VIEWPOINTS [ PEOPLE ] GDF Suez’s deputy chief risk officer, Michel Dennery, on dealing with the media in a crisis
RISKS [ THREATS ] In the wake of the Norwegian terrorist attacks, an examination of the violent political extremists who could threaten Europe in the coming years
European risk and corporate governance solutions
www.strategic-risk.eu [ October 2011 ] Issue 73 €25
GOVERNANCE [ ETHICS ] The growing risk of civil unrest is showing companies the danger of being seen as bad corporate citizens
THEORY & PRACTICE NEWS & ANALYSIS » Bank share slump » China US cyber row » Water risk map » Food crisis index
[ BEST PRACTICE ] In the age of austerity, one area that companies can easily save money is energy. How to manage the costs and keep the lights on
GLOBALISATION RISKS As the world grows together, multinationals derive huge benefits from the free flow of goods and services. But globalisation brings major risk management challenges Mega Risk Atlas Pull out and keep our global risks wall chart Internal fraud Practical steps to prevent fraud in your organisation Top five The world’s biggest bribery fines and worst offenders
LEADER [ OCTOBER 2011 ]
Nathan Skinner, EDITOR,
Issue 73 October 2011
STRATEGIC RISK
www.strategic-risk.eu WELCOME
Printed by Warners Midlands Plc © Newsquest Specialist Media Ltd 2011
are going to have to get used to dealing with the outcome of events previously considered unthinkable – such as volcanic ash clouds and nuclear meltdowns. The combined effects of globalisation, urbanisation and climate change appear to be leading to more and bigger catastrophes. According Wharton Business School’s risk centre managing director, Erwann Michel-Kerjan, the 21st century has not had a six-month period without a major crisis affecting several countries or industry sectors at once. The world has become an interdependent village and classic risk management strategies may be out of whack with the new order. In an effort to move the debate forward on some of these issues, much of the editorial you’ll find in this issue of StrategicRISK looks at the risks arising from this new norm, as well as how to deal with risk interdependency and risk accumulation. Turn to page 25 to find out how European businesses are learning to deal with the vulnerability associated with a global presence. There’s also a special Globalisation Executive Report dealing with these issues in more depth (also T] IN ASSOCIATION
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A YEAR TO REMEMBER
7 8 9 12 15
RISKS [ THREATS
available online at goo.gl/JfTTQ).
Iraq Saudi Arabia
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released into an unsuspecting world. The point he was making was that companies
tions Sanc Natural catastrophes Corr upt ion and brib ery
StrategicRISK is published eight times a year by Newsquest Specialist Media Ltd., and produced in association with Airmic (the Association of Insurance and Risk Managers). The mission of StrategicRISK is to deliver the latest risk and corporate governance solutions to key decision-takers in UK and European companies. StrategicRISK is BPA audited with a net average circulation of 10,046, June 2010.
becoming the new norm. He joked that they were being bred somewhere and
Algeria
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said at a risk management conference in Germany that black swans were
Tunisia
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TERRORISM Northern Ireland,
S
April 2011
1
A car bomb killed a police officer his home in Omagh and dissid republicans were blamed for the The amount of terrorist attack Northern Ireland has increased past two years, and the region co to be one of the most deprived of the UK.
o s o
Piracy fact sheet
Source: International
Maritime Bureau
R_8pp_pul loutsection .indd iv ]
[ RISK ATLAS
www.strategic-ris k.eu
SR_8pp_pulloutsec tion.indd iii
around each one — hope you enjoy it! SR
14/0
[CONTACT THE EDITOR] Email nathan.skinner@strategic-risk.eu or follow me at twitter.com/StrategicRISK
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK
1
l a r e v e S . a i d n I n i s d o o fl e r e v e e S r “ a s r e r u t c a f u ” r e d UK man n u e n o g e v a h o t d repor te
© 2011 FM Global. All rights reserved. In the United Kingdom, FM Global is the communicative name for FM Insurance Company Limited which is regulated by the Financial Services Authority.
These days, there’s no such thing as a local incident. If you lose production in India, you can lose market share across Europe. That’s why FM Global takes a different approach. We base your property insurance on the site assessment of our engineers, not the calculations of actuaries. We work with you to look at critical sites in your supply chain. And we don’t just insure against loss, we help you to prevent it. You can actually save up to 85% of the cost of flooding, with the right precautions. So your business can stay in business. Speak to your FM Global representative or contact your broker, and visit www.fmglobal.co.uk/touchpoints to read our latest White Papers.
Secure the value you create
CONTENTS [ OCTOBER 2011 ]
16
How can businesses prepare for the effects of climate change?
Risks
[ THE LATEST BUSINESS ROUND-UP ]
[ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
6
25
10-15 PULL-OUT
16
Centre pages Global risks as you’ve never seen them before, in our handy pull-out wallchart
Special Report
GDF Suez’s Michel Dennery embraces both the positives and negatives of risk
News & Analysis
8
Risk Atlas
20
News Matrix The biggest stories online, including food security rankings, the cost of Hurricane Irene and SocGen’s share price fiasco Risk Indicator A new study on food insecurity reveals the extent of the effects of famine on risk worldwide; the top five superhackers News Analysis A er Air France, the hazards of highly automated systems; A decade of lessons from 9/11; Protectionism in Brazil; and the UK’s ‘missed opportunity’ on bribery News Feature Climate change is one of the least predictable risks, but businesses can start to adapt by monitoring their water use. What does the weather hold for insurers and wine growers?
Viewpoints
27 28 30
Governance [ ETHICS ][ COMPLIANCE ][ REPORTING ]
35 38
[ PEOPLE ][ OPINION ][ COMMUNITY ]
19
INTRODUCTION
I
N PREVIOUS REPORTS THIS YEAR, STRATEGICRISK HAS LOOKED AT companies’ considerations when establishing a captive insurance company and surveyed a selected group of risk managers and others involved in captives. This report goes a step further, outlining some of the day-to-day issues that can arise with operating a captive. Some of these – particularly the administrative functions such as issuing and monitoring policies and premium invoices, maintaining the captive’s financial and operational records, and completing and filing premium tax returns – can, it is hoped, be left safely to the appointed captive management company. In addition, a good management company will advise on any relevant changes in the captive domicile’s regime and generally contribute expertise when it comes to meeting the parent company’s objectives. However, risk managers need to take control of strategic decisions. A key issue can be which coverages to pass to the captive rather than insure in the conventional third party market. Traditionally, risk managers have used captives to cover the risks that insurers were reluctant to consider – or charged very high premiums for. These risks tend to evolve with time. For example, some time ago insurers were reluctant to cover the costs of product recalls. Companies that considered themselves vulnerable to this risk would pass it on to their captives. Now insuring product recall cover is probably not such an issue for most businesses, although particularly exposed companies – for example, those in the food and drink and pharmaceutical sectors – may still consider that they will get a better deal by using their captive to cover the primary loss. Employment practices liability is another example where companies may feel that they can arrange cover more cost effectively through their captive, particularly if they don’t have a very good loss history in this area. This is a liability that to date has probably most affected US and UK companies but there is no doubt that increasingly claims will spread to continental Europe. More recently, a trend has emerged for wrapping employee benefits cover within the captive’s remit. Spearheaded in the US, this trend is now extending to European captives. Risk managers with multinational insurance programmes also need to consider how they can use their captive to smooth some of the differences in approach that can exist between the parent and its subsidiaries.
Finally, this report looks at the knotty problem of captives and taxation. In years gone by some companies seized upon captive formation as a way of avoiding or minimising tax. Those days are largely gone, but sadly fiscal regulators have long memories. Captives – and their domiciles – are exposed to considerable scrutiny, as demonstrated by this year’s (successful) challenge to Liechtenstein’s tax regime. Captives can produce some taxation benefits but this aspect is something that their parent organisations need to keep a close eye on. SR
Contents [ CAPTIVE MANAGEMENT ]
46 47 48
Mapping management Who’s looking a er your captive? Tightening up on tax Captive tax rules and considerations What do you cover? Captives can insure ‘virtually anything’
20
SPONSORED BY
This special report has been produced with input from: Qatar Financial Centre Authority
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK
41
SPECIAL REPORT
Captives
22
41 What day-to-day issues can arise when running a captive, and when is it time to bring in specialist managers?
4
48
Summer of discontent For Sue Copeman, the August riots in UK cities spelled out a warning that no country is safe from civil unrest Forging ahead GDF Suez’s Michel Dennery believes social inequalities combined with increasing commodity prices are a bitter cocktail for risk managers First build your allies Abengoa’s chief risk officer Rogelia Bautista Guardeno on the benefits of becoming an expert in not buying insurance Headspace Pirelli’s group risk manager Jorge Luzzi on the importance of listening and the futility of possessions
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
COVER STORY: Divided they fall European firms that increase global reach may become more vulnerable to local unrest and suffer from a lack of corporate culture The greatest risks and opportunities The top four barriers to success in emerging markets RISK FINANCING: Marine and cargo How to keep afloat despite pirates, natural catastrophes and still economic waters TERRORISM: Extreme threat ongoing Even companies that take mitigating steps can never afford to take safety for granted
Top five bribery fines The five mega-fines for corruption that leave Willis’s £6.89m looking positively puny Pressure points It is crucial that multinationals operating in volatile communities are seen to be good citizens
Theory & Practice [ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]
45 46 47
Switch on to energy risk Put energy on your board’s agenda, develop an integrated strategy and explore unexpected benefits Dig deeper to combat employee fraud Background checks before and a er employment are the first line of defence and should be taken seriously How to manage a global supply chain Global outsourcing is popular to cut costs, but a full understanding of the new risks it introduces is vital
Cov era ge a s
FOR THI WAR NK D ING
as y our
com
pan y.
Environmental insurance solutions from the industry leader. Dynamic new environmental liability regulations require dynamic new solutions. Chartis has underwriters with international experience and expertise to address complex environmental exposures, including gradual pollution, own-site contamination and damage that threatens our ecosystem. Start putting our experience to work for your future. Learn more at www.chartisinsurance.com
All products are written by insurance company subsidiaries or afďŹ liates of Chartis Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. For additional information, please visit our website at www.chartisinsurance.com.
NEWS MATRIX [ THE LATEST BUSINESS ROUND-UP ]
Top 10 essential online stories 01 01 CYBER CRIME
03
London university opens research unit
02
08 05
05 OVERSEAS EMPLOYEES
Finance body calls for tighter regime The Institute of International Finance has published a report calling for greater co-ordination in regulatory reforms. It says Solvency II could go against risk management best practice, citing incentives to shorten the maturity of insurers’ corporate bond holdings that may encourage insurers to shorten the tenor of their asset portfolios while cashflow profiles remain long term. web. goo.gl/3Y5Hl 03 HURRICANE IRENE
Hurricane Irene, which hit the US East Coast in late August, was said to have caused insured losses of $3bn-$6bn (€2.2bn-€4.3bn). Bringing a downpour of more than a foot of rain to parts of the Atlantic coast, the hurricane raised rivers to record flood levels and forced more than two million people to evacuate their homes. web. goo.gl/wMquS
6
04 FOOD CRISES
Food crisis index highlights growing impact of global political turmoil The world’s most concerning food crises are being intensified by drought, conflict and corruption, according to a report published by Maplecro . The Food Security Index assessed the availability and stability of food supplies across 196 countries. Countries in the Horn of Africa and Sub-Saharan Africa topped the list, lead by Somalia and DR Congo – mostly as a result of political turmoil and extreme drought. web. goo.gl/k9XLl
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Accident-prone Brits get GPS travel helpline In response to a report by the British Foreign Office that more than 19,000 UK citizens are involved in emergencies abroad every year – most of them in Spain – a personal emergency service has been launched. The small GPS alarm service, Skyguard International, is available to British travellers in a total of 34 countries. It enables them to communicate in times of need with a UK-based management centre to gain advice and to summon national emergency services of the country in question. web. goo.gl/L9vyF Reuters
Somalia: The country tops the global ranking for food insecurity
02 SOLVENCY II
Irene could cost more than €4.3bn
06
09
04
Reuters
City University London’s new Centre for Cyber Crime and Security opened this month to research and tackle the threat posed by cyber crime and terrorism. Lead researcher Muttukrishnan Rajarajan said cyber security is one of the key issues faced by governments and organisations today, so the demand for research is huge. “Engineering is a science, computing is a science, security is a science too. And cyber security is a growing area of concern for the country,” said Rajarajan. A goal of the centre is to produce a higher number of trained cyber security professionals to work against the threat in the industry. web. goo.gl/DZI09
10
07
LINKS TO THE WEBSITE About goo.gl Type the goo.gl address into your web browser to access our recommended articles from strategic-risk.eu
08 SOCGEN STOCK FALL
Rex
06 HACKING
China and USA in cyber row
SocGen shares drop following media gaff
China has claimed it has been the victim of 500,000 cyber attacks in the past year. The fact that many of the attacks trace back to US IP addresses has caused tensions between the nations. A recent hack into the Hong Kong stock exchange forced the suspension of trading in seven companies. web. goo.gl/AOXzx
An inaccurate article by UK newspaper Daily Mail has led to a steep drop in the price of French bank Société Générale’s shares. The article was based on fictional stories published on the website of France’s newspaper Le Monde and examined a possible collapse of the euro, naming real banks as examples. The Daily Mail article claimed that the French bank was on the “brink of disaster” – words that sparked the share price plunge. Two days later, the paper retracted the article stating: “We now accept that this was not true and we unreservedly apologise to Société Générale for any embarrassment caused.” web. goo.gl/KOblS
07 CORRUPTION
First scalp for Bribery Act The first prosecution under the much discussed UK Bribery Act was carried out recently. The case involved administrative clerk Munir Yakub Patel, who allegedly accepted a £500 bribe. While critics would rather have seen a corporate corruption case than the domestic bribery allegation against Patel, legal experts were satisfied that the act had been successfully shown in operation. The first big corporate offence, say experts, is still some time away. web. goo.gl/HtOSw
Online contents Most read stories Rogue trader costs UBS $2bn web. goo.gl/M3XKH Infographic: Future risks web. goo.gl/HKVF3 9/11 anniversary: Terror threat “no less severe” web. goo.gl/etXoQ German DVS Dailies web. goo.gl/hrRAF Companies aren’t prepared for cyber attacks web. /goo.gl/6vV63
Taj Palace hotel in Mumbai, during terrorist attack in the city on 26 November 2008
09 POST 9/11
10 WATER RISK
Terrorism risk profile unveiled
Water risk atlas
More than 2,400 macro terrorism attacks have been committed in the past 10 years, according to RMS’s recently published report, Terrorism risk in the post-9/11 era. The report demonstrates that the threat has become more diverse, extending beyond the Middle East and South Asia regions. Attacks throughout the past decade have dispersed into more than 40 countries worldwide. The way terrorism risk is managed has progressed in recent years too. “Insurers are managing accumulations using realistic scenarios and event-specific footprints to monitor exposure across multiple lines of business,” said RMS senior vice-president of emerging solutions Peter Ulrich. web. goo.gl/5rhbs
An interactive global map showing the current and future situation of water scarcity and quality has been launched by the World Resource Institute. The Water Risk Atlas has been developed to help businesses better understand the global threat of water risk. It is based on a system of 22 risk indicators that determine the overall risk assigned to a location. The programme can use this information to display the location’s water risk from today until 2095. web. goo.gl/FZLZO
Online analysis Terror risk on the rise Over the past year, the number of terrorist incidents worldwide increased by 15%, according to new analysis. Islamic terrorism is a factor in many, but not all, of the most dangerous parts of the world, according to Maplecro ’s risk analysis. The five most at risk countries are Somalia, Pakistan, Iraq, Afghanistan and South Sudan. Countries identified as “extreme risk” sustained 75% of last year’s fatalities.
www.strategicrisk-.eu [ OCTOBER 2011 ] StrategicRISK
7
RISK INDICATOR [ VISUALISING DATA AND TRENDS ]
FOOD SECURITY
Food insecur
Famine feeds risk challenges
A new study rated the food security of Somalia and the Democratic Republic of Congo as the lowest in the world, while countries in the drought-stricken Horn of Africa are also at “extreme risk”
A new index reveals the extent of food insecurity worldwide and the factors exacerbating the problem
Which countries have the least secure supplies of food?
8
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
05
06
07
Burundi
Eritrea
Angola
Chad
Ethiopia
08
09
10
11 Comoros
04
Liberia
03
Afghanistan
02
Haiti
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Somalia
HE WORLD’S MOST SEVERE FOOD CRISES ARE BEING INTENSIFIED BY man-made factors and extreme weather events, a newly released food security risk index finds. Countries in the Horn of Africa and Sub-Saharan Africa are the most vulnerable to food insecurity, according to the index. Maplecro ’s Food Security Risk Index (FSRI) assessed the stability and availability of food supplies in 196 countries. It measured the availability, access and stability of food supplies across all countries as well as the nutritional and health statuses of populations. Rising global temperatures and a growing population are probably the two biggest factors leading to food scarcity, the report notes. The study indicates that Somalia, rated with the lowest food security in the index, has been ravaged by inflationary pressures on the cost of staple cereals. This, combined with the country’s ongoing political turmoil, has resulted in the disruption of trade and the destruction of transportation networks. Thirty percent of the population within southern Somalia is suffering from acute malnutrition. In all of drought-stricken Eastern Africa, which has seen crop failures and livestock death due to the worst drought in 60 years, an estimated 17.5 million people currently require food assistance. While the world’s underdeveloped nations such as DR Congo (ranked number 1 with Somalia), Haiti (ranked seven) and Zimbabwe (ranked 14) are topping the list, emerging economic power India was categorised as ‘high risk’ on rank 51. While India’s food production is sufficient for domestic consumption, the nation’s food security situation is worsened by political violence and endemic corruption. Despite the country’s substantial economic growth over the past decade, approximately 25% of the world’s hungry poor live in India due to its severe income inequalities. “As global demand for food grows due to rising populations, food security will take on increasing importance for governments and it needs to be on the risk agenda of multinationals,” Maplecro chief executive Alyson Warhurst says. In addition, food security can be a key driver of political and social volatility. Many sources point to competition for food and water as one of the key causes of the conflict in the Darfur region of Sudan, for example. Scarce water and grazing land almost certainly fuelled tensions between Arab and non-Arab Sudanese nationals. Any area suffering from food or water stress has a higher risk of conflict, explains Maplecro analyst Kimberlee Myers. “You’ll start to see more and more conflict, both violent and non-violent, as water supplies lessen and demand grows.” Improving infrastructure could help offset food security in developing countries. Food security is also tightly wound up with access to clean water for drinking and using in agriculture. “For companies, it has a lot to do with where you’re operating. You need to know how much water is available to you and how much is available to the local population. You don’t want to be involved in a project where your company is taking water from the local population. That will end up being a reputational risk for you and also a possible water pricing risk,” Myers adds. SR
DR Congo
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East Africa According to the study, a number of critical factors have combined to intensify the current food crisis in the Horn of Africa. This region, along with much of Sub-Saharan Africa, is particularly vulnerable to food insecurity.
In southern Somalia alone, more than 29.000 children under the age of five have died over the course of the current crisis.
The total number of people requiring food assistance in eastern Africa is estimated at 17.5 million, more than 12 million of whom are in urgently need of humanitarian assistance.
Inflationary pressures on the cost of staple cereals have also rendered many Somalians acutely vulnerable.
Somalia’s ranking as first in the inde two decades of conflict and political t has led to ineffective government an infrastructure. The human and econo conflict has been profound.
Maize prices in Mogadishu were 100% higher in June 2011 than in June 2010.
The price of sorghum in Somalia rose by 180% compared with 2010 prices.
3 p th o c fr m th 4 so
CYBER RISKS
Top five
rity
[ MOMENTOUS HACKS ]
1.
Contributing factors to food insecurity A low capacity to combat the effects of extreme weather events such as drought
2.
High rates of poverty
3.
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Sudan
Central African Republic
Djibouti
Zimbabwe
Yemen
Sierra Leone
Mozambique
North Korea
Kenya
Failing infrastructures, which undermine both food production and emergency food distribution capacity
ex is the result of turmoil, which nd poor omic toll of the
30% of the population within he southern areas of Somalia are currently suffering rom acute malnutrition, with he rate exceeding 40% for children in some areas.
Conflict is also a major driver of food insecurity as it displaces people from their normal social networks and livelihoods. For example, the ongoing violence in eastern DR Congo is largely responsible for its precarious food security situation
4. 5.
Stuxnet (2010, industrial systems) Deemed to be the most sophisticated cyber weapon to date, it infected about 100,000 PLCs (‘programmable logic controllers’ or small computer devices used in industry), including those of an Iranian nuclear plant and a uranium enrichment facility. RSA (2011, key cryptography) It compromised the authentication system of RSA Security and attacked the security of the USA’s major defence contractors. Gary McKinnon (2002, US government and military) McKinnon, diagnosed with Asperger’s syndrome, hacked thousands of PCs within the US armed services, NASA and the Department of Defense. Lulzsec (2011, consumer data) Hit the networks of Nintendo, PBS and the FBI. IMF (2011, World Bank) In May, hackers forced the International Monetary Fund to cut its computer link to the World Bank.
OVERHEARD
India It is not just poor underdeveloped nations that are at risk. India, one of the world’s emerging powers, is ranked 51st by Maplecroft and is categorised as high risk. India remains blighted by poverty and stark income inequality. Food security within India has
25%
According to a 2011 World Food Programme report in India, approximately 25% of the world’s hungry poor live in the country.
been worsened by significant overpopulation, environmental degradation, political violence and endemic corruption. Many people with low incomes in the country remain food insecure as a result of increasing food prices.
43%
Around 43% of children in India under the age of five suffer from malnutrition.
Source: Maplecroft, data based on the key elements of food security as laid out by the UN’s Food and Agriculture Organisation (FAO).
“Soundbites” ‘Brazil is and will be more a country of opportunity for investors, reinsurers and the business community in general’ Antonio Fernandes President of Apogeris and head of risk management at MDS >> see News Analysis page 14
‘You have to develop strong communications to advance and to undertake new tasks. You must always advance while being vigilant at the same time’ Michel Dennery Deputy chief risk officer, GDF Suez >> see Viewpoints page 21
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK
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NEWS ANALYSIS [ CONTEXT & INSIGHT ]
AUTOMATION
The hidden risks of highly automated systems The Air France flight accident raises more questions than answers over automatic systems and what steps should be taken if they fail
has not always equipped to provide an unemotional, rational, or consistent response. But if automatic systems receive inaccurate data, they turn from being reliable to potentially hazardous. This is what happened on AF477, when the 3 pitot tubes – which sense indicated air speed – appear to have simultaneously iced up. Finding that none of the readings agreed with each other, the automatic pilot cut out and handed control back to the crew.
Rex Features
Situational awareness
Flight 447: Wreckage was obvious but it would take nearly two years to recover the flight recorders
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HEN AIR FRANCE FLIGHT 447 disappeared over the Atlantic Ocean on 1 June 2009, with the loss of all on board, there was consternation. Modern passenger aircra are not supposed to fall out of the sky. It was vital to find out what happened. Three major searches failed to find the aircra ’s data and cockpit voice recorders, but a fourth search in May 2011 discovered both, at a depth of about 12,000 feet, thus enabling the Bureau d’Enquetes et d’Analyses (BEA), the French air accident investigation body, to start piecing together what had gone wrong. So far, the BEA has issued three interim reports, with a final report expected in the autumn. But the contents of the interim reports give substantial pointers to the cause of the accident, and raise considerable – if predictable – concerns about the relationship between human beings and highly automated systems. Fly-by-wire passenger aircra , such as the Airbus 330, largely fly themselves, with the automatic systems depending on computer analysis of the data fed in by the various sensors. Additionally, the automatics
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have built-in protections, preventing the pilot from making excessive control inputs that might take the aircra beyond its designed parameters. It is hardly surprising that the automatics, which are tireless, reliable and precise, are perceived as the safest method of conducting a flight. Indeed, there is ample reason to prefer the automation of any hazardous process to the alternative of control by a human brain, which evolution
Air France light AF447 Airbus 330-203 carried 216 passengers and 12 crew members. 1 June 2009: Aircra vanishes en route to Rio de Janeiro from Paris 6 June 2009: Wreckage from AF477 confirmed 8 June 2009: Vertical stabiliser salvaged and bodies found 26 June 2009: Initial search ends 2 July 2009: The BEA releases interim report 20 August 2009: First search for flight recorders ends 24 May 2010: Second search for flight recorders ends 1 May 2011: Flight recorders found and recovered 27 May 2011: Second interim report released by BEA 29 July 2011: Third interim report released by the BEA
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
There is debate all over the professional forums about what the pilots should have done next and why they didn’t do it. But, in a nutshell, the pilot flying appears to have lost situational awareness, put the aircra into a steep climb and stalled it. This was possible because the automatic protections had been lost when control was handed to the pilots. Therea er, none of the crew seemed to have recognised what was happening and, rather than drop the nose and attempt to regain flying speed, persisted in pulling the aircra ’s nose up even though they were losing 10,000 feet per minute. And here we have the implicit risks hidden in automation. If the automatics fail, it is up to the human operator to resolve the potential emergency. But if the human lacks direct experience of the system (because the automatics have always done the job), they have less to rely on. And since there is evidence that much decision-making derives directly from the recognition of similarities between current events and past experience, his decision-making capacity may be impaired.
A sufficient back-up plan? How do you train humans rigorously enough to make the right decisions when automation fails, without incurring the costs (and risks) of disabling the automatics in order to gain hands-on experience? A common answer is to use standard operating procedures and checklists. The aircra industry uses both, plus simulator training. But these may not cover a particular emergency, or, as may have happened in AF447, the standard operating procedure for one situation may not be the correct solution for what occurs. And in the difficult and confusing environment of a cockpit ringing with aural warnings, in darkness, possibly in turbulence – the chances of standard procedures and checklists being an adequate substitute for decades of hands-on experience are limited. SR
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NEWS ANALYSIS [ CONTEXT & INSIGHT ]
A GUIDE TO Executive liability Download StrategicRISK’s Guide to Directors’ & Officers’ Liability at goo.gl/spxkm
E TO rs’ ’ Directo e ers &Obilffiitcy in Europ Lia
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LEGACY OF 9/11
A decade of harsh lessons in interconnectivity The fall of the Twin Towers and its a ermath show the ripple effect of global risk. Ten years on, in the year of the Japan earthquake, what have we learned?
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HE HORRIFIC CARNAGE AND destruction visited on New York City 10 years ago was a defining moment in modern history. Those events and America’s foreign policy moves in the a ermath of September 11, 2001 have had an impact on people the world over (and many more have lost their lives in the years since the Twin Towers fell). But 9/11 was also a watershed moment in the evaluation of risk, which brought home the new complexity of the global risk landscape. Not only was the direct scale of loss so dramatic but the a ermath of the attacks also led to a whole spectrum of indirect losses. One of the most well publicised of these is the increase in car accidents as a result of people taking to the roads for fear of air travel. For the insurance industry itself, putting aside the direct losses, the distribution of the claims burden was remarkable. According to Munich Re, of the approximately US$32bn (£20bn) in claims payments a er 9/11, about a third were for business interruption losses (such as at airport duty-free shops). The attacks also caused widespread turbulence in the stock markets, further weakening global business and impacting on insurers’ financial strength. It is a good guess that the terrorists who committed these acts had an idea of the symbolic and real blow that they would be dealing America and the West by their actions. But it’s unclear whether they, or anyone, would have understood exactly how far-reaching these impacts would be. Munich Re’s reinsurance chief executive, Torsten Jeworrek, says: “Today, good risk management requires a much deeper understanding of interrelationships than in the past. Modern risk management has to identify and evaluate these interrelationships in advance.” New concentrations of risk are arising all the time, and spotting these accumulations is extremely hard. Severe
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Be prepared: Japanese school children take cover under their desks as part of a nationwide earthquake drill
natural disasters, for example, have always led to a severe accumulation of risk, but these losses mainly involved property in the affected area and did not spread to other regions. Today, however, the situation is very different. The earthquake in Japan in March showed the true scale of loss potential arising from disrupted global supply
Joe Plumeri’s top 10 risks At a recent conference in Germany, Willis chairman and chief executive Joe Plumeri outlined his top 10 global risks: 10 Reputation 09 Supply chain 08 Cyber security 07 Globalisation 06 Cost and availability of credit 05 Reputation and compliance 04 Market cap risk 03 Pandemics 02 Terrorism 01 Climate change
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
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chains. especially in the automotive and technological industries. Motor manufacturers worldwide had to reduce or suspend some plant operations as a result of lack of parts. Technological companies issued profit warnings. The disaster in Japan was exacerbated by the concentration of suppliers to certain industries. This is not unusual. Specialist industry suppliers are o en located in a single country (for example, semi conductor production is focused in Taiwan, China and Korea). Where the countries concerned are in natural catastrophe zones, a major incident, as in Japan, can limit availability of components for an entire global industry. As far as natural catastrophes are concerned, the situation only looks set to get worse. Aon’s Annual Global Catastrophe Report 2010 highlighted that natural catastrophic activity in 2010 was far higher than the previous three years, with 314 separate events causing significant damage in various parts of the world. “These 314 events, defined as natural meteorological and climatological occurrences that have caused a significant impact in terms of insurance claims, economic loss and/or fatalities or have had a large humanitarian effect, resulted in economic losses of $251.95bn (€184bn) and insured losses of €28bn,” said the report. “By comparison, 2009 tallied 222 events that combined to produce €42bn in economic losses and €14bn in insured losses.” Companies and countries can’t prevent natural catastrophes – but they can improve risk management and reduce the impact of natural disasters. Many of these problems are the result of living in today’s increasingly globalised, interconnected and complex world. But this reality only heightens the necessity for early recognition of the interactions between risks. It may be possible for risk managers to (in some instances) work with their insurers to understand risk accumulations and interconnectivity. Working with research institutes and universities, some insurers have begun developing new so ware and solutions to support the qualitative and quantitative analysis of complex risk accumulations. Risk managers entering into partnerships may be able to access some of this expertise and know how to decipher and reveal the interdependencies between risks. SR
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With you from A-Z Ingo Zimmermann, Head of EADS Corporate Insurance Risk Management
NEWS ANALYSIS [ CONTEXT & INSIGHT ]
‘I think this is the most critical economic situation in my time as a risk manager’ >> Rogelio Bautista Guardeno, chief risk officer, Abengoa (p22)
BRAZIL
Europe’s search for growth crosses Latin protectionists O
VER THE PAST FEW MONTHS, Europe’s risk managers, spearheaded by Ferma, have been lobbying for the Brazilian government to change its policies towards reinsurance entities. One of the sticking points is a rule that insists 40% of reinsurance business is placed with local reinsurers. Ferma believes this will reduce capac+ity in the market and increase exposure for companies operating in Brazil, leading to an inability to obtain some types of cover. “Most of the large corporations that operate in Brazil have captives or global insurance programmes, so these regulations will increase their costs and reduce their coverage,” says Ferma general secretary Pierre Sonigo. Others are more guarded. “We do not see any immediate effect on the insurance market, but problems may arise if the local insurance/reinsurance capacity is not high enough to cover some new risks,” says Portuguese risk management association Apogeris’s president, Antonio Fernandes, also head of risk management for MDS, a division of Portuguese corporation Sonae. It’s not only in reinsurance that Latin America is showing worrying signs of protectionism. A key point of Brazil’s new industrial policy is the abolition of tax for labour-intensive industries such as clothing, footwear, furniture and so ware to increase the competitiveness of Brazilian manufacturers against Russia, Korea and China (tax was previously 20%). Government procurement regulations will also be overhauled to favour Brazilian companies over multinationals operating in Brazil. Competition for the multinationals will increase significantly overnight and their exposures will also change. “These kinds of regulations can make risk management more difficult, as you have to keep up with changing policies as
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Corbis
Tax breaks and incentives to boost Brazil’s businesses against other emerging economies herald a home-loving trend that increases risk for multinationals
Emerging benefits A er a brief slowdown in 2009, the emerging countries recovered strongly in 2010 at an average GDP growth of 7.3%, according to IMF figures. Asia led the way, with real growth of 9.5%, followed by Latin America with 6.1%. The BRIC nations performed well and this is expected to continue throughout 2011 and 2012. Against slower growth in advanced markets, founded in a need for debt consolidation and austerity measures, emerging markets are becoming increasingly attractive.
42%
Brazil key stats 1. Most important sectors (2010, % of GDP): Services: 67% Industry/mining: 27% Agriculture: 6% 2. Main import sources (2010, % of total): China: 14.1% USA: 12% Argentina: 7.9% Germany: 6.9% 3. Main export markets (2010, % of total): China: 15.2% Argentina: 9.2% Netherlands: 5.1% USA: 4.6% Source: Atradius
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
well as trying to anticipate and act on the regulations before they come into effect,” Sonigo says. Brazil’s new set of incentives and tax breaks for domestic businesses could represent a developing trend of protectionism in emerging markets, at a time when many companies in Europe are looking to these markets for growth. Certain developing economies are taking steps to shield themselves from the effects of the crises in Europe and the USA. Countries such as China and Brazil are concentrating on developing their own businesses, technologies and markets, rather than focusing on commodities and low-margin manufactured goods. While Fernandes sees Brazil as a huge opportunity for foreign companies – “for investors, reinsurers and the business community in general” – he believes it may suffer from a lack of highly skilled workers in key sectors such as engineering and energy. “It may have to import specialists.” According to the Brazilian government, almost 30 million Brazilians entered the middle class between 2003 and 2009 – it now accounts for more than half the population. But the new industrial policy could make it a lot more difficult for multinationals to access this burgeoning market. SR
of European companies anticipated doing business with 19 emerging markets this year. Exporting to emerging markets is the most widely expected action.
33%
of European businesses believe emerging market businesses are able to develop more economic production.
China
is considered to be the most important emerging market, followed by Russia, Poland and the Czech Republic.
5.8%
is the expected GDP growth for Asia Pacific in 2012. Projected global growth is 3.1% this year and 3.5% in 2012. Source: 2011 doing business in emerging markets survey, Atradius
NEWS ANALYSIS [ CONTEXT & INSIGHT ]
Crime and corruption is a huge problem in many parts of the world. Download StrategicRISK’s world risk map at goo.gl/wdtjC
CORPORATE CORRUPTION
‘Disappointment’ over UK’s first bribery prosecution Rex Features
Legal experts claim the act’s test case has missed an opportunity to set a strict precedent, while others believe its potential will only be realised in time In the dock: Some believe corporate bribe-payers are getting off lightly
corporate criminal offence of failing to prevent bribery – not least as corporates are exposed on a strict liability basis. “There is no doubt that such prosecutions of corporates will follow – but it will take longer,” Cole says. Critics deemed that a foreign corruption case carried out by the Serious Fraud Office would have been a more appropriate test case, rather than a minor domestic one (with charges laid by the Crown Prosecution Service). In the view of various legal experts, however, this kind of ‘big splash’ is some time away. “We are seeing this case now because it is a typical single instance of individual bribery whereas corporate bribery is usually committed over a period of time,” says Peters & Peters partner for business crime litigation David McCluskey. “Corporate bribery is o en investigated and prosecuted as a course of conduct, against a complex backdrop of large corporate contracts, involving a series of negotiations. It’s not surprising that there hasn’t been a corporate prosecution yet. “I believe it must necessarily be a couple of years before there is a big splash – particularly when going a er corporations and overseas corruption.”
Corporate focus
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HE FIRST PROSECUTION UNDER THE UK Bribery Act has been met with disappointment from some legal experts. Critics claim the authorities missed their first opportunity to send a stern signal in their fight against corporate corruption. The test case, concerning an alleged £500 bribe accepted by administrative clerk Munir Yakub Patel, could have influenced how organisations perceive their risk under the new Bribery Act regime. “Although a valid violation of the law, this small footnote of a case seems insignificant given the buzz around the revamped Bribery Act,” says information management firm Recommind’s senior corporate counsel, Howard Sklar. “The UK has talked the talk, but with this it has shown it’s not ready to walk the walk.”
Unfounded criticism This criticism, however, is not shared by everyone. In a series of interviews with StrategicRISK, leading lawyers commented that a test case of this kind is no surprise
and that the controversy around it is unsubstantiated. “It is not a surprise that this is the first prosecution we’re seeing,” says Hogan Lovells’ head of the global bribery and corruption task force, Jeremy Cole. “It’s inevitable that the simpler cases are going to be pursued at an earlier date. And the prosecutors cannot pick and choose which cases they prosecute based on PR value. “This recent prosecution concerns the receipt in the UK of a bribe by an individual. However, what corporates and practitioners will be most interested in is how the courts will deal with the new
‘I believe it must necessarily be a couple of years before there is a big splash – particularly when going a er corporations and overseas corruption’ David McCluskey Peters & Peters
In the extensive press coverage that the Bribery Act received, the main focus lay with its influence on companies. Behind the shadow of this key aspect, less emphasis was put on the prohibition of bribery on a personal level. That is, say the experts, as much a part of the act as the fight against corporate corruption. “The Bribery Act’s first purpose was to consolidate some incoherent old legislation into a single modern piece of legislation,” says law firm Herbert Smith partner Alexander Oddy. “In this respect, the act is nothing fundamentally new. It has always been a criminal offence to accept or offer a bribe as much as it is a criminal act now.” “No doubt the authorities were anxious to bring the first prosecution under the new act to court to show it in operation. But the prosecution of Mr Patel doesn’t strike me as a completely missed opportunity – the fact is that the new act is now being used for the job it’s supposed to do. What will of course really be a big deal is the first prosecution of a corporate scandal.” SR
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK
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NEWS FEATURE [ CLIMATE CHANGE ]
Corbis
Climatic activity on the other side of the world can have a disproportionate effect elsewhere
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StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
CLIMATE CHANGE
Rising temperature From agricultural production to changes in the weather, most businesses will be exposed to climate change. But with its risks clouded by uncertainty, how do they reduce that exposure?
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Key points 01: The threat of climate change is huge, but establishing the risk is difficult 02: Changes in weather can have disproportionate effects in other areas 03: The total value of assets exposed in 2005 was estimated to be $3 trillion 04: Businesses should be reducing water useage to help reduce their exposure
LIMATE CHANGE IS ONE OF THE GREATEST THREATS facing humankind. But it also represents one of the most uncertain, unpredictable risks, and while there is a broad consensus that we face enormous challenges, quite what those will be remains a matter of debate. “It’s very hard to establish the risk,” says environmental NGO Earthwatch head of climate research Dr Daniel Bebber, who works with HSBC on climate issues. “The central issue is uncertainty.” But the limits of scientific knowledge are only the beginning of the problem, and our understanding of the risk is further complicated by the difficulties in mapping human response to change. “Even a tiny fluctuation in the climate can have an effect on agricultural production, but this can be magnified out of all proportion by public panic, market speculation and government response,” says Dr Bebber. “In 2008 a drought in Australia caused a collapse in their rice harvest. They are not a big producer, but the government panicked, worrying that there would be a shortage, which prompted larger producers to react with their own embargoes; then speculators got involved and the price went through the roof. By the end of the year, there were food riots in many countries.” Small changes in the weather can have disproportionately devastating affects in other areas. For example, coastal cities are exposed to a far greater risk from increased storms, surges and sea level rises than inland, yet these areas are where the world’s businesses and populations tend to cluster – and where our financial powerhouses tend to sit.
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Making changes to the insurance game plan IN A WORLD OF INCREASED climatic volatility, one industry that is already trying to adapt is insurance. With an increasing number of extreme weather events widely predicted by scientists, it follows that there will be more and more weather-related claims made to the companies that insure everyone
from farmers to homeowners. “Munich Re has already assembled an extremely impressive and probably unique database of claims,” says Dr Bebber. “It has separated them into those that are climate-related, such as floods, and those relating to ‘natural’ disasters, such as earthquakes.” In 2010 there were 950 natural
catastrophes, according to Munich Re, 90% of which were weatherrelated, giving last year the second highest number since 1980. Overall losses were estimated at around $130bn (€95bn), of which $37bn was insured. That puts 2010 among the six most loss-intensive years for the insurance industry since 1980.
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK
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NEWS FEATURE [ CLIMATE CHANGE ]
A northward march of crops could bring decline to Spanish wine-growing regions
A recent OECD Environment Working paper ranked the top 10 cities in terms of exposure population as Mumbai, Guangzhou, Shanghai, Miami, Ho Chi Minh City, Kolkata, Greater New York, Osaka-Kobe, Alexandria and New Orleans. But in terms of assets exposed, the list changes to Miami, Greater New York, New Orleans, Osaka-Kobe, Tokyo, Amsterdam, Rotterdam, Nagoya, Tampa, St Petersburg and Virginia Beach. The total value of assets exposed in 2005 was estimated to be $3 trillion (€2.2 trillion) – around 5% of global GDP. Flash forward to the 2070s and, according to the OECD, the total population exposed could grow more than threefold to around 150 million people and the asset exposure could reach $35 trillion – roughly 9% of projected global GDP. However the figures are stacked up, it’s clear that a huge section of the world’s population and economy are at risk from climate change – a point underlined by Manhattan’s recent narrow escape from the jaws of Hurricane Irene. Reflecting on a stormy 2010, Munich Re reinsurance chief executive Torsten Jeworrek says: “[Last year] showed the major risks we have to cope with … once again, that there must be no slackening of our efforts to analyse these risks in detail and provide the necessary insurance covers at adequate prices. These prices, calculated by the insurance industry, make it possible to assess the economic consequences of these otherwise difficult-to-evaluate risks.” Almost all businesses – either directly or through their supply chains – will have some exposure to climate change. “For example, water availability is already becoming a major issue,” says Dr Bebber. “A lot of businesses need a lot of water, and they may not realise it. Working to reduce the amount used is just one thing managers should be doing to reduce their exposure.”
Tomorrow’s world But among all the confusion and complexity of our changing planet, there are some emerging trends that businesses can use to model what the future will look like. The most significant of these are based on location. “Broadly speaking, climate change will exacerbate the existing differences between a comfortable north and a strained south,” says Dr Marek Kohn, author of Turned Out Nice Again: How the British Isles will change as the world heats up. “In particular the fate of the Mediterranean basin looks pretty bleak, not only on the European side, but the African and Middle Eastern sides as well, and this is a region already under serious strain that does not have the developmental cushion of the West. Spain will suffer but Morocco more so. Migration may well be the biggest story as labour is pulled north towards employers.” This could also mean that developing markets in Africa and western Asia could, quite literally, dry up in the coming decades. “The UK will also have a different experience to mainland Europe, and our climate may become an object of envy rather than mockery because weather extremes will always be softened by the effect of the Atlantic, just as they are now,” says Dr Kohn. “This might make the British Isles quite an attractive place, relatively speaking, for inward investment and migration. Not only for the retirees who currently head for the Dordogne and Costas, but also the yuppies of Paris, Berlin and Barcelona might find a new affection for Manchester, bringing their money and business with them.”
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StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Mumbai Guangzhou Shanghai Miami Ho Chi Minh City
Kolkata Greater New York Osaka-Kobe Alexandria New Orleans
Corbis
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Top 10 climate change exposed cities
However, Dr Kohn warns: “It’s worth remembering there are no political or economic islands in the world, and we will always be affected by what happens elsewhere.” Whatever the outcome, there will undoubtedly be opportunities in adaptation. “For example, in developing new crop varieties better able to cope with drought and temperature extremes,” says Dr Bebber. “Or – providing governments and the international community agree on the right legislation – carbon markets, as well as sequestration and alternative technologies.” Getting to grips with this and securing the right investment with the world’s economies being buffeted by some serious storms may be tricky – but the alternative is a future that looks even more uncertain. SR
Climate change brings winemaking woes WINE IS ONE OF THE MOST ICONIC European products; not only an exportable and profitable industry but, for many, a foundation of the civilisation that has shaped life on the Continent with pronounced regional trends. Over the centuries, grape varieties have acquired strong associations with particular areas – in French the word ‘terroir’ is used to denote the special characteristics a bottle acquires
from local geography, climate and geology. But all that could be about to change as climate change bites. “There will be a general northward march of crops,” says Marek Kohn. That could be great for new producers, but disastrous for established vineyards. “We could be seeing champagne in the south of England while poor old Portugal is le growing raisins, and this could be a relatively rapid, decadal shi ,” says Kohn.
Viewpoints
[ PEOPLE ] [ OPINION ] [ COMMUNITY ]
‘Many European businesses have embraced globalism and the benefits it provides while ignoring what’s happening on their doorsteps’ Sue Copeman, EDITOR-IN-CHIEF, STRATEGICRISK IN MY OPINION
A season of discontent Although the August riots have undoubtedly damaged the UK’s global reputation, no country is immune from civil unrest
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HE UK RIOTS AND ENSUING DAMAGE that occurred in August took businesses by surprise, not least those whose premises were looted or burned. The root causes are far wider than the alleged direct trigger – the fatal shooting by police of a local man in the municipal borough of Tottenham. Drugs, a crime-funded lifestyle and laziness may play a part – if one believes the media – but it’s too easy to blame these and not look beyond them to the fundamental failings of a society that has let a large proportion of its members down. And while the UK may be the victim today, other European countries are also likely to fall prey to this worst kind of activism.
Many European businesses have embraced globalism and the benefits it provides while ignoring what’s happening on their doorsteps. This includes communities divided by racism, disaffected minority groups falling outside the education system and turning to crime, and a general feeling of hopelessness among the unemployed as regards changing their situation by any legal means. Clearly economic circumstances and demographic changes have played a major part in reducing the number of jobs and opportunities available for young people. Many European companies have chosen to outsource some of their more labour intensive activities to countries in the developing world where employment costs
INSIGHT
Deprivation and the London riots Locations within deprived areas are more vulnerable to unrest, especially those that have high deprivation levels but have also experienced an influx of upmarket retailers and high-income groups
Least deprived areas Most deprived areas Unrest incidents
Source: Exclusive Analysis
> Profile Michel Dennery ......... 20 on considering sustainability within risk mitigation > Q&A Abengoa ........................ 22 Chief risk officer Rogelio Bautista Guardeno on his career so far
are lower. As Europeans look forward to a longer life span, retirement ages are being extended with a consequent reduction in new recruits. And, with fewer jobs available, despite antidiscrimination legislation, I suspect that some companies give preference to applicants that they view as ‘nationals’. It would be unrealistic not to recognise that racism still abounds, certainly in the UK. In Britain, today’s target is the black community, but at one time Jewish people were hated and hounded, Irish immigrants came in for their fair share of disapprobation, Asians were – and to some extent still are – mistrusted and discriminated against. If the UK is typical of Europe, it’s a sorry state of affairs. And it doesn’t seem so much different from the tribal tensions that we all deplore in countries like Libya and some parts of Africa – those tribal tensions that all too frequently lead to war. So the UK, and perhaps other countries in Europe, has little to congratulate itself on how it is handling the inhouse issues that are now creating civil unrest in other parts of the world. This is the macro picture. How does it translate to the micro – in this particular context, what risk managers can do to protect their outlets against riot damage? Hopefully, there will not be a repeat any time soon of what happened in August in the UK. And there’s no easy answer as to how any European company can protect its premises against mob vandalism. But there are some strategies that might help. I believe that the key is involvement with the local community. Large retail chains with a presence in every high street can be pretty anonymous and, as such, expose themselves as targets to rioters and looters. Individual outlets should pursue a policy of employing local people and getting involved in local affairs, for example funding school initiatives, scholarships, land for allotments or whatever. Perhaps, more controversially, they need to address head on the ‘more difficult’ sectors of their local community. Funding a drug rehabilitation centre or providing support for families in need may be difficult, but in the UK where the government is looking for the ‘big society’ to support services that can no longer be funded by the public sector, such initiatives are now feasible. The fundamental principle as far as risk management is concerned is that it is far more difficult to trash something to which you feel an allegiance. Have the riots harmed the UK’s reputation globally? Probably yes, but – in these times of civil unrest and national uncertainty – few European countries can be sure that they may not be the next victims. SR [READ MORE ON-LINE] Sue Copeman also writes a regular column at www.strategic-risk.eu
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PROFILE
Forging ahead Social imbalances will play a major part in future risk mitigation, GDF Suez deputy chief risk officer Michel Dennery believes, with ERM playing a critical role
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Career history EDF Head of media relations 1994-97 EDF/ GDF Services Vice-president of gas and electricity distribution 1997-2002 EDF/ GDF Distribution Deputy manager of procurement 2002-06 GDF Suez Deputy chief risk officer 2006-present
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ICHEL DENNERY, DEPUTY CHIEF RISK OFFICER AT GDF Suez, is one of the most active members of the French risk management community. As well as being a Ferma board member, Dennery is the president of the French risk management association Carm. Throughout his diverse career in risk management, Dennery has strived to promote the profession in France. After graduating from the École Centrale de Lilles in 1981, Dennery began work as an engineer. Yet, despite this technical background, it is probably his experience with the media that has had the biggest influence on his approach to risk management. “I had three different operational engineering jobs, after which I wanted to get involved with the corporate side of the business,” he says. “So I was given the job of managing the press service at EDF. I had to manage several different media crises, and every time you prepare a press release you anticipate a reaction from the press and the public, which has key parallels with risk management.” Dennery held the position of head of media relations at EDF for three years, and during this time he spoke at a seminar on business communication in 1996. The event was organised by Thierry van Santen, another prominent figure in the French risk management community, who was developing risk management at the French food group Danone. “At that time I understood how risk management was connected to communication and PR. The risk officer’s role is to anticipate the unexpected and that’s one of my key roles now,” Dennery says. After being inspired by Van Santen, Dennery returned to his work in operational management but he continued to actively study the discipline of risk management. This work culminated in an extensive report on global risks in 2000. “I had hired an intern and we began to work on a method for a global approach to risks,” he explains. “We worked with the research team at EDF and we contributed to the elaboration of the first method of global risk management for EDF.” For Dennery, an informed understanding of risk allows companies to act with more conviction and to progress more quickly. “You have to develop strong convictions to advance and to undertake new tasks. You must always advance while being vigilant at the same time,” he says. He believes that companies need to have a dynamic approach to risk and that over-regulation can sometimes leave companies more prone to disaster. “Organisations that have systems that are too rigid are cutting themselves off from reality, cutting themselves off from the reaction of the public, and sooner or later a catastrophe will take place. Certitudes can be very dangerous.”
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Raphael Dautigny
Experience across different industries has given Dennery the objectivity needed to work with a global firm such as GDF Suez
Dennery often emphasises the positive side of risk. For example, touching on cyber risk, he says: “Cyber risk is often highlighted as a negative thing – and there is the real threat of hacking and of data loss – but there are also a lot of opportunities. The question for businesses is to know how to anticipate this new business and harness it, protect your brand image and your market share by using this new media to engage with clients and stakeholders. For me, there is also a generational or a cultural issue. I really have the impression that things are changing very quickly and that companies need to manage this change so they don’t get left behind.” Dennery thinks his experience across various sectors and industries gives him the benefit of objectivity. This is essential to co-ordinate risk management for a truly global company ‘In China there are like GDF Suez. For example, 300 million people who Dennery believes pension risk is a have a standard of living of a that is comparable to that manifestation more general problem: that of the distribution of western economies – “In a region that’s the equivalent of the ofthatwealth. is developing economically, such as European population’ Europe in the roaring Michel Dennery GDF Suez ’20s or Asia now, the cost of looking after society is relatively low, so you can increase funds going to social welfare. When the economy plateaus – which is the case now in Western countries – we no longer have the economic growth to finance the cost of social welfare.” The challenge is now for governments, and also companies, to address the imbalances that exist in the economic system, he says. “If this social cost is impeding economic growth, you have to find a new balance in society without having huge reductions in the public sector.” Dennery repeatedly stresses the importance of anticipating risks and effectively planning to mitigate future threats. One of the key emerging risks he identifies is the sustained increase in the price of commodities. “We’ve seen the prices of metals almost double in 10 years. The price of crops such as wheat and corn has increased significantly. In terms of energy, before the economic crisis the price of oil had risen to $150 or $160, but today the global demand for all kinds of nonrenewable resources has seen a huge increase because of demand from economies that are no longer emerging, but have emerged.” A series of major demographic shifts have already occurred and risk managers need to understand how these changes will affect their companies, he says. “In China there are 300 million people who have a standard of living that is comparable to that of western economies; 300 million is the equivalent of the European population. This standard of living increases the demand for energy, water, metal and food. In the long term, there is a real question around price level and the profitability of business activities that are dependent on these primary resources.” Like many risk managers, Dennery believes ERM represents the future of risk management. “The question today is to go further and
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»
VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]
» ask companies to be
Raphael Dautigny
more explicit about their ‘Organisations that are risk appetite. Moreover, this is the goal of the too rigid are cutting green paper published themselves off from by the EU and the 9th Directive on corporate reality … and sooner or governance. When we later a catastrophe will talk about risk appetite, we are talking about the take place’ development of the Michel Dennery GDF Suez business, the appetite for business growth.” However, for ERM to continue to establish itself in the corporate culture of companies around the world, a strong risk management community is essential. This is where Ferma can help, Dennery says. “As professionals, it’s very important to be able to exchange ideas so we can improve risk management in our organisations and share new ideas. Ferma has developed a number of communication
Q&A
‘I believe the risk manager should be an expert in how not to buy insurance’ Could you tell us about your career history? “I graduated in law and I also did postgraduate studies in business administration and human resource management. My first job as a professional was as a manager for a company owned by the French business Vivendi. I have been at Abengoa for the past 20 years. At first I was the manager of one of the companies of the group, and 13 years ago the chief executive gave me the task of setting up a risk management department in our company.” Why did he pick you to set up the risk management department? “I think he knew I had the right management experience, but he also wanted someone who had an education in law, was technically minded and understood the engineering industry. From the beginning, our idea of risk management was not related to insurance, it was to analyse and understand our political, financial and regulatory risks. The chief executive wanted someone who could analyse contracts, agreements, joint ventures, clauses, responsibilities and so on. At the beginning it was me and me alone and now we have 35 people working in the risk management department.”
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StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Rogelio Bautista Guardeno, CHIEF RISK OFFICER, A BENGOA
Is ERM gaining influence and popularity throughout Europe? “I think there is a lack of understanding of risk management at the highest levels in some big companies in Europe. It’s true that there is a growing number of people who understand that risk management is something that adds value to a company. However, only a few years ago it was still seen as a process that was there solely to protect assets and responsibilities, not to anticipate possible risks or improve the company. In the US the situation is quite different and there are more CFOs than in Europe – my role is more akin to that of a CFO than a risk manager in the traditional sense of the term. I think that Abengoa is probably the only company in Spain where the risk management department engages in all these kinds of activities.” What is the most important lesson that you have learned in your career? “The most important thing is probably that you cannot achieve real risk management if the executive branch of the company is not convinced; risk managers need the support of the board to do their jobs effectively. The most important lesson for me is that risk management has to come from the top down
and not from the bottom up. If risk management comes from the top down, 75% of the battle is already won. The second valuable lesson is that risk management has to be a function that forces the risk manager to understand all of the processes, functions and staff of their company. Risk managers have to have a very broad perspective; you can’t simply be an expert in insurance. I often say that the risk manager should be an expert in how not to buy insurance: ideally they should know how to manage risks without paying for them. Of course, you need to know how to buy insurance, what kind of insurance policies there are in the market, what kind of risk you are able to protect with an insurance policy; but this is the second step. The first step is to manage all other options so that you don’t have to buy insurance.” Do you communicate with staff at all levels of the company? “Yes, I think that this is very important. We have several internal procedures and we have an internal manual on risk management that is transmitted to all employees in the company. For example, for 10 years now I have been organising internal training in risk management not only for the risk management or insurance team but also commercial people,
Community update tools with social networks – there is a Facebook community as well as a LinkedIn community, and there are videos on YouTube relating to risk management. I really have been pleasantly surprised by the appetite that risk managers have to communicate with their peers.” As for the future of his own industry, Dennery believes that renewables are important but that it’s the diversification of energy sources that is key. “Renewable energy will never supply enough power to meet all the world’s needs. We can’t really consider covering the world in dams, windmills and solar farms. However, when we can harness renewable energy, we need to do it; so we’re talking about 20% or even 30% of energy production. If we can do that, it will prolong our access to fossil fuels. This is something we have to do.” The two key lessons, then, that other risk managers can learn from Dennery are the importance of managing relationships with the media and the ability to see the opportunities that are linked to risk. SR [READ MORE ONLINE] There is an archive of risk management profiles on www.strategic-risk.eu
technical people and the management team. Risk managers must be able to obtain allies in the company. The other people in the business have to see the risk manager as someone who helps, who brings something, not someone who takes away or limits activity. This is because our work as risk managers depends on what these people tell us about the running of the business; we have to be loved, not hated by the organisation.” How do you think risk management is evolving? “I’m not sure. When you talk with other risk managers, they say that risk management is evolving and that’s a good thing. But in reality, if the awareness and support of executive management is not increasing, risk management cannot develop effectively. I believe that the evolution that we are seeing in risk management is the result of the efforts of risk managers rather than increasing support from the board. The main factor is that there are many great people working in risk management, people who have great ideas and who have the intention of developing the discipline of risk management. However, companies’ boards need to give more support to these kinds of individuals.” How do you think the economic crisis is affecting risk managers? “I believe we are in a critical time. I think that we are in a time when dynamics are changing, there are lots of different pieces which are moving and changing place. For example, you have the Arab Spring and various economic convulsions. I think that risk managers are obliged to understand the implications of these events and also to raise themselves above, to have a more objective view of the situation. We have to be able to see these events from above so we can anticipate the consequences of these events and protect our companies. You have to have a global perspective of the situation and be able to react very quickly to changing factors. I think that this is the most critical economic situation in my time as a risk manager.” SR
Austrians living in regions that are in danger of floods or avalanches are unable to purchase insurance for natural disasters in their ‘red zones’ – high risk regions – because it does not exist. A request put forward by the country’s Versicherungsmakler (association for insurance brokers) asked Austria’s insurance industry and government to make insurance for natural disasters possible in every red zone region.
On its recent German launch, web-based collaboration platform for the industrial insurance sector inex24 was mired in controversy for its data security. Now ThyssenKrupp, Siemens, Tchibo and Bosch have jumped on board and made the platform popular among German insurance managers. ThyssenKrup was the first customer to successfully arrange its property renewal via the system.
The Nordic Risk and Insurance Summit (NORIS) called on insurers, reinsurers and businesses to tackle a growing array of emerging risks and to contend with the new key dynamic of an interconnected world. The consequences of risk ripples across the globe are extremely difficult to combat, warned Swiss Re head of emerging risk management Reto Schneide at the conference.
HOT ISSUE
DVS Conference 2011 Just days before the hustle and bustle of Bavaria’s annual Oktoberfest began in Munich, insurance and risk management experts gathered in the picturesque city at the annual DVS conference on 7 and 8 September to talk about the industry’s hottest topics. One issue was a discussion about the material damage caused by the recent catastrophes in Japan. Reiner Gleiss of Mitsui Sumitomo Germany released figures showing that a sum of €5.4bn was owed by industrial
insurers. Various (re)insurers have predicted the overall amount of damage to be more than €146bn. Addressing a more international issue, Agostino Galvagni of Swiss Re revealed that natural disasters have cost insurers worldwide around €70bn in the first half of 2011. He predicted the premium for natural disasters to rise significantly, saying: “Everything points towards the fact that premiums will now start to rise.”
[READ MORE ONLINE] You can download StrategicRISK’s own local language conference dailies here: goo.gl/G26qx
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Risks
[ THREATS ] [ OPPORTUNITIES ] [ MANAGEMENT ]
> Giant Risk Atlas StrategicRISK has compiled information from a series of reports this year to create this annual risk atlas wall chart
GLOBALISATION
Divided they fall The benefits of a worldwide presence can be offset by increased vulnerability to hazards including political unrest, natural disasters and lack of a shared corporate culture
E
UROPEAN COMPANIES THAT HAVE GONE GLOBAL HAVE GAINED IN lower supply costs, larger markets for their products and, more recently, the ability to offset western recession. The pain for many began to bite this year when a series of global events spelt out the vulnerability associated with a worldwide presence. Political tumult began in Tunisia, then Egypt and extended elsewhere. Floods in Australia were the first of several huge natural catastrophes including the earthquakes in New Zealand and Japan and the US hurricanes which, according to Associated Press, have already cost insurers almost $25bn (€18.3bn). In addition, according to a 2010 McKinsey Global Survey, while the core drivers of globalisation remain valid, “executives are still grappling with how to seize the opportunities of an interlinked world economy”. Until the credit crunch, mergers and acquisitions (M&As) were one of the traditional routes used to speed up globalisation, the potential benefits including instant market presence in new territories and increased market share in existing ones. For companies that were not cash-rich, the crunch spelt the doldrums for M&As. » Bloomberg reported that global M&A activity saw a ‘strong comeback’ last year.
Establishing a common culture across territories is essential, but not easy
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RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
Some global corporations, most recently News Corp in the UK, have found that breaching ethics is not just a matter of reputational damage and a few harsh comments on the web – although those never help a business. There can be a direct detrimental financial 01: Global expansion impact. Investors, particularly in the USA, are never slow to sue. activity through M&As Pierce notes that directors are now aware that the message the is making a comeback board is giving out may not reflect what’s happening lower down post credit crunch the chain of command. “I am asked often by organisations to 02: However, at least half compare the rhetoric with the reality,” he says. of all M&As do not If strategies, risk culture and CSR are the soft issues around succeed, usually due globalisation, the hard issue is that some countries are more prone to integration issues to natural disasters and political unrest than others. Companies 03: Establishing a At least half of all M&As do not succeed embracing globalisation go to regions that common corporate Reports suggest that over half of all M&As – offer the greatest benefits in terms of supply some put the figure as high as 90% – do not culture, including costs and indigenous market. These may not succeed in terms of meeting corporate approach to risk and be the safest bet in global risk roulette wheel. objectives. In its study Post-Merger CSR, is key to a Japan’s earthquake Natural catastrophes are aptly named Integration: The Key to Successful M&A, successful M&A was an eye-opener for ‘acts of God’. They are largely unpredictable. Merrill Corporation says that success 04: Some countries are Even in notoriously hazard-prone areas, no depends almost entirely on an effective more prone to natural some sophisticated risk model has yet been able to come up with integration process. disasters and political western companies a firm indication of when and where Establishing a common corporate culture unrest than others catastrophes will occur and their scale. Risk across diverse organisations in very different 05: The Japan earthquake that had thought they managers may have to carry the can if they countries is a challenge. For risk managers revealed weaknesses were in control of their do not have mitigation strategies in place. looking to roll out enterprise risk management in many global Traditionally, risk managers whose (ERM), the difficulties in establishing a companies’ supply supply chain companies have operations in high-risk areas universal approach to risk and its management chains will seek to protect physical assets as far as can be profound. Some national cultures are feasible and insure the loss should the worst happen. But some risk inherently more risk averse than others. managers are moving outside the conventional mode. Accenture’s 2011 global risk management study points to the inability of many companies to infuse a risk culture throughout their organisation. “If a broader culture of risk awareness is not New emphasis on mitigation created, companies will struggle to realise the full benefits Adrian Clements, general manager of asset risk management at possible,” it says. ArcelorMittal, believes that compensation for physical damage Similarly, enforcing common corporate social responsibility may be poor consolation in view of the potential for years waiting (CSR) standards across worldwide operations and their supply to get back into production and lost market share. Although the chains is an imperative that global companies cannot ignore. The company transfers some financial risk, Clements has embarked on OECD, which this year issued new guidelines to promote a programme to mitigate its market share risk. responsible business conduct by multinational enterprises, also This involves analysing the vulnerability of individual plants to amended its code to take in non-OECD countries. extreme events such as large earthquakes and providing protection to ensure that they can quickly be up and running. Clements says that it’s also important to look at the surrounding infrastructure to Learn from News Corp troubles guarantee continuity of production. It’s a new approach, moving According to Global Governance Services chief exexcutive Chris away from identifying probability for insurance purposes to Pierce, the board must be responsible for setting ethical standards. assessing and protecting vulnerability for mitigation. One stumbling block is that something considered legal in one Japan’s earthquake, accompanied by a tsunami and nuclear jurisdiction may be banned in another, for example contract reactor problems that shut down suppliers’ power, was an facilitation payments or donations to political parties. eye-opener for some sophisticated western companies that had thought they were in control of their supply chain. Automotive SPOTLIGHT companies had to reduce operations because of lack of supplies from Japan and there were profit warnings from electronics companies. The winners were those businesses that had already made alternative supply arrangements, says Chainlink Research, The Willis report, Executive Risks – A boardroom guide 2010/2011, highlights the greater whose 2011 supply chain risk survey reveals that multinational appetite of regulators globally in identifying and prosecuting companies and their companies are pretty poor at managing their supply chains. directors for breaches of competition and securities regulation. Volatile political conditions have also caused concern this year. “Overall, there is a growing appetite for increased and improved enforcement, and this As well as the need to repatriate employees – in some cases at very can be seen at a local level in just about any jurisdiction,” says the report. There is also short notice – hard-won contracts with governments may be increased co-operation between regulators on an international basis. overturned if a new political regime takes over. SR
Key points
The Organisation for Economic Co-Operation and Development (OECD) also confirmed that foreign direct investment activity recovered last year for the first time since the beginning of the global financial crisis in 2008. However, if globalisation in itself presents new risk challenges, so too can the strategies used to effect it. With M&As – and divestments – the devil is in the detail, according to the head of Marsh’s M&A practice in London, Daniel Max. Sellers may play down the significance of potential risks and liabilities and be reluctant to give the required warranties or indemnities.
Regulators increase D&O threat
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StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
GLOBALISATION
The greatest risks and opportunities Intellectual property, currency fluctuations, political instability and lower safety and quality standards are the top four barriers to success in emerging markets
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LOBALISATION IS THE CHOSEN STRATEGY FOR most large companies but it has a significant impact on corporate risk profiles – it has the affect of both increasing and decreasing risks. In recent years, the advantages of globalisation have come well and truly to the fore. Diversifying into developing countries with strong market demand has helped large international conglomerates to weather the European and US recession. As one risk manager commented in this year’s StrategicRISK Report, the ability to do “natural hedging” in terms of services and products provided and the countries they are provided to gives more resilience against economic factors. Similarly, access to cheaper labour forces than those available in the West has helped to protect profitability. But diversifying into emerging markets without a clear understanding of the threat landscape is foolhardy to say the least. Each region has its own specific risk issues and risk managers need to meet the challenge of assisting their boards to assess these issues in order to make the right choice for the business. “The core drivers of globalisation are alive and well, but executives are still grappling with how to seize the opportunities of an interlinked world economy,” said a McKinsey Global Survey last year. On risks faced by their companies in emerging markets, executives cited breach of intellectual property (40%), volatility of currency or exchange rates (38%), geo-political instability (26%), and lower safety and quality standards (26%) as the top four. Executives at North American, technology and telecoms companies were most concerned about IP, while companies in the financial sector worried most about currency volatility and energy companies about geopolitical instability.
Globalisation brings with it uncertainty The StrategicRISK Report published earlier this year also revealed European corporations’ concerns about political developments in
North Africa and the Middle East. Unrest on this scale in the countries affected had not been predicted and the speed of developments took the business world by surprise. “Some companies with operations, outlets or suppliers in the countries concerned have been directly affected, facing serious challenges with respect to expatriates’ safety and repatriation, tangible investments protection and continuity of supply. Others believe that they may experience an indirect impact. And all are concerned that new turmoil in the Middle East could affect oil production, pushing up energy prices,” said the report. Having property, projects, outlets and service contracts in countries with a potentially volatile political regime has to be a significant risk for global companies. Risk managers need to have adequate processes in place for enforcing property security and protecting – or even repatriating – personnel should civil unrest prove a threat. There is also a supply chain disruption risk for companies that source from such countries. And contracts with state-owned or quasi state organisations may be threatened by government changes and possible repudiation.
Understanding risk interdependence
www.strategic-risk.eu [ October 2011 ]
Globalisation risks The threats facing companies in an increasingly globalised world
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Political risks and the effects of natural disasters are two of the immediate concerns of global risk managers. Following the Queensland and Victoria floods in Australia, the Sydney Morning Herald warned that urbanisation, climate change and globalisation are leading to more and greater catastrophes. It quoted Erwann Michel-Kerjan, managing director of the Wharton Business School’s Risk Centre in the USA and chairman of the Organisation for Economic Co-operation and Development (OECD) secretary-general’s advisory board on financial management of catastrophes. He said that in the 21st century there has not been a six-month period without a major crisis that affected several countries or industry sectors. The world has become an interdependent village. The article commented that classic risk strategies are out of step with the new interconnectedness of the global economy. “The conventional risk management approach lists possible events and determines the probability of their occurring based on experience. The problem is that it assumes risks are local and routine and fails to take into account the impact they may have on different organisations and states. It does not factor in the impact of the growing number of unlikely but potentially devastating events. It is an outdated approach that robs organisations of their agility.” All of these comments suggest that tomorrow’s global risk manager may be a somewhat different animal from today’s. There are new risks to consider, such as lack of appropriately skilled employees, and a far more uncertain geo-political climate. Expecting the unexpected could be the norm. SR
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RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
RISK FINANCING MARINE AND CARGO
Pressure from all sides Major natural catastrophes, piracy attacks, continuing cargo the and a stagnant global economy – there’s plenty keeping the marine and cargo market awake at night this year
I
T HAS NOT BEEN A GOOD YEAR SO FAR FOR MARINE AND cargo insurers. Hit by natural catastrophes around the world – including the magnitude 9.0 Japan earthquake and tsunami on 11 March – loss ratios have begun creeping up. Yet the market remains wildly competitive, with new capacity conspiring to exert downward pressure on premium rates in what is already a very so market. “It’s been a shocking year for cat events but so far that hasn’t translated into a significant hardening of rates or even rate increases within the cargo market, except on limited occasions where you’ve got stock in a known high-cat area,” says Chartis International vice president of global marine cargo Jonathan Eaton. “Overall rates are at best flat, but in reality if it’s a profitable piece of business from an underwriting standpoint, there’s still downward pressure on rates.” The Japan event, February’s earthquake in Christchurch, the flooding in Queensland and severe weather in the US are adding up to significant claims for the insurance industry – with reported estimates of about $60bn (€43.5bn). How much of this falls to the marine and cargo market is uncertain, but there will be losses. According to cat modelling agency RMS, while there were initial estimates of at least 10 ocean-going ships considered total hull losses in the tsunami, with a total insured value between €145m and €218m, some were eventually located adri . Other significant losses in the marine sector are cargo coverages, with thousands of 20 equivalent units (containers) smashed and inundated by the tsunami or washed away at Sendai Port. Large quantities of stock were also spoiled by salt water inundation or while they were stuck in warehouses at port level. Overall, the impact on industry capital at a time when investment returns are low suggests underwriters will be under more pressure to make a profit going forward. “ There is definitely an upward pressure from insurers, but for the most part we’re managing to stay where we are on renewals,” says Lockton divisional director for risk solutions, cargo and logistics, Graham Hambly.
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Buyer’s market An oversupply of vessels in a sluggish global economy remains a concern, but orders have picked up for bulk carriers, tankers and containers, with China the source of 41% of the demand. While import and export activity has picked up as the global economy emerges from financial crisis, earnings are still lower than the last peak in 2008 (International Union of Marine Insurance, IUMI). Any new business in the market is aggressively fought over, says Eaton. “Most noticeable in cargo is an increase in activity on project cargo risks as finance has come back for some projects that have been mothballed,” he says. “We’ve seen an increased number of projects recommencing, so that’s a positive trend. But that business, which is very much on target for us, is subject to the same overcapacity, so we’ve seen quite a violent decrease in rating and widening in terms for good-quality business.” The continued increase in global cargo underwriting capacity has created a competitive buyer’s market, according to Gallagher London. In its February 2011 marine newsletter it comments: “Trade volumes and commodity prices are increasing in most sectors, which will increase clients’ turnovers and put pressure on underwriters to reduce rates further. These increases in volume will likely increase claims activity, with insurers’ margins diminishing. To moderate this potential for reduced margins, underwriters and brokers will be looking to work with clients to establish and incorporate effective risk management solutions.” One concern is that in such a so market insurers could be tempted to take a harder stance on claims. The industry needs to work together to ensure a high level of professionalism is
1996-2000 2001-2005 2006-2010
45%
40%
35%
30%
maintained, thinks Eaton. Finding new ways of gaining efficiency in the market is also to everyone’s benefit, and initiatives such as electronic endorsements can help achieve that.
Supply chain disruption From a cargo perspective, one significant impact of this year’s catastrophes – including the Arab Spring unrest throughout North Africa and the Middle East – is the impact on supply chains. Spikes in the price of coal and steel were experienced when the mining sector in Queensland’s Bowen Basin was unable to get its product to port, while in the USA car manufacturers and the electronics industry experienced a slowdown in activity a er the Japan earthquake.
25%
Other
Total marine losses 1996-2010, by cause, all vessel types
NEW AGE OF PIRACY Machinery
Hull damage
Collision/contact
Fire/explosion
Grounding
Weather
20%
15%
5%
10%
0%
Source: Lloyd’s Marine Intelligence Unit
‘We’ve seen quite a violent decrease in rating and widening in terms for good-quality business’ Jonathan Eaton Chartis International
“The earthquake in New Zealand, tsunami and floods in Australia have had an impact on the cargo market,” says Hambly. “Not only have you got goods held at ports and in transit in those places, it’s increasingly the case that goods are insured throughout the supply chain – from the time the goods are manufactured and
IN THE FIRST HALF OF 2011 THE NUMBER OF PIRATE attacks on ships around the world reached 266 (up from 196 attacks in H1 2010, according to the International Maritime Bureau). Ransoms are increasing, with the average thought to be about $4m (€2.9m), and there have been tales of growing violence on board hijacked vessels. According to Ole Wikborg, the Norwegian president of IUMI, piracy problems in the Gulf of Aden and the Indian Ocean are “an absolutely unacceptable disruption of global trade to which marine insurers must respond”. In addition to increased capacity for specialist kidnap and ransom (K&R) covers, marine and cargo insurers have been doing their utmost to mitigate the financial losses resulting from piracy, helping in negotiations with pirates and to provide their proportion of ransoms demanded to release crews. “The first thing they want to know is whether piracy is covered under a cargo policy,” says Hambly. “The problem is that when goods are taken by pirates, technically they’re not lost and damaged – they know where they are – so you have a situation where cargo insurers tend not to pay the claim straightaway as there’s a good chance of getting them back. “With ransoms paid, generally vessels are returned in three or four months,” he continues. “The problem we’ve encountered is that when you’re dealing with something that is time-sensitive or goods that deteriorate or commodities subject to price fluctuations, the delay of two or three months could leave you with a substantial loss that wouldn’t necessarily be covered under a conventional cargo policy. We’ve been trying to put together some vehicle that will pay for loss of income from the piracy act.” While piracy is undoubtedly a concern for insureds, Eaton urges them to keep a sense of perspective. “While it’s high profile and gets a lot of press, the actual number of hijacks when you look at total volume of shipping is relatively small, but they are significant nonetheless and the average cost of ransoms is going up,” he says.
produced through to the end customer – known as stock throughput insurance.” While trade disruption covers are available in the market – and contingent business interruption if a client is heavily reliant on one key supplier, for instance – trying to bring new products to market and encourage additional premium spend is not easy in the current climate. Delay cover can be put back into policies where it has been excluded, but again that requires additional premium. “There’s increased awareness of other products that fall under the heading of marine – trade disruption is one. The other side of this is finding a market for that in the sense that risk managers are increasingly price conscious, especially when margins in their own organisations have been cut to the bone,” says Eaton. SR
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republicans (see box, over) – and similar groups such as Basque separatists – may pose a risk to life, they are not capable of the massive attacks that have been perpetrated or attempted by Islamic fundamentalists. “The threat is less from al-Qaeda (see box), which is in a lot of trouble, and more Terrorist threats have become an inescapable aspect of modern life and, from groups or individuals inspired by al-Qaeda or what al-Qaeda represents,” says as these leading terrorism experts argue, countries cannot take their Steve Hewitt, senior lecturer in American and Canadian Studies at the University of safety for granted – whatever action they take to minimise the risks Birmingham and author of The British War on Terror: Terrorism and Counter-Terrorism ESPITE RECENT TALK OF A “STRATEGIC VICTORY”, on the Home Front since 9-11. 10 years on from the attacks of 9/11 Islamic fundamentalism “Statistically, Islamist terrorism is less of a threat than is still the major terrorist threat to Europe. “Any statement that ethno-nationalist terrorism, but the difference is that Islamist al-Qaeda is a spent force should be treated with real scepticism,” violence tends to be more spectacular, with higher losses of life.” says Maplecroft associate director Anthony Skinner. Figures released in 2009 by Europol showed that more than The only deaths from terrorism in the UK since the bombings 99% of terrorist attacks in Europe between 2006 and 2009 were of 7 July 2005 have been in Northern Ireland. And while dissident carried out by non-Muslims, and out of a total of 1,009 terror EUROPEAN TERRORISM
Threat level: ongoing D
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© Rex Features
suspects arrested continent-wide in 2008 only 187 of them were arrested in relation to Islamist terrorism. However, the scale of the Islamist threat far outweighs other political violence. “It’s very hard to measure the scale of the Steve Hewitt Birmingham university threat,” says Skinner. “It very much depends what is in the pipeline and although we are seeing a surge in al-Qaeda-inspired activity in North Africa, Yemen, Iraq and Nigeria, it is difficult to predict where an attack might happen or what the scale might be. “It’s very hard to spot an individual acting alone (see box, below),” he continues, “and in that sense the intelligence services are on the back foot.”
‘There has to be an acceptance that nothing can ever be 100% risk-free, so it becomes better to have plans in place’
End of bin Laden, end of al-Qaeda?
Far-right rally denouncing globalisation, Paris, May 2011
With the death of Osama bin Laden on 2 May, many might have been tempted to interpret the killing as a full stop to the end of the al-Qaeda era. That would be a mistake. While it’s true that, alongside bin Laden, many of al-Qaeda’s most important figures have been killed and had their networks disrupted by the US and its allies – particularly through drone attacks on the Afghan/Pakistan border – their influence endures. That’s because al-Qaeda was never the single organisation run on a tight hierarchy that many imagined. It was akin to a venture capital firm, providing finance, training and, most importantly, ideological inspiration to groups that made contact. As such it continues to inspire Islamic fundamentalists, particularly in Yemen, Somalia and Maghreb, all of which represent serious emerging threats.
So er targets “If there are attacks, they’d likely be against public transportation networks or other so targets because those carrying them out increasingly seem to be amateurs or even individuals,” says Hewitt. “There is a fear of a Mumbai-style attack but the lack of easy accessibility to weaponry might mitigate against that.”
Although all aspects of society are potential targets, transportation, and in particular air travel, remains a favourite. “There almost seems to be a one-upmanship going on, in that the terrorists devise a new method to attack planes, which leads to new security measures, which leads to new ways to attack planes,” says Hewitt. Other vulnerable industries include any multinationals working in the defence industry, energy or infrastructure. “What they want is a high-profile, headline-grabbing target,” says Skinner. “At some level there has to be an acceptance in a free society that nothing can ever be 100% risk-free, so it becomes better to have plans in place in the event of an attack,” says Hewitt. “Luckily, terrorists seem to want to go after better-protected targets instead of lesser-protected so-called ‘soft targets’. Part of that seems to be about a desire for maximum publicity but also an effort to send a message that no one can ever really be safe.”
9/11 ANNIVERSARY
Terror threat “no less severe” IN THE AFTERMATH OF THE KILLING OF AL-QAEDA’S leader Osama bin Laden the global terrorism threat has become much more diverse but no less severe, according to a new report by Risk Management Solutions (RMS). On the one-decade anniversary of the September 11 terrorist attacks, the report analyses the way terrorism risk management has evolved. It surmises that the assassination of Osama bin Laden caused a blow to the global “Jihadist” movement that could change the threat landscape. More than 2,400 “macro terrorism” attacks have been committed in the past 10 years, according to RMS. These attacks have extended beyond the Middle East and South Asia hot spots, spreading to more than 40 countries worldwide. Terrorism risk may have dispersed but the way it is managed has also progressed over the past decade, says the report. “The insurance industry has become much more comfortable using loss models to manage terrorism risk,” says Peter Ulrich, senior vice president of emerging solutions at RMS. “Insurers are managing accumulations using realistic scenarios and event-specific footprints to monitor exposure across multiple lines of business.”
Potential for attacks Although there hasn’t been a major fundamentalist attack in mainland Europe since the London bombings in 2005, the developing political context still makes attacks likely. “The increasingly polarised climate in Europe, with the emergence of far right parties in a number of countries and rhetoric and legislation directed against all or some Muslims, makes the situation far more volatile,” says Hewitt. “It plays into a key al-Qaeda narrative in which Muslims are under attack and can CLEAN SKINS
The impossible risk ONE OF THE MOST SIGNIFICANT PROBLEMS FACING counter- terrorism is identifying the individuals that pose a risk. Time and time again attacks have been carried out by cells made up of people previously unknown to law enforcement – including the 7/7 bombers, Timothy McVeigh and most recently Anders Behring Breivik in Norway. These so-called ‘clean skins’ take full advantage of their invisibility, and attacks are almost impossible to stop unless the perpetrator makes a mistake and is picked up by surveillance. To combat this, intelligence services have dramatically improved the sophistication of operations since 9/11 – particularly their eavesdropping on internet, cellphone and other communications activity. But the truth remains that in an open society a terrorist acting as a lone wolf can be almost impossible to spot, until they act.
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© Rex Features
NORTHERN IRELAND
Return of the Troubles? AFTER SOME QUIET YEARS following the success of the peace process, terror is back in Northern Ireland. MI5 currently rates the risk of an attack by dissident republican groups in the province as ‘severe’ and ‘substantial’ on mainland UK. According to security minister David Ford, both the Real IRA and the Continuity IRA have improved their bombmaking techniques. A bomb abandoned in north Belfast last year had the capacity to kill hundreds.
never really be at home in Western democratic countries. In that sense, I’m much more optimistic about countries such as Canada and the United States that have a history of accepting and integrating immigrants from around the world. European countries seem to be still at an earlier stage of trying to figure out how they will adapt to changing populations.” Hewitt highlights the increasing divisions within European countries. “Falling into far-right politics, repression and exclusion is one path, but it strikes me as going nowhere except to more polarised societies. And the greater the polarisation and alienation, the more true extremists are aided in their recruitment of individuals willing to engage in violent extremism,” he says.
More than 99% of terrorist attacks in Europe between 2006 and 2009 were by non-Muslims
However, having a mainstream outlet for anti-immigration sentiment may be taking some of the sting out of the threat posed by the far right. “Having a legitimate outlet for the right, a political channel, does limit recruitment when compared to militant Islam,” says Skinner. The threat of political violence remains a fact of life in the West, but it is almost impossible to quantify as a risk. All we know is that terrorist attacks happen – unpredictably and infrequently – but when they do, they can destroy businesses, kill hundreds and destabilise the whole of society. SR [READ MORE ONLINE] To download a terrorism risk map, go to goo.gl/96bYo
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EUROPEAN RISK MANAGEMENT AWARDS
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ENTER TODAY
Being shortlisted or winning a StrategicRISK Award is a fantastic opportunity to raise the profile of your work. It can also help you to raise the awareness of risk management within your organisation and boost team morale.
2) COMPLETE OUR REVISED ENTRY FORM Visit www.strategicrisk.co.uk/srawards and simply answer ten short questions. These will make up your entry.
CHOOSE FROM TEN AWARDS CATEGORIES • European Risk Manager of the Year • European Risk Management Team of the Year • Enterprise-wide Risk Programme of the Year • Best Risk Communication of the Year
We’ve made it even easier for you to tell us about your achievements. 1) CHOOSE A CATEGORY Select from one of ten award categories
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Governance
The ‘it couldn’t happen to us’ assumption is a dangerous one to make, as these case studies of corruption clampdowns across the world prove
R
ISK MANAGEMENT AND INSURANCE INTERMEDIARY Willis’s fine late last month of £6.89m (€7.9m), over failings in its anti-bribery and corruption systems and controls, represents the biggest fine imposed by the FSA in relation to financial crime systems. Willis allegedly made payments of £27m to overseas third parties that assisted it in winning and retaining business from overseas clients, particularly in high-risk jurisdictions. Even while the FSA investigation was under way, Willis identified as suspicious several payments totalling $227,000 (€165,000), which it made to two overseas third parties in respect of business carried out in Egypt and Russia. These were reported to the Serious Organised Crime Agency (SOCA). SOCA acting director of enforcement and financial crime Tracey McDermott makes clear what is at stake for companies: “The action we have taken against Willis shows that we believe it is vital for firms not only to put in place appropriate anti-bribery and corruption systems and controls, but also to ensure that those systems and controls are adequately implemented and monitored.” Anyone thinking of taking her words with a pinch of salt need look no further than these top fines extracted from companies – mainly by US authorities – which make Willis’s appear mild. SR
[ ETHICS ] [ COMPLIANCE ] [ REPORTING ]
‘The tone set at the top was a corporate culture in which bribery was tolerated and even rewarded at the highest levels’ SEC’s Linda Thomsen on Siemens’ record-breaking fine
‘BONNY ISLAND’ SCANDAL Involving high-level bribery of Nigerian officials in connection with a massive liquefied natural gas plant, this case snagged two of the all-time big-five fines. The bribes were paid to well-placed officials in the Nigerian government from 1995 until 2004 and resulted in contracts – valued at more than $6bn (€4.3bn) – to build liquefied natural gas facilities on Bonny Island, Nigeria. Last year the US Securities and Exchange Commission (SEC) charged Italian company ENI and its former Dutch subsidiary Snamprogetti Netherlands with implication in the scheme, which included deliveries of cash-filled briefcases and vehicles to Nigerian government officials to win deals. Snamprogetti and ENI jointly paid €91m to settle the SEC’s charges, with Snamprogetti paying an additional €175m penalty to settle separate criminal proceedings brought by the US Department of Justice. The €266m paid by ENI and Snamprogetti brought the total sanctions against the companies involved in the scheme to more than €933m (see KBR, overleaf). “This elaborate bribery scheme featured sham intermediaries, Swiss bank accounts, and carloads of cash as everyone involved made a concerted effort to cover their tracks,” says the SEC’s Division of Enforcement director, Robert Khuzami. “But the sanctions paid by these companies show that ultimately, there is no hiding or profiting from bribery.”
»
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» BAE SYSTEMS Admitting guilt in February 2010 to criminal charges, the aerospace specialist paid one of the largest ever fines over alleged corporate bribery a er striking a deal to end transatlantic corruption probes that entangled it for years. The deal cost the group almost $450m (€332m) – the bulk of it in the USA. But it stopped the company from being barred from government defence contracts in the USA and elsewhere that underpin its business. The deal immediately sparked debate over whether BAE had got off lightly a er eight years of investigation in London and Washington.
‘The deal immediately sparked debate over whether BAE had got off lightly after eight years of investigation in London and Washington. Under the settlement, BAE agreed to pay a $400m fine in the USA and pleaded guilty to one charge of conspiring to make false statements’ Under the settlement – the first co-ordinated transatlantic deal in a corporate bribery case – BAE agreed to pay a €292m fine in the USA and pleaded guilty to one charge of conspiring to make false statements to the government in connection with regulatory filings and undertakings. In Britain, the company paid £30m (€34.5m) and pleaded guilty to a minor accounting offence. While the UK settlement involved admissions of wrongdoing only in relation to the company’s sale of a radar system to Tanzania, the broader US deal covered central Europe as well as the company’s huge and controversial Saudi Arabian arms sales.
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KELLOGG, BROWN AND ROOT In February 2009, the US Department of Justice fined Kellogg, Brown and Root (KBR) – a former subsidiary of the Halliburton Corporation – a total of €420m for its involvement in a decade-long scheme to bribe government officials in Nigeria in exchange for construction contracts on Bonny Island. The fine, imposed following five years of multi-jurisdictional investigations, was the largest ever for a US company under the Foreign Corrupt Practices Act. The act forbids the bribing of foreign government officials to obtain or retain business overseas. KBR entered guilty pleas to a five-count criminal information in the federal court in Houston, Texas, and agreed to pay €292m in criminal fines. (KBR Inc and Halliburton jointly agreed to pay €128m in forfeited profits to the US Securities and Exchange Commission in a concurrent civil action without admitting wrongdoing.) The plea was the partial culmination of no less than five international investigations, including French, American, Swiss, Nigerian and British authorities, which had spent years unravelling what happened behind the scenes of one of the most expensive construction projects in African history.
‘KBR’s guilty plea was the partial culmination of no less than five international investigations, including French, American, Swiss, Nigerian and British authorities’
THALES In June last year French state and defence electronics group Thales was hit with a record fine of €630m for bribes in the 1991 sale of frigates to Taiwan. French defence minister Gérard Longuet said the government had agreed with Thales that the decision, which upheld a lower court’s ruling, should not be appealed. He explained at the time: “There won’t be an appeal at the request of Thales, which considers that it would not be good publicity for it.”
‘The case centred on allegations that bribes were paid to win a deal to sell the Taiwanese navy six Lafayette-class frigates built by French industrial group Thomson-CSF – now Thales – and the state-owned naval shipyard DCN’ France’s conservative prime minister, François Fillon, pinned the blame for the case on the socialist government of former president François Mitterand. The case centred on allegations that bribes were paid to secure a deal to sell the Taiwanese navy six Lafayette-class frigates built by French industrial group Thomson-CSF – which has since become Thales – and the state-owned naval shipyard DCN. The Paris Appeals Court confirmed the 2010 decision of an arbitration court, imposing a fine of more than €435m, to be paid to the Taiwanese state. The cost of interest raised the total to €630m, making it the biggest ever in a French corruption case. The French state’s share of the fine was €460m, with Thales picking up €170m.
SIEMENS The German engineering group agreed to pay fines from the US and German authorities amounting to €1.2bn in December 2008 – the largest such penalty in bribery history. The US Justice Department fined the company and its subsidiaries in Argentina, Bangladesh and Venezuela €326m for violations of the US Foreign Corrupt Practices Act, while the parent company agreed to further fines of €253m to settle charges laid by the US Securities and Exchange Commission. Siemens also paid a total in fines of about €619m to the Office of the Prosecutor General in Munich. “For much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens,” says acting assistant attorney-general Matthew Friedrich. Transactions on which Siemens paid bribes included the construction of metro transit lines in Venezuela; metro trains and signalling devices in China; power plants in Israel; mobile phone networks in Bangladesh; telecommunications projects in Nigeria; ID cards in Argentina; medical devices in Vietnam, China and Russia; traffic control systems in Russia; refineries in Mexico; and mobile networks in Vietnam. Siemens also paid kickbacks to Iraqi ministries in connection with sales of power stations and equipment to Iraq under the United Nations Oil for Food Programme. The SEC’s Linda Thomsen notes: “The scope of the bribery scheme was astonishing, and the tone set at the top at Siemens was a corporate culture in which bribery was tolerated and even rewarded at the highest levels.”
‘The scope of the bribery scheme was astonishing, and the tone set at the top at Siemens was a corporate culture in which bribery was tolerated and even rewarded at the highest levels’
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ANTISOCIAL BEHAVIOUR
Pressure points Large European multinationals are an integral part of the fabric of society and the growth of civil unrest, swiftly and unpredictably mobilised by new technology, is showing companies the danger of being seen as ‘bad citizens’ in struggling economies Key points 01: Discontented stakeholders have far greater ability to co-ordinate activism through technology 02: Multinationals need to pursue good corporate citizenship when they expand globally 03: Immigration is an issue for many companies, particularly the need to provide specific services for the new citizens 04: Companies consider the risk to employees travelling abroad to be underestimated
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that it is difficult for risk managers to dictate how their senior VENTS IN NORTH AFRICA AND THE MIDDLE EAST executives conduct themselves, those risk managers raising this have made European companies very conscious of the wider point felt that all they could do was to mitigate the impact and dangers of civil unrest when it evolves into political turmoil and put in place appropriate security against possible activism. even ferments revolution. They also recognise, perhaps as never “Media statements might not actually help. There is a danger before, the power of mobile and internet communications in that activists will see what is going on in other countries and may mobilising and organising protest. take more direct action against your business,” explained a risk This is our assessment of the views of 30 leading European manager responding to StrategicRISK’s enquiries. risk managers interviewed earlier this year for the StrategicRISK The problem of action by demonstrators across multiple Report 2011, sponsored by Marsh. locations was raised by several companies. They look to robust, According to our research, European corporations recognise that regularly tested business continuity planning to mitigate the effects. today’s technology gives discontented stakeholders far greater ability “We look at the extent to which things can happen in several than ever before to co-ordinate activism that may have an impact in places at once. For example, if a pressure terms of business continuity, asset damage and group takes a dislike to you, they might loss of reputation. For some companies, efforts to not just protest outside your office but mitigate this may be hampered by political, take action at several locations,” was one economic and other considerations, over which ‘Cities have grown up risk manager’s view. their control is limited. around our plants. If Current economic pressures are “Our security people are starting to think one of the key causes of civil unrest. about social networking, instant messaging and we decide that it makes But some companies predict an equally the like,” one of the risk managers we interviewed no sense to keep a plant adverse reaction, including industrial disclosed. “Each of these, by their nature, allows people to organise themselves rapidly in a highly running, that has a direct disputes and strikes, when economies start to recover, if that recovery is unplanned, unstructured way.” social impact which can not accompanied by increased jobs The need to balance societal and economic risks is seen as a particular challenge by some lead to strikes and unrest’ and wages. “When the economy is bad, people companies that have embraced globalisation European risk manager expect to suffer financially. When it by choice or necessity. While it may make restarts, they want to get their share of sound political or economic sense to move the the cake and return to what was normal before. Trade unions will global location of certain services or facilities, the impact on local become more active, asking for more wages and greater communities may be severe. employment, so strikes could stifle the restart,” explained a risk As another risk manager put it: “Cities have grown up manager anonymously. around our plants. If we decide that a plant is not doing well and Some risk managers were concerned about the effects of it makes no sense to keep it running, that has a direct social recession on young people unable to find work, as well as the impact, which can lead to strikes and unrest.” restrictions on the buying power of older people on fixed incomes Some risk managers stressed the need for good citizenship who would traditionally be expected to make luxury purchases when expanding globally. As well as reducing the likelihood of such as travel. And clearly the fact that people are living longer civil unrest, this can also ensure the ability to obtain a good has an impact on the cost of pension payments. quality workforce. As one risk manager put it: “The difficulty that young people According to one of them: “Enlightened companies have in finding work can leave a psychological scar that has a recognise that their future is tied up with the communities in long-term impact and may lead to risk aversion later on in life.” which they operate and in which their suppliers and customers operate. They need to look after these communities.” The perceived behaviour of a business and/or of its senior Migration executives can make that business the focus of attention for Several other companies saw immigration as an issue. Concerns demonstrators and adverse internet comment. Bearing in mind related to the potentially important impact in terms of social
StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
STRINGER/AFP/Getty Images
Unrest: Egyptian anti-government demonstrators face pro-regime opponents in Cairo’s Tahrir Square
Making sure that people travel safely and understand what to do if things go wrong in potentially hazardous political areas is a key ethical concern for most companies. It goes beyond dangers relating to crime or terrorism to address the basics of safe travel. “Motor accidents are probably one of the most likely risks for our people abroad. We provide a specific website to give assistance and advice to limit the risk. We also provide a contact point to ensure speedy reaction and help should one of our business travellers have a problem,” explained a risk manager.
RISK REPORT
Top societal risk issues • • • • •
CIVIL UNREST BUSINESS TRAVEL THREATS DEMOGRAPHIC CHALLENGES PANDEMICS MIGRATION Source: StrategicRISK Report 2011
Pandemics instability and the need to provide specific services to cater for the new citizens. Even those companies that perceive the volume of immigrants as providing an opportunity for selling additional services were cautious regarding credit risks and fidelity issues. This suggests a generally low perception of immigrants’ social standing and behaviour.
Protecting business travellers Many European companies place a great deal of emphasis on protecting their employees while they are travelling abroad on business, and consider that this area is a largely underestimated risk.
Report 2011
www.strategic-risk.eu [ May 2011 ]
Against all odds From North African wars to cyber crime and recession-fuelled unrest on the streets of Europe, this report explores the top concerns of European risk managers
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In related findings, European companies regard pandemics as a risk but perhaps not as great a concern as they were in 2010. All companies acknowledge that they have a moral responsibility to safeguard the integrity of their business and this includes the safety of their employees. They also acknowledge that pandemics could have serious affects on their business in terms of employees, suppliers, restricted travel, and so on, and could therefore represent a serious problem. However, this seems to be an ongoing concern rather than an immediate major risk. “We are prepared for the effects of a pandemic but do not see this happening in the next year,” said a risk manager. SR
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Special Report
INTRODUCTION
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N PREVIOUS REPORTS THIS YEAR, STRATEGICRISK HAS LOOKED AT companies’ considerations when establishing a captive insurance company and surveyed a selected group of risk managers and others involved in captives. This report goes a step further, outlining some of the day-to-day issues that can arise with operating a captive. Some of these – particularly the administrative functions such as issuing and monitoring policies and premium invoices, maintaining the captive’s financial and operational records, and completing and filing premium tax returns – can, it is hoped, be left safely to the appointed captive management company. In addition, a good management company will advise on any relevant changes in the captive domicile’s regime and generally contribute expertise when it comes to meeting the parent company’s objectives. However, risk managers need to take control of strategic decisions. A key issue can be which coverages to pass to the captive rather than insure in the conventional third party market. Traditionally, risk managers have used captives to cover the risks that insurers were reluctant to consider – or charged very high premiums for. These risks tend to evolve with time. For example, some time ago insurers were reluctant to cover the costs of product recalls. Companies that considered themselves vulnerable to this risk would pass it on to their captives. Now insuring product recall cover is probably not such an issue for most businesses, although particularly exposed companies – for example, those in the food and drink and pharmaceutical sectors – may still consider that they will get a better deal by using their captive to cover the primary loss. Employment practices liability is another example where companies may feel that they can arrange cover more cost effectively through their captive, particularly if they don’t have a very good loss history in this area. This is a liability that to date has probably most affected US and UK companies but there is no doubt that increasingly claims will spread to continental Europe. More recently, a trend has emerged for wrapping employee benefits cover within the captive’s remit. Spearheaded in the US, this trend is now extending to European captives. Risk managers with multinational insurance programmes also need to consider how they can use their captive to smooth some of the differences in approach that can exist between the parent and its subsidiaries.
Finally, this report looks at the knotty problem of captives and taxation. In years gone by some companies seized upon captive formation as a way of avoiding or minimising tax. Those days are largely gone, but sadly fiscal regulators have long memories. Captives – and their domiciles – are exposed to considerable scrutiny, as demonstrated by this year’s (successful) challenge to Liechtenstein’s tax regime. Captives can produce some taxation benefits but this aspect is something that their parent organisations need to keep a close eye on. SR
Contents [ CAPTIVE MANAGEMENT ]
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Mapping management Who’s looking a er your captive? Tightening up on tax Captive tax rules and considerations What do you cover? Captives can insure ‘virtually anything’
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This special report has been produced with input from: Qatar Financial Centre Authority
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SPECIAL REPORT [ CAPTIVE MANAGEMENT ]
DAY TO DAY
Mapping management While local managers contribute a great deal to the running of a captive, specialist captive management companies can ensure all bases are covered
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N ORGANISATION THAT HAS a captive will also have appointed a management company located in that captive’s domicile to handle the day-to-day running of the business. But, as with any subsidiary – which is after all what a captive is – that’s not the end of the story. The parent company’s risk manager will often be responsible for control and strategic management, and other people within the organisation need to get involved as well. Having said that, local managers can contribute a lot at the early stage, particularly in the way of ascertaining future objectives for the captive and advising risk managers on opportunities to achieve these. As Kane USA managing director Elizabeth Steinman says, a good manager handles much more than just the book-keeping aspects of running an alternative risk insurance vehicle. This can be particularly useful for risk managers who have not yet selected their captive’s domicile. “An effective captive manager will analyse the specific risk profile of a client and advise on the best way forward, without being bound by a particular domicile or structure. While providing access to a network of insurance and reinsurance companies, the decision of how much cover is purchased by a captive and where it buys its cover is totally impartial. It is based purely on getting the best coverage at the best price,” says Steinman. While captive management companies should offer a full breadth of service in the day-to-day running of a captive, Steinman believes it is important to choose an independent manager with service packages that are unbundled so that a client can decide how much involvement they wish to have. This will help them to better manage their costs while continuing to work with other valued service providers, she says. For some risk managers an important element of a captive is the support it can provide for a multinational insurance
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programme. In an article on Captive.com, Nathan Shpritz and Alison Calder of Liberty Mutual Group explain: “Multifaceted companies with diverse operating units may encounter an interesting dilemma – the parent organisation has the risk appetite and wherewithal to maintain high retentions, but the operating units prefer lower retentions to limit the financial impact of large losses. A captive can be quite effective in this situation. The captive itself takes a high retention and sells lower retention policies to its insureds – the local operating units.” They give the following example. A French division wishes to have only a $25,000 general liability deductible but the US parent has a $1m per occurrence risk appetite. The French division purchases a $25,000 deductible policy from the captive, which then aggregates worldwide general liability exposures into a single excess contract with a $1m retention with the reinsurer of its choice. The captive retains
the risk in the excess layer and receives the premium to fund this layer from the French division’s policy. The French unit is happy, and the overall corporate insurance programme costs are minimised because fewer premium dollars are transferred to an outside insurer. Direction on how the captive can meet the parent company’s needs in these types of situations has to come from the risk manager so that the captive can fulfil its primary role as a facilitator and cost-saving vehicle. It is not just the risk manager who will be involved in the running of the captive. Jardine Lloyd Thompson Insurance Management (JLTIM) cites the case of a client that had recently reactivated its captive to better manage and finance its risk. It says both the client’s risk management department and JLTIM recognised that internal education and familiarisation for the various departments of the parent corporation would be needed to ensure the captive functioned properly. Initiatives included extensive technical briefings for accounting staff – particularly on issues relating to insurance company loss reserves (including incurred but not reported, or IBNR) – and the establishment of committees on the captive board, with invitations for key people to serve on them, giving them a greater sense of ownership in the captive. SR
WHAT DOES A CAPTIVE MANAGER DO? THE KEY RESPONSIBILITIES OF A CAPTIVE manager involve:
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Providing insurance, risk management, and underwriting expertise to the captive Developing and evaluating business plans and providing pro forma financial statements Producing and shepherding the captive’s licensing application with regulatory agencies Developing equitable premium allocations among the captive’s insureds; Issuing and monitoring policies and premium invoices Providing certificates of insurance for captive coverages Monitoring and reconciling bank and investment records
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Maintaining the captive’s financial and operational records Coordinating the services of the captive’s service providers including the actuary, auditor, tax preparer, claims administrator, attorney, investment advisor, fronting carrier and broker (if applicable) Being the primary captive contact for regulatory agencies and assisting in regulatory compliance Producing quarterly and annual financial reports for the captive’s board of directors; Filing insurance regulatory reports as needed Completing and filing premium tax returns Monitoring claims and assistance in setting reserves Monitoring the captive’s reinsurance programmes.
DOWNLOAD StrategicRISK 2011 Captive guide StrategicRISK surveyed 100 risk managers to discover the factors that influence captive formation and location. Download the report here: goo.gl/JfTTQ
TAX MATTERS
Tightening up on tax The days when having a captive could produce some significant tax benefits for its parent company have largely disappeared. But fiscal authorities are still prepared to challenge where they feel a captive is providing an unfair advantage
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HE INTERNATIONAL ASSOCIATION of Insurance Supervisors’ issues paper on the regulation and supervision of captive insurance companies sums up the current situation. “Although tax minimisation may have been an early driver for captive formations, many tax authorities have now largely eliminated tax minimisation advantages through CFC [controlled foreign companies] tax legislation that consolidates the profits of captives with those of the
captives’ parent companies. Where this is not the case, the possibility of deferring tax through the use of a captive still does exist. This could lead to some misuse of the captive where excessive premiums are charged and profits artificially inflated,” it says. CFC laws are common to most OECD member states. There have been recent revisions – for example, in Italy and Spain – but the key aim of preventing tax evasion remains. Offshore domiciles are generally free to set their own direct tax rules. Domiciles in the EU must apply the relevant EU directives when it comes to governing captives but can charge differing taxation rates. This is not to say that everything in the captive taxation garden is rosy. This year the tiny principality of Liechtenstein, the domicile for some European continental captives, fell foul of the regulators. While not a member of the EU, Liechtenstein is a member state of the European Free Trade Association (EFTA) which, with the EU, comprises the European Economic Area (EEA). Its reputation as a low-tax haven has in the past attracted the interest of the OECD and national governments, with pressure to improve its financial regulations and apply greater banking transparency. The latest challenge came from EFTA, which last year concluded that tax
UK RULES ON CAPTIVES AS CONTROLLED FOREIGN COMPANIES (CFCs) MOST OECD MEMBER STATES HAVE CFC LAWS. As an example, UK provisions are summarised below. •
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A UK company that has a relevant interest (25% or more) in a captive insurer is subject to the same CFC rules as any other UK company. Unless the CFC meets the requirements of the excluded countries list and the exempt activities test, and passes the motive test, its profits will have to be apportioned to the UK company. To fall within the definition of a CFC a company must be subject to a lower level of taxation. Applying this standard may require particular care in the case of general insurance companies because of the potential for significant differences between provisioning and loss equalisation rules that apply in different territories, and the possible application of funded (non-annual) accounting. Tax paid by ‘international companies’ in certain offshore financial centres is treated as tax for comparison purposes. While captives are unlikely to benefit from the excluded
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countries list, they may pass the exempt activities test. All companies carrying on exempt activities must occupy premises in the domicile and the business affairs must be effectively managed there and this requires a suitable staffing presence. As an insurance company falls within the definition of a wholesale, distributive or financial trader, the test cannot be passed where more than 50% of commissions or net (of reinsurance) premiums are derived directly or indirectly from connected or associated persons, or from persons with at least a 10% interest in the company, and which are attributable directly or indirectly to the liability of an associate. Premiums paid via a fronting company will be treated as from an associate, so long as the insured liability is that of an associate. A captive wishing to benefit from this test must therefore insure the liability of third parties. This is most commonly encountered in warranty insurance and creditor insurance arrangements.
exemptions available to certain types of companies under the Liechtenstein Tax Act were incompatible with the EEA agreement. It also ordered that aid granted to captive insurance companies should be recovered. The Liechtenstein Tax Act exempts captive insurance companies from payment of corporate income and coupon tax, and provides that they pay only half the rate of capital tax applicable to other companies. The authority concluded that such favourable treatment provided the companies with an advantage that was unavailable to other companies in a similar position. Liechtenstein – later joined by two captives registered in the principality, Reassur Aktiengesellschaft and Swisscom Re – disputed the decision. Judgment was given by the EFTA court this year in favour of the surveillance authority. Subsequently, Liechtenstein’s government pointed out that its new law pertaining to the taxation of captives, which entered into force in 2011, is in accordance with the EEA agreement so the judgment has no bearing on the current tax situation in the principality. The case illustrates the need for captive owners to keep a careful eye on tax issues. KPMG’s 2010 Captive Insurance Benchmark study, Negotiating the Captive Insurance Terrain, acknowledges that over the years there have been a number of challenges to the accounting treatment of captives as insurance companies. But it reports that more than 90% of the study’s respondents indicated that the level of coordination between the risk management and tax departments addressing captive-related issues was either moderate or high. “The majority (more than 80%) of respondents indicated they hold periodic meetings with the tax department to coordinate captive issues,” says the report. The study also shows that risk managers may see a need to increase the tax department’s comfort level regarding its position on the tax treatment of captives. Sixty per cent endeavoured to do this with strategies that included: • • • •
Citing rulings Citing case law Citing examples of other captives Obtaining outside professional consultation. SR
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SPECIAL REPORT [ CAPTIVE MANAGEMENT ]
RISK COVERS
What do you cover? Most captives are used to insure standard property and casualty risks, but if structured and financed properly, almost anything can be covered
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HERE IS GROWING INTEREST IN expanding the range of coverages placed in captives. “When over two hundred years ago some sugar refiners found that they could not get fire insurance cover on reasonable terms, they formed the first recorded captive insurance company. Today, many businesses again have increasing difficulty getting insurance cover on reasonable terms. This problem is compounded by the incalculable potential for loss arising from environmental damage and the increasing expectation of people to be fully compensated for adversity.” So says GRM Consulting, discussing the potential value of forming a captive insurance company. Despite the extended ‘soft’ insurance market, risk managers still see captives as a useful vehicle for insuring risks that may be less easily or cost-effectively placed elsewhere. The survey, conducted for StrategicRISK’s September report – Captives 2011 Going Places – showed that lack of commercial market coverage for specific perils/exposures was a factor in the decision to form a captive cited by 44% of the respondents. According to the Kane Group, captives allow risk-savvy parent companies to secure a depth of coverage often not available in the general insurance market, help reduce overall insurance spend and reward companies with superior loss records. KPMG’s 2010 Captive Insurance Benchmark study, Negotiating the Captive Insurance Terrain, shows that internationally the most common coverages written in captives were property,
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employers’ liability/workers’ compensation, general and other liability and motor liability (see chart). Some respondents indicated that they also write crop, deductible buy-down, employee personal lines, first- and third-party asbestos and terrorism insurance in their captives. Leading considerations on whether or not to place coverages in the captive included: •
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Cost of transferring the risk to third-party insurers relative to retaining the risk Availability of coverage in the third-party market Access to the reinsurance marketplace.
According to the study, some companies annually re-evaluate affordability and availability of third-party insurance. Others simply retain as much risk as the company has an appetite for as part of an overall enterprise risk evaluation. The risks that companies place with their captives are likely to expand. Richard Klumpp, president and chief executive at Wilmington Trust SP Services, now part of the US M&T Bank, says a captive provides ultimate flexibility in the types of risks it can insure. “Basically, the sky is the limit,” he says. “If structured and financed adequately, virtually anything that makes good business sense is likely be approved and insured by a captive’s domicile regulators.” The fact remains that most captives are still used to insure standard property and casualty risks, although large captive owners have started to include certain employee benefit risks such as group life, long-term disability, and medical stop-loss. “Many believe that captives will soon be used to also insure pension and post-retirement benefits,” say Klumpp. BWCI group chief executive Stephen Ainsworth and partner and head of insurance consultancy services Ian Morris agree with Klumpp’s view that employee benefits coverages are likely to become a more common inclusion in captives. “While the use of captives and protected cell captives for employee benefits business is comparatively new, there is considerable interest and activity in both Europe and the USA,” they say. “The risks that can be insured by captives are limited only by the needs of the
captive owner, who can choose from a variety of legal structures available within particular domiciles. For these reasons, it is imperative to thoroughly investigate structural and domicile options prior to captive formation,” Klumpp adds. SR
WORKERS’ COMPENSATION CASE STUDY THE PARENT COMPANY PROVIDES professional employment organisation (PEO) services to small- to middle-market employers throughout the USA. Its services allow employers to outsource human resource operations including payroll, benefits, compliance and workers’ compensation. The company administers $45m of payroll on an annual basis. Premium: $4.6m – workers’ compensation Losses: $900,000 – average per year ANALYSIS: To reduce cost on its $4,600,000 workers’ comp premium, the company entered into a high deductible plan where it took the first $250,000 of each claim. This resulted in a lower premium, but the carrier required it to post a large amount of collateral. Over a three-year period the company had more than $2.5m of letters of credit and cash collateral posted with the carrier. The insurance company was reluctant to release these funds. Risk Management Advisors recommended the client form a captive, pay the premium to its own insurance company and purchase reinsurance to cover any catastrophic claims. RESULT: Instead of paying large premiums or losing control of a significant amount of cash and credit with traditional carriers, the client was able control the money in its own insurance company. Premium Fronting Premium ceded to captive Reinsurance Captive loss fund Average annual losses Captive profit/ owner savings
7%
23%
$4,600,000 $(322,000) $4,278,000 $(983,940) $3,294,060 $(900,000) $2,394,060
Source: Risk Management Advisors
Theory & Practice STRATEGY
Keeping the lights on Energy risk is a growing concern in a world where resources are becoming increasingly scarce, but mitigating this risk now offers a wealth of additional benefits
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NCREASING LEGISLATIVE requirements, growing volatility in energy prices and a tough economic climate have all contributed to making energy more of a top-level concern over the past few years. In fact, the 2011 npower Business Energy Index (nBEI) – an annual report tracking business opinion on energy use – revealed that major energy users rank energy as the top business risk they face. It was placed higher than health and safety, credit and security in terms of risk. While this is not necessarily a new concern – the issue of energy risk was identified as a significant business concern in 2010’s index – it is a growing one. At the end of last year, npower commissioned the London School of Economics to produce a white paper Energy Risk Management for UK Business. This provided a comprehensive guide to current energy risks and forecast how they will grow in the future. The report identified specific energy risks and, combined with feedback from businesses, the following areas are seen as fundamental elements of energy risk: • Credit risks – a good credit rating is typically a requirement of any energy contract • Increasing regulatory and technological complexity • New price and reputation risks from carbon regulation, such as the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) in the UK or the EU Emissions Trading Scheme and • A continued upward trend and increased volatility in energy prices. There are steps organisations can take to minimise their exposure to energy risk:
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DEVELOP AN INTEGRATED STRATEGY Businesses need to develop an integrated
[ INSIGHT ] [ CASE STUDIES ] [ BEST PRACTICE ]
accurate data that shows where and how energy is being used, can the necessary measures be put in place to reduce consumption. With more than a fi h (22%) of businesses stating they have not reduced their organisation’s energy consumption at all in the past 12 months in 2011’s nBEI, it is clear there is significant room for improvement. By reducing energy consumption, companies can decrease their exposure to the reputational and financial risks associated with energy.
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strategy bringing together the management of energy consumption and energy procurement. This will be a step change for many, but it is crucial that the different people and departments responsible for energy work in a collaborative manner. It is also crucial that the strategy that is developed has board-level buy-in.
INVESTIGATE THE OPPORTUNITIES AFFORDED BY SELF-GENERATION AND DEMAND MANAGEMENT TECHNOLOGY This year’s nBEI revealed that 39% of major energy users and 61% of small to medium-sized enterprises do not have any self-generation capability. This means not only are they missing out on back-up generation capabilities and reputational benefits, but potential revenue streams. Only 15% use self-generation to sell back electricity to the National Grid and just 11% said they would participate in the National Grid’s STOR (Short Term Operating Reserve) scheme. For major energy users in particular, there is the chance to generate significant revenues by selling back to the grid during times of high demand. Added to this, as demand on the grid starts to become a major issue, large energy users in particular will need to assess new ways to manage their energy more intelligently, whether through selfgeneration technology or demand management tools.
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PUT ENERGY ON THE BOARD’S AGENDA Energy needs to be a board-level consideration. In this year’s nBEI, only 14% of organisations said they had someone responsible for energy purchasing sitting at board level. With so much risk attached to energy purchasing, it is an area that businesses should look to address to ensure the right level of focus is being given to the issue, and that it is at the heart of all operational decisions.
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IMPLEMENT AN EFFECTIVE ENERGY MANAGEMENT STRATEGY The starting point of any energy management journey is data. Only with
UTILISE ENERGY MANAGEMENT SERVICES AND PRODUCTS Organisations can help reduce their exposure to energy risk by taking advantage of the energy management services and products offered by the market. For example, smart meters capture crucial data on energy use, which can then be analysed to make decisions on energy efficiency. This data can be used with monitoring and targeting so ware to make it easier to track energy consumption and reduction targets, and show where savings are being made. SR
Wayne Mitchell is industrial and commercial markets director at npower
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THEORY & PRACTICE [ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]
EMPLOYEE FRAUD
the risks associated with the job in question. A screening policy should be implemented that should include post-employment screening – both at periodic intervals and when employees are promoted or transferred to new roles.
Dig deeper in screening checks to fight fraud Financial institutions are forced to trust their employees, yet 70% would consider committing workplace fraud. Here are steps towards a counter-attack RECENT SPATE OF INTERNAL FRAUD cases has placed renewed emphasis on recruitment and staff screening. Since the global economic downturn began, the threat of fraud by a company’s own staff has been hinted as a likely result of squeezed finances. Andrew James Ward’s incarceration in August for expenses fraud committed against his former employer Aviva, and the jailing of former Barclays Bank employee Wesley Gabriel in July for selling confidential account information, are just two of the most recent examples of the problem. CIFAS, the UK’s fraud prevention service, says internal fraud increased by 45% between 2009 and 2010 and there has been evidence for many years supporting the idea that staff in general seem to disregard the importance of internal fraud. For example, a study by Leicester University in 2003 found that out of 2,000 people interviewed, 70% would commit fraud against their employer if they thought they could get away with it. Insurers, banks and other financial institutions have to place more trust in their staff than many other types of business. In these environments, individuals regularly handle very large payments as premiums and claims are reconciled through the books or customer account data is accessed and changed. So what factors should risk managers consider when engaging in the human resources battle against internal fraud?
Reuters
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DIG DEEP In some instances it may be appropriate to dig a little deeper and, for example, ask to see proof of activity for each month of a certain period. If there are periods of non-employment it is wise to seek appropriate documentation such as (in the UK) Department for Work and Pensions correspondence in relation to unemployment, travel visas, flight tickets, card receipts, written evidence on headed paper of voluntary work, and so on. Scrutinise educational and qualification certificates carefully. Don’t accept poor copies and contact the issuing institutions to check dates of study.
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Blackened name: Former media mogul Conrad Black is serving time in a Miami jail for defrauding his investors
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KNOW YOUR EMPLOYEE Pre- and post-employment screening should become standard. Any falsehood on a job application can affect a candidate’s ability to fulfil the role. Also, if a new employee commits fraud or another criminal act and it turns out that a reference check could have stopped the business from hiring that candidate, the
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employer can be held liable.
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BE TRANSPARENT The company’s recruitment policy, job advertisements and application form should specify which pre-employment screening checks will be carried out. You will also need written permission from candidates to contact their former employers. However, irrespective of whether you have permission, some employers only release a restricted amount of information to negate their potential liability in claims from former or new employees. Restricted confirmation is better than nothing and at least you will know whether the candidate actually worked for their stated former employers. Remember that unexplained gaps in an employment history could also indicate periods detained at Her Majesty’s pleasure.
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BE APPROPRIATE The level of employee screening should always be established following a risk assessment of the work environment and
BE AWARE OF APPLICANTS’ RIGHTS In certain environments such as healthcare, criminal records checking is considered to be proportionate due to the potential risks involved but it is important to have a policy in place that governs the handling of disclosure information and the recruitment of ex-offenders. According to the UK’s Rehabilitation of Offenders Act 1974, criminal convictions should not automatically preclude employment, and the discovery that an employee has a previous conviction should not automatically result in dismissal. All candidates should be encouraged to provide details of their criminal record at an early stage in the application process and they should be reassured that criminal record disclosure information will only be seen by those who need to see it as part of the recruitment process. For certain roles, such as senior management and finance, it may be appropriate to undertake a credit history check and, again, confidentiality reassurances should be given. Staff involved in recruitment should receive adequate training in the screening process, their legal obligations and how to interpret and manage the results of these checks. SR
Jane Peters is head of operations for Avertis Risk Solutions
DOWNLOAD StrategicRISK’s supply chain risk best practice guide Go online and download our practitioners’ guide to supply chain risk management to develop your company’s approach at: goo.gl/bv4TP
STRATEGY
How to manage a global supply chain Global sourcing can be a cost-effective measure, but it does present an array of potential risks that must be accounted for
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OURCING GLOBALLY CAN MAKE financial sense but may also present unforeseen reputational and contingent business interruption issues. And recent research suggests that companies are generally still poor at managing their supply chains. There is a growing trend among larger companies to reduce manufacturing in-house and outsource much of their production operations. One of the main reasons for sourcing goods and services overseas is cost, says JLT partner Tim Cracknell. “Costs are crucial, particularly if there’s not a lot of room for manoeuvre in your own pricing and you want to improve profitability,” he explains. If the cost is the plus factor, the downside is reduced control over production. “You can’t just drive down the road and visit your supplier, so you have to rely on site visits and surveys to check capabilities and quality,” warns Cracknell. “If the components concerned are non-critical and low value, you might be prepared to take some things on trust – for example, that the supplier concerned is not employing under-age workers.” If suppliers breach the company’s code of ethics there is the potential for reputational damage, but the greatest risk companies face
is that circumstances may arise that affect suppliers’ ability to deliver. These can occur for a number of reasons. For example, with recession and consequent financial pressures still continuing in some areas, there may be the danger that a supplier will go out of business, leaving its customers high and dry. Here are some pointers for how to manage these risks:
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IDENTIFY CRITICAL SUPPLIERS Identify the supply chains and suppliers most critical to the business. Ideally, companies should understand the risk profile of their entire supply chain and any particular vulnerabilities and risk issues attached to individual suppliers, advocates Cracknell. “You can then come up with loss estimates. How long would it take to bring production back on stream? What stocks are available – and where in the supply chain – to enable you to maintain output? How long will these last?” he says.
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REVIEW FINANCIAL INDICATORS Consider current and historical financial data. Reliance on Z and O scores (a measure used to summarise publicly available information about the
probability of bankruptcy) and Dun & Bradstreet reports do not go far enough to predict financial instability.
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CONSIDER QUALITATIVE FACTORS Analyse governance issues, business continuity, leadership changes, litigation and investigations. ChainLink’s 2011 Supply Chain Risk Survey found that some companies were much more proactive than others faced with the Japanese earthquake earlier in 2011. “They swung into action based on up-to-date and recently validated/ practised contingency plans they had in place. Some of these firms set up a war room within 30 minutes of the tsunami.”
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LOOK AT PRIVATELY OWNED SUPPLIERS Take additional steps to obtain quantitative and qualitative data on private companies critical to your supply chain. Supplier risk is frequently or always part of the supplier selection process. And most companies do not consider risk beyond immediate suppliers.
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FINALLY, CONSIDER PURCHASING YOUR SUPPLIERS Western companies seeking to preserve profit margins may put additional pricing pressure on their suppliers. The result can be that these suppliers are tempted to cut corners, with implications for quality and, once again, adherence to ethical standards. If a critical supplier is in financial difficulties, the ultimate solution may be to purchase the company concerned, says Cracknell. SR
[READ MORE ONLINE] For more practical help on managing global supply chain risk, download StrategicRISK’s Globalisation Report 2011 at goo.gl/JfTTQ
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VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]
WHAT’S INSIDE YOUR HEAD?
Headspace Pirelli group risk manager Jorge Luzzi has an international career and a clear vision for risk management, but knows that those alone don’t make him a rich man What are you thinking about right now? How we can develop our profession in the upcoming years. I believe that we are in a time of change in the profession, so we should be very active in participating in its future development. What is your greatest fear? I’m worried about the global financial crisis. We’re dealing with an ongoing crisis that started in 2008 and the business community needs to work very seriously to address this problem.
What makes you unhappy? Injustice. When I see people abusing power or privilege, that makes me mad. Who is your greatest hero? Albert Schweitzer, Martin Luther King and Mahatma Gandhi. I picked three as it was difficult to choose just one. These people had the strength and integrity to stand up to established institutions and challenge ideas. They all managed to do something that was extraordinary; they dared to go ahead when everything was against them. This is the spirit that I like. I find it to be very inspirational. What’s the biggest risk you’ve ever taken? I was on a plane travelling from São Paulo in Brazil to Miami. While we were flying over the middle of the Amazon, the pilot said: “Prepare for landing, we are in Manaus in the Amazon.” At that point I was really terrified. All we could hear on the plane was the pilot saying “prepare for impact” and I really thought that was going to be my last day on Earth. The plane landed without any engine power at about 3 o’clock in the morning in the middle of a valley, in the middle of the Amazon; it was really terrifying. What is the worst job you’ve ever done? I don’t know if this was really a job, but it felt like it. When I was at university I used to host parties at my apartment. I really enjoyed them but the problem was that afterwards it was up to me to clean the place up. Washing all the dirty dishes and cleaning up the apartment by myself, that felt like my worst job.
What was your most embarrassing moment? One time when I was in the USA, I had to give a business speech. Before the presentation I was with Italian colleagues, and when I actually got up to make the speech I proceeded to speak for a few
What is your greatest achievement? I’ve helped to create or to develop several risk management associations in various countries and those are probably my greatest achievements.
‘If you are rich but you don’t have love for your family and friends then you don’t have much at all’
What is the most important lesson you’ve learned? You have two ears to listen and just one mouth to speak. This is a way of saying that you shouldn’t always try to impose your opinion on someone else and that it’s so important to listen to what other people have to say as this is how you learn.
minutes in Italian. The people in the audience were very polite and let me continue speaking in a foreign language until I realised. What is your most treasured possession? I don’t think that treasure is related to possessions, my treasure is my family and friends. Possessions are transient so they’re not really important in the long term. If you are rich but you don’t have love for your family and friends then you don’t have much at all. What makes you happy? Spending time with my family and friends makes me happy. I think this is key for anyone who is looking to live a happy life and in modern times many people can forget this.
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StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Illustration by Richard Phipps
Tell us a secret? I say to students who are studying risk management: “Trust me, the risk management profession will give you a lot of opportunities.” Years ago, students in this field often considered risk management to be their last option, or some thought these students weren’t doing well in banking or finance. That’s simply not true. I really think our profession is in a time of progression and development and that’s what people need to realise. SR
Jorge Luzzi is group risk manager at Pirelli and a Ferma board member
Photos : Creatas, Photodisc, Enrique Algarra/PIXTAL, DigitalVision, Juliet White/Gettyimages -
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There’s a lot more to Swiss Re than reinsurance. Isn’t it time you found out how much more? Don’t let the name mislead you; there’s a lot more to Swiss Re than reinsurance. Commercial insurance, industrial insurance, large corporate risks and specialty insurance. Insurance for aviation and space as well as environmental and commodity markets. Financial tools like insurance-linked securities and catastrophe bonds. Yet every service we offer and every challenge we face, our clients receive the same commitment and the same hands-on expertise. As in everything we do at Swiss Re, risk is our raw material; what we create for you is opportunity. See for yourself at www.swissre.com/corporatesolutions
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