national governments, as well as how risk management should be incorporated into the governance and management systems of organisations,” he added on the reasons behind a potential in-depth revision of ISO 31000.

Following these requests ISO/TC 262/WG 2 had to deal with a total of 656 comments when it met in Paris this March.

“While they did complete the task, it has demonstrated the need for a new high-level document that will require a full technical review

by ISO/TC 262/WG 2 to develop a design specification that outlines additional issues to be addressed based on the comments examined in Paris,” said Mr Knight.

The design specification will have to be approved by the participating members of ISO/ TC 262.

“As it stands, ISO 31000 is a generic guidance document, which has been found to be very useful in developing countries and small to medium-sized enterprises. Yet there is a need for something more substantial than the guidelines contained in Annex A of ISO 31000:2009 to help organisations move further onwards, and that is what ISO/TC 262/WG 2 is currently working on,” explained Mr Knight.

The next steps will depend on the work being carried out by ISO/TC 262/WG 2 following the Paris meeting and its subsequent recommendation to ISO/TC 262.

According to Mr Knight there are two potential ways forward.

One would see ISO/TC 262/WG 2 finalise the limited review of ISO 31000:2009 into a Draft International Standard (DIS) and send it out for ballot. It then would undertake a full technical review to develop a design specification for a New Work Item Proposal (NWIP) for a high-level standard on the management of risk aimed at multinationals and governments.

Alternatively, ISO/TC 262/WG 2 may seek the approval of the ISO/TC 262 technical committee to stop the limited revision of ISO 31000 and accompanying Guide 73 and go directly to a full technical revision, Mr Knight said.

He explained that this second route would require a design specification that outlines the issues to be addressed in addition to what has currently been achieved under the revision.

A task group of ISO/TC 262/WG 2 has until the end of June 2015 to develop the design

specification for comment and submission to ballot of the technical committee participating members, along with the latest Committee Draft (CD) of ISO 31000.

Any revised ISO 31000 publication date would depend on which approach is taken, said Mr Knight.

“In the event of the first proposal being adopted, I would expect the revised edition of ISO 31000 to be published in mid-2016. On the other hand, if the second proposal is chosen, then I would hope to see publication of the resultant standard by the end of 2017,” he said.

—Ben Norris

» SOLVENCY II TO BENEFIT CAPTIVES BUT CONCERNS REMAIN PREPARATIONS FOR EU DOMICILED CAPTIVES appear to be on track for the January 2016 Solvency II implementation deadline, although aspects of the new capital rules still need clarification.

Günter Dröse [pictured, below], Chairman of the European Captive Insurance and Reinsurance Owners Association (ECIROA), is optimistic that captives based in EU domiciles— including Dublin, Luxembourg, Gibraltar and Malta—will be ready for the January 2016 implementation deadline. However, there are a number of areas where ECIROA has concerns.

“Captives in general should not have a problem implementing Solvency II next year, although there is the potential for some confrontation with local supervisors where interpretation of Solvency II remains open, most notably around how the principle of proportionality is applied,” said Mr Dröse.

Proportionality is likely to be the biggest issue for captives, which are essentially subject to the same rules as commercial insurers and reinsurers under Solvency II, explained Mr Dröse. There is little guidance on how the concept of proportionality—which gives national supervisors the option of reducing the regulatory burden for less risky insurers—will be applied to captives, he said.

Challenges over proportionality will revolve around ‘simplification without reducing’, according to Derek Bridgeman, Vice President of Captive Solutions for Marsh in Dublin. For example, captives will have to produce the relevant corporate governance and risk management framework policy documents. However, applying proportionality, the process will not be as onerous as for commercial insurers, he said.

“Captive jurisdictions appear to be applying the principle of proportionality, however the impact of Solvency II will somewhat depend on how each jurisdiction translates its requirements into national law and how its insurance regulator then applies those requirements to captives,” said Mr Bridgeman.

Mr Bridgeman believes that captives will be ready for the January 2016 implementation deadline. But implementation has placed additional demands on captive owners and managers, he said.

“The consensus is that captive market readiness has improved greatly for Pillars 1 and 2, which cover the areas of solvency capital requirement and corporate governance and risk management frameworks. This has seen captives complete forward-looking assessments of own risk (FLAOR), stress and scenarios-based testing, as well as reviews of their risk management framework,” he said.

However, for Pillar 3 requirements that cover the area of regulatory reporting, there has been little practical captive engagement with national regulators to date, said Mr Bridgeman.

“2015 should ensure that the captives are in a strong position ahead of implementation, however, this year will be a critical one for all captive owners, particularly around Pillar 3 reporting,” said Mr Bridgeman.

Core rules around solvency, governance and quantitative reporting are ‘stable’, enabling captive owners to prepare for Solvency II, according to Mr Bridgeman.

However, there are a number of areas where clarification is required, he said.

For example, there are areas where Solvency II requirements will overlap with those of existing national regulators. The Irish regulator intends to maintain its SAO Actuarial Certification requirement, but many feel that more clarity is needed over how this will fit with the actuarial function requirement of Solvency II. ECIROA has been working with EIOPA and the European Commission to iron out outstanding issues for captives that require clarification. For example, the definition of a captive under the directive could restrict captives’ ability to underwrite third party liability risks, explained Mr Dröse. This is an issue that has yet to be resolved, although EIOPA is in discussion with the Commission, he said.

There are also unanswered questions for captive owners around equivalent regulation, under which European regulators will recognise insurance supervisory regimes in jurisdictions outside the EU. The Commission is currently negotiating so-called mutual recognition with regulators in Bermuda, Japan and Switzerland.

Equivalency has implications for the treatment of fronting insurers and reinsurers located outside the EU, potentially adding costs for captives, said Mr Dröse. While the Commission has given guidance on equivalency it has not explicitly referred to captives in the case of Bermuda, a major captive and reinsurer domicile.

“While EIOPA has agreed equivalency for insurers in Bermuda Class 4 and above, it did not refer specifically to captives. We have asked EIOPA for clarification,” said Mr Dröse.

—Stuart Collins

8/6/15 16:10:42

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8/6/15 15:59:49

Continued from Page One

NEWS SPHOTO: Ray Attard

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CAPITAL MARKETS: Increasing standardisation and liquidity seen CONTINUED FROM PAGE ONE tropical cyclone risks.

The market is rapidly expanding out of its traditional US catastrophe market.

The week before the event, for example, a new catastrophe bond was launched which is set to become the first securitisation of earthquake risks in continental Europe on an indemnity basis.

The bond, called Azzurro Re, is a €150m earthquake cat bond sponsored by Italian insurer UnipolSai Assicurazioni.

At the Malta event sponsored by Aon, ArgoGlobal SE, Allied World, Atlas Insurance and Royal London, Mr Lohmann explained that the bulk of the assets involved in these deals are actually collateralised reinsurance or insurance-linked warranties (ILWs).

He reckons that there is currently about $24bn in tradable cat bonds outstanding. He did not include capital allocated to so-called ‘Hedge Fund Re’ vehicles in the figures because they are not available.

GROWTH SEEN Mr Lohmann told delegates that alternative capital’s share of catastrophe reinsurance limits purchased is now estimated to be around 20%.

Before discussing the future of this fast-growing market and its possible use for corporate risk managers, Mr Lohmann gave some useful definitions.

He said that the market is defined by investors that seek to purchase instruments that represent ‘pure insurance’ risk as an asset.

This is done typically in a structured format either in the form of a tradable instrument or a private placement of debt or equity (Insurance-Linked Securities) issued by a transformer vehicle that assumes (re)insurance risk on a fully collateralised basis.

According to Mr Lohmann, the main perils transferred today are as follows: ■ CATASTROPHE RISKS: This portion, the largest segment, has high standardisation already, short

01-CRE-Y6-05-News.indd 24

maturity terms and is liquid.

■ OTHER NON LIFE-RELATED RISKS: This is a smaller but growing market.

It is not yet standardised and is less liquid. Risks covered include aviation, marine, motor and health. More recently terror and multiperil crop insurance have been added.

■ LIFE RELATED RISK: This is a large market and is almost as big as the cat segment. It is not standardised, has longer maturity terms and includes a variety of risks including mortality and extreme mortality (pandemia), embedded value, longevity and US Triple X Regulation.

Catastrophe risk dominates this market for a number of reasons, explained Mr Lohmann.

It is a relatively easy risk to explain, comparatively simple to analyse, there are named perils coverages, clear triggers and third party vendor models available to validate pricing.

There is also increasing standardisation and liquidity and most important of all it is not correlated to market risk.

Mr Lohmann said that the real motivation behind ILS is that they enable the efficient management of capital.

They transfer risk, reduce earnings volatility, expand capacity and limit, expand financial leverage, finance growth, protect shareholders’ equity and manage counterparty risk.

“The common objective is to improve or optimise the company’s expected returns and/or reduce volatility,” said Mr Lohmann.

The traditional market has responded to this potential and real threat by joining the party, explained the cat bond expert.

Reinsurers were the first sponsors of risk transfer to the capital markets— Mr Lohmann himself arranged the first bond when at Hannover Re—and still represent a significant volume of business transacted with alternative capital, he said.

Reinsurers represent 20% of the outstanding bond issuance and are significant buyers of ILW and collateralised reinsurance. The latter

market is larger in size than the cat bond market, said Mr Lohmann.

A number of reinsurers have also established sidecar vehicles to capture revenue by managing third party capital and leveraging that from their established client relationships.

“Some, such as Hannover Re and Renaissance Re, have been using this instrument as part of their strategic capital management for many years,” said Mr Lohmann.

“Others are more recent entrants and it remains to be seen whether these vehicles are built to last or are simply an opportunistic attempt to reduce their own exposure by shifting the risk to a fee paying capital provider,” he continued.

CAPITAL QUESTIONS So who is providing the capital and are they really here to stay or just shortterm opportunists?

According to Mr Lohmann the market is dominated by specialist managers that account for some 74% of the identified alternative capital assets.

The US and Switzerland are the top locations of investors. End investors include pension funds and insurers, endowments, sovereign wealth funds, reinsurers, family offices and high net worth individuals predominantly through the private bank channel, he explained.

Mr Lohmann is convinced that this capital is here to stay for the long haul.

“Most of the investors, by volume, have long-term horizons. Pension funds conduct extended due diligence before making a commitment. Provided the losses that occur are events that could have been reasonably anticipated, we do not expect wholesale withdrawal after a major event. Many investors increased their commitments post the Tohoku earthquake in 2011,” he told delegates in Malta.

“Even though yields have compressed in line with the softening traditional reinsurance market, investors value the low correlation that insurance risk brings from a portfolio perspective,” continued Mr Lohmann.

“We are seeing some withdrawal

by certain investors in response to the reduced spread environment. Most are reducing their involvement but not exiting completely. There is lots of money waiting in the wings,” he added.

Mr Lohmann also tackled the big question for corporate risk managers: Can alternative capital provide solutions to new emerging risks?

Mr Lohmann noted that the alternative capital market is often cited as the potential ‘solution’ to capacity constrained markets.

In his view, however, risks ‘entertained’ by capital market investors must have the following characteristics: ■ The risk entertained should not correlate with financial markets for other assets, it must remain a diversifying asset.

■ There must be a clear description of the risk being entertained.

■ There must be sufficient data such as exposure information and claims information available to properly price the risk.

■ Whether a covered event has occurred and the quantum of loss recoverable for an insured event is quantifiable within a reasonably short time frame.

At this point Mr Lohmann showed a table in which he set these main required characteristics against five socalled emerging risks: terror, political risk, cyber, supply chain/business interruption and weather.

His conclusions made for sobering reading for corporate risk managers keen to tap this new source of risk capital to help tackle their coverage gaps.

Terror looks like a difficult area for the capital markets. It is reasonably correlated to market risk as shown by the terror attacks on the US in 2001, the cover is only reasonably clear, there is insufficient data to price and assess the risk and the occurrence of an event only occurs within a reasonable timeframe with property damage, he said.

Political risk, very high on the agenda of most corporate boards as they expand to unstable markets in

search of new revenue, looks equally difficult to Mr Lohmann.

It can be correlated to market risk depending upon the circumstances, clarity on cover is not always available, there is again insufficient data to price and assess the risk and the occurrence of the event does not take place in a ‘reasonable timeframe’, said Mr Lohmann.

Cyber is impossible to cover through this market according to Mr Lohmann as it satisfies none of his criteria. This will not come as a surprise to corporate risk managers who themselves are finding it difficult to even define this risk.

The outlook for supply chain is more positive, according to the cat bond expert.

Correlation is mixed, cover can be quite clear but not always depending upon product design, data is available but limited for all risks and the occurrence timeframe works for parametric triggers but not indemnity triggers, said Mr Lohmann.

And, perhaps not surprisingly, the best potential lies in the weather risk area, concluded Mr Lohmann.

It does not correlate to market risk, clarity of cover is possible, there is sufficient data and third party models and the events do occur within a reasonable timeframe.

BRIGHT FUTURE Darren Bailey, Executive Director at Aon Risk Solutions and an expert in this field, followed Mr Lohmann on the podium in Malta and made it clear that this market is set to continue its stellar growth.

Mr Bailey predicted that this market will grow by $100bn in the next five years.

“The returns are double digit and good luck finding that in other asset classes. It is a growing business and looks like it is here to stay,” concluded Mr Bailey.

But, as Mr Lohmann stressed during his speech, most corporate risk managers keen to find ways to solve their risk transfer needs in emerging risk areas such as cyber and political risk had better not hold their breath.

This remains a work in progress.

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UPCOMING EVENTS

SAVE THE DATE! ■ÊÊRISK FRONTIERS—SOUTHERN AFRICA Ê

23 July 2015Ê

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13 November 2015Ê

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19 November 2015Ê

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■ÊÊRISK FRONTIERS—STOCKHOLMÊ

24 November 2015Ê

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■ÊÊRISK FRONTIERS—COPENHAGENÊ

25 November 2015Ê

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■ÊÊRISK FRONTIERS—WEST AFRICAÊ

3 December 2015Ê

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Continued from Page One

26

NEWS

INSURANCE ACT: Insureds: ‘Prepare for the Act as soon as possible’ CONTINUED FROM PAGE ONE Airmic members to work with their brokers and insurers now to maximise the benefit of the Act,” said Airmic CEO John Hurrell in the briefing paper.

Mr Lewis of Herbert Smith Freehills backed Airmic’s call for insureds to prepare for the changes under the Act as soon as possible and enter into dialogue with their risk transfer partners on this subject now.

INCREASING KNOWLEDGE “Policyholders are becoming more aware of the changes soon to take place, and that’s extremely important.

Although the implementation date is over a year away, that’s actually not much time given the work involved in ensuring they will be compliant,” he said.

Mr Hurrell urged members to use the briefing paper as a basis for discussions with the market. “It has taken years to get the reforms into

law and now we have finally won that battle our members understandably do not want to wait another 18 months to see the rewards. The endorsements should make a huge difference to policyholders who want to make those changes now,” Mr Hurrell told Airmic News.

Paul Lewis, partner in the insurance and reinsurance disputes team at Herbert Smith Freehills, worked closely with Airmic on the briefing paper. “These endorsements should certainly help some Airmic members enjoy the benefits of the reforms sooner than August 2016 by helping guide their discussions with their insurers,” he said.

He stressed that there is no onesize-fits-all remedy to benefiting from new policyholder protections under the 2015 Insurance Act. “This isn’t something that can simply be cut and pasted into an existing policy. The wordings are only samples and policyholders need to be careful in how they incorporate them

into their contracts,” he explained.

The paper stresses that current policy wording must be reviewed carefully to identify which elements of the endorsement members might wish to use. Members are advised to discuss the options with their insurance broker in the first instance and seek independent legal advice where needed.

The paper explains that members should take particular caution if their existing policies are more advantageous in places than the terms of the Act. OPTIONS AVAILABLE It also notes that care must be taken to ensure that sections of the endorsement used are compatible with existing terms of a policy.

Members may wish to use part or all of the endorsement, the paper says.

According to Airmic most insurers have been supportive of the reforms under the Act. Since it became law many have publicly stated their

intention to implement its changes with immediate effect, the association added.

“Given these positive comments we have seen coming from some of the leading players in the market, we would certainly hope they would be receptive to what we are proposing,” said Mr Hurrell.

The new Airmic briefing paper forms the second part of a series of guidance to help insureds prepare for the Insurance Act. The first guide, The Insurance Act 2015: What Members Need To Know was published in March and explains the core changes of the reforms and gives advice to members on the key next steps they should be taking.

The third paper, to be released later this year, will advise policyholders on best practice for meeting the new standards of ‘fair presentation of risk’ mandated under the Act during the disclosure process. The guide will be prepared by Airmic after a series of roundtable discussions and workshops

involving Airmic members and market representatives.

Under these obligations insureds will have to review the way in which they prepare underwriting information. They will need to consider how best to conduct and record a ‘reasonable search’ for material information and structure underwriting information to comply with the duty to give a ‘fair presentation of the risk’.

‘GET IT RIGHT’ “It will be crucial that members get this right to protect themselves and avoid being subject to the various remedies open to insurers under the Act,” said Airmic.

Airmic also stressed that the content of its latest guidance relates to the position under English law and does not constitute legal advice.

Members are advised to consult their lawyers should they require advice on any matter that is the subject of this briefing.

REPUTATION: ‘Reputational risk is complex to understand/quantify’ CONTINUED FROM PAGE ONE going further than just looking at extending existing covers but we need the wider market to move forward in step and this is more likely if we are able to build out from where they are more comfortable,” said Mr Hurrell.

Ideally, risk managers would like to have broad all-risk cover that does not require a big investment in time and information to underwrite reputational risk, according to John Scott, Chief Risk Officer, Zurich Global Corporate.

“However, in reality reputational risk is complex to understand and quantify. An allrisk reputational insurance would be too difficult to quantify, price and open to moral hazard,” said Mr Scott.

“A better approach would be for insurers and their clients to work together and identify the root causes of reputational risk, develop good risk management around these risks and look to transfer specific aspects where possible by extending existing products, like product recall,” he said.

According to Mr Scott, it is possible to go a long way with existing insurance policies by ‘stretching the understanding’ of what insurance can provide.

“Insurance is a powerful risk transfer tool and it can be used to mitigate aspects of reputational risk, such as the cost of crisis management and PR consultants,” he said.

‘A DIFFICULT RISK’ Kiran Nayee, a partner at JLT, also believes that extending reputational-type coverages under existing policies is the way forward. “This is a difficult risk for buyers to articulate and a difficult one to underwrite. While there are standalone products out there, take-up is likely to remain limited because most clients would see that as an additional insurance spend,” said Mr Nayee.

“You first need to get reputational coverages into existing insurance policies. You have to

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start somewhere and in that regard the approach suggested by Airmic is heading in the right direction,” said Mr Nayee.

There are a range of existing insurance products—namely product recall, D&O, cyber and supply chain insurance—that can include some cover for reputational risk, usually related to crisis management costs. These types of cover could be developed further.

“If risk managers look at the threats to reputation, their existing insurance could be part of the solution. So talk to your insurers to see how to round-out your policies and to understand the triggers and quantum,” advised Mr Hurrell.

For example, JLT has extended the scope of reputational cover in its product recall insurance and included a trigger for recalls linked to reputational risk.

Product recall policies typically only respond to a recall where there is the threat of bodily injury or physical damage, explained Mr Nayee. JLT’s extension will respond to incidents that have no threat of bodily or physical injury, but do pose a threat to a company’s reputation, explained Mr Nayee.

Cyber insurance is another line of business that looks to address damage to reputation as part of cover. Although loss of business related to damage to reputation is currently not insurable, cyber insurance can cover the costs of crisis management and managing a breach, according to Paul Bantick, Cyber UK Focus Group Leader at Lloyd’s insurer Beazley.

Protecting reputation is one of the key drivers behind purchasing cyber insurance and managing the downside of a data breach, he explained.

“Certain risks contain a crisis element and can pose a significant risk to an organisation’s reputation,” according to Mr Bantick. “As a result there is a growing demand for insurance that comes with services like crisis management, and a high degree of expertise and experience,” he said.

Beazley is now adapting this approach to other lines of business.

“ However, in reality reputational

risk is complex to understand and quantify. An all-risk reputational insurance would be too difficult to quantify, price and open to moral hazard...”

JOHN SCOTT, ZURICH

For example, the insurer has added a response service to its US management liability insurance, as well as a weather insurance product.

While some insurers will extend existing lines of business to include crisis management, there are a small number that have created standalone products.

According to Tom Hoad, Underwriter at Tokio Marine Kiln, reputational risk can be covered through standalone coverage.

Tokio Marine Kiln is one of the only insurers that will cover loss of earnings, as well as the costs of crisis management through a standalone reputational insurance solution.

“There are sceptics that have not taken the time to understand reputational risk insurance. But we have been working with clients for a number of years to give them a product with real commercial merit,” he told CRE. Tokio Marine Kiln has written a number of standalone reputational risk policies, targeting consumerfocused industries such as luxury goods and franchise operators. The product, which has subscription market support and capacity in excess of $100m, has seen an uptick in demand and sales, said Mr Hoad.

The insurer is also developing a business to business reputational risk product, but this requires a third party to measure media or

public sentiment. For consumer risks, Kiln taps into the point of sale systems many companies have to monitor product sales.

“Much of the value in business today is often intangible, but the insurance industry is still pre-occupied with physical loss.

Risk management has moved on and the scope of risk managers has expanded to include crisis management and preparedness, so it is only natural that they look to insure,” said Mr Hoad.

Global Corporate Allianz & Specialty (AGCS) also offers a standalone reputational risk product that covers the cost of crisis management and public relations based on named triggers or linked to existing insurance contracts.

For example, the policy would respond when one or more traditional property casualty policies—such as aviation, marine hull, D&O, property and crime— are triggered. Clients can also name their own perils.

However, AGCS’ cover does not extend to loss of profits or revenues.

“Loss of income or revenue is not currently possible to underwrite on a standalone basis because it is difficult to quantify losses and attribute directly to a crisis,” argued Terry FitzGerald, Head of Commercial D&O at AGCS. “Demand for standalone cover has been growing but not as fast as we would have liked,” said Mr

FitzGerald. Retail, leisure, food and drink and aviation sectors have all shown interest, he added.

“Reputation is insurable and we have a product that is selling in several territories, so I hope that it will become a more common purchase and we are engaging with clients to raise awareness,” explained Mr FitzGerald.

Risk managers are enquiring about reputational risk transfer products and there is growing demand for innovation in this area, said Robert Barnes, Client Executive in the Financial and Professional Practice at Marsh.

“The insurance industry needs to innovate in the area of reputational risk. Clients have an articulated need so the insurance industry needs to provide a product. There are only a handful of standalone products out there and they have not gained traction,” he said.

SMALL LIMITS Standalone reputational insurance products will contain potentially unacceptable exclusions, such as those for known events, said Mr Barnes.

Limits can be small relative to the size of companies that are interested in cover, he added. Insurers also have only limited appetite— some sectors, such as financial services and pharmaceuticals, fall outside the scope of underwriters, he explained.

“As an industry we should take a step back and start with first principles. If clients can get firm data, they can throw the gauntlet down to brokers and insurers to craft a solution and see if there is capacity and a product that unambiguously transfers reputational risk,” according to Mr Barnes.

“This can’t be solved by a traditional inflexible insurance product, it is too complex an issue.

But if you can get good data, the market is soft and insurers are looking to drive the top line and respond to client needs…the ingredients are all there,” said Mr Barnes.

8/6/15 14:52:01

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8/6/15 15:49:28

Your

pioneering ideas

Our

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A world

of opportunities

This year two pilots will embark on an unprecedented mission: to fly around the globe using solar power alone.

It’s easy to envisage the multitude of technological, mechanical and weather risks this involves. Yet when others regarded such an endeavour as uninsurable, we’ve been on board the Solar Impulse program since 2012. Why? Because we share a belief in the richness of knowledge and potential for innovation that flourishes when expertise is combined across industries. With our wealth of experience in aviation, engineering, construction and renewable energy, we have worked alongside the Solar Impulse team to assess, manage and mitigate the risk – so what was once just a pioneering dream can become reality. We’re smarter together. solarimpulse.swissre.com

Swiss Re Corporate Solutions is proud to be the official insurance provider of Solar Impulse, the only manned aircraft to fly day and night with only the power of the sun. ©2015 Swiss Re. All rights reserved.

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