StrategicRISK April 11 by Nathan Skinner

VIEWPOINTS [ PEOPLE ] Electrolux’s Lennart Edström, former Merchant Navy officer, on learning risk lessons from the sea

RISKS [ THREATS ] In an increasingly complex environment business disruption is occurring with alarming frequency. How do you choose the right supply chain protection?

European risk and corporate governance solutions

www.strategic-risk.eu [ April 2011 ] Issue 69 €25

GOVERNANCE [ COMPLIANCE ] Regulators have a tendency to run risk managers ragged. What are the biggest hurdles and how can you vault over them?

THEORY & PRACTICE NEWS & ANALYSIS » War in Libya » Japan’s nuclear crisis » Middle-East predictions » Fresh fears for Hungary

[ INSIGHT ] The businesses that perform best are the ones that seize the opportunities presented by risk

Special Report Is the tide about to turn on the D&O insurance market? Risk Atlas Climate change offenders won’t bear the brunt of its impact or costs Whistleblowing An open culture can help you net more black swans

THE SUM OF ALL FEARS How the media exploits potential dangers and tilts the public’s perception of risk

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LEADER [ APRIL 2011 ]

Issue 69 April 2011

Nathan Skinner, EDITOR, STRATEGIC RISK

www.strategic-risk.eu WELCOME

Editor Nathan Skinner Editor-in-chief Sue Copeman Market analyst Andrew Leslie Group production editor Áine Kelly Deputy chief sub-editor Laura Sharp Group sales director Tom Sinclair Business development manager Donna Penfold +44 (0)20 7618 3426 Redesign Joe McAllister Production designer Nikki Easton Group production manager Tricia McBride Senior production controller Gareth Kime Head of events Debbie Kidman Events logistics manager Katherine Ball Publisher William Sanders +44 (0)20 7618 3452 Managing director Tim Whitehouse Cover image Corbis Email: ﬁrstname.surname@ newsquestspecialistmedia.com ISSN 1470-8167 Published by Newsquest Specialist Media Ltd 30 Cannon Street, London EC4M 6YJ tel: +44 (0)20 7618 3456 fax: +44 (0)20 7618 3420 (editorial) +44 (0)20 7618 3400 (advertising) email: strategic.risk@newsquest specialistmedia.com 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.

True disaster stories A

THIRD WAR HAS BROKEN OUT IN THE MIDDLE EAST TO ADD TO the horrors of Afghanistan and Iraq. The difference between this war and the

last is that this time the liberal interventionists have the support of a UN Security Council resolution. That international consensus emerged because everyone wants stability in the Middle East, particularly in key oil-producing regions such as Libya. Civil unrest has swept across North Africa and the Middle East, bringing to an end the autocratic regimes of Zine El Abidine Ben Ali in Tunisia and Hosni Mubarak in Egypt. The media’s obsession with Libya is partly down to the violence but also the eccentricities of Colonel Muammar Gaddafi. It may be that this is distracting attention away from more serious threats to regional stability, such as violence in the Yemen. The mass media is drawn to disaster, and the earthquake/tsunami/nuclear crisis in Japan easily shunted Libya off the front pages. A 9.0 quake so powerful it actually made the earth spin a little faster crippled Japan’s Fukushima Daaichi plant and triggered a potential nuclear disaster. Truly objective opinion is hard to find when it comes to nuclear meltdown, an archetypal risk that is embedded in our psyche. It appears to be the case that certain safety measures were overlooked at Japan’s Fukushima Daiichi plant, such as situating the diesel generators for the plant’s critical cooling systems on the ground floor where they could get flooded and shut down. By and large, nuclear power is extremely safe. But it’s unlikely that the wider public will be left with that same sentiment after weeks of being told we are on the verge of nuclear meltdown.

For all subscription enquiries please contact: Newsquest Specialist Media, PO Box 6009, Thatcham, Berkshire, RG19 4TT, UK tel: +44 (0)1635 588868 email: customerservice@strategicrisk.eu Annual subscription (incl P&P) £249 €399 $499 Two-year subscription £449 €649 $849 Three-year subscription £427 €663 $821 Printed by Warners Midlands Plc © Newsquest Specialist Media Ltd 2011

This issue, we explore the problems with risk portrayed in the media and our emotional reactions to it. We also explain the factors that inﬂuence a person’s perception of risk and look at ways to manage this. We may never be able to protect ourselves 100%, particularly when faced with forces so powerful they can shift the world on its axis, but a rational rather than emotional response can save lives, time and money. SR [CONTACT THE EDITOR] Email nathan.skinner@strategic-risk.eu or follow me at twitter.com/StrategicRISK

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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CONTENTS [ APRIL 2011 ]

Sea of troubles: the economic crisis has led to rising protectionism as countries ﬁght to stay aﬂoat

Lennart Edström: the Electrolux head of risk learnt you can’t hide from risk during his time in the Merchant Navy

News & Analysis

Risks

[ THE LATEST BUSINESS ROUND-UP ]

[ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]

8-10

The Best of the Web The biggest stories online, including fears over Gaddafi’s plans, Middle East expropriation and Chevron’s €5.7bn fine Risk Indicator The dominos le standing in the Middle East as others have toppled; and the dizzying cost of the Japan earthquake and tsunami News Analysis Flood-affected Australian firms are showing us how business interruption is done; the Hungarian toxic sludge plant continues to pollute News Feature There are fears that global governance is breaking down, as relations between China and the USA fracture. Is the ‘every state for themselves’ mentality on the rise?

Governance [ ETHICS ][ COMPLIANCE ][ REPORTING ]

SPECIAL REPORT

D&O liability insurance

Viewpoints 15

Directors’ cut Rates for D&O insurance have dropped yet again

Those who can, D&O New laws in Germany put directors in greater need of cover

Buying local Companies need to think globally as well as addressing local risks

How to stay nimble amid the hurdles When regulators say ‘jump’, risk managers must comply. We list the rising number of issues on which ﬁrms must toe the line

[ PEOPLE ][ OPINION ][ COMMUNITY ]

COVER STORY: Alarmed and dangerous Everyday life is not nearly as perilous as the media encourages us to believe. How can risk professionals respond to irrational fears of potential danger? RISK ATLAS: The next 10 catastrophes Mapping the countries most vulnerable to the effects of climate change, despite producing the lowest emissions RISK FINANCING: Chain reactions Supply chain risks are high on the agenda following recent natural disasters. What types of cover are insurers able to provide?

Here be dragons Electrolux head of risk Lennart Edström got his ﬁrst taste for risk, and how to manage it, from his days in the Merchant Navy Gulf rises to complex new challenges GCC countries are upping their efforts when it comes to risk management techniques Libya is not a blueprint for upheaval Richard Fenning of Control Risks answers questions on the Middle East situation, China’s growing power and the rhetoric of globalisation Headspace Ferma president Peter den Dekker shares his stories of bungee jumping, bartending and breaking the ice … literally

Theory & Practice [ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]

When chance really could be a ﬁne thing High-rollers look risk in the eye and make it work for them. We suggest ﬁve ways to ensure the gamble pays off Speak up now to prevent whistleblowing How do you get people to trust in an open culture, where business concerns are communicated more freely? How to spot a con man; lessons in leadership Tips to avoid being duped; plus Marks & Spencer’s John Windsor on showing your worth even when times are good

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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NEWS MATRIX [ THE LATEST BUSINESS ROUND-UP ]

Top 10 essential online stories 08 04

01 WAR IN LIBYA

05 01 02

02 CIVIL UNREST

Corporate asset expropriations are “relatively certain” in the Middle East in the near future because of the popular uprisings in the region, experts have warned. “The ownership of businesses associated with the previous elites will be challenged,” said Exclusive Analysis in a special update on the situation. “Contract risks will be greatest where land was seized from poorly compensated ordinary people.” Harm to assets is also likely wherever there is ﬁghting between loyalists and pro-coup militants, the update added. web. goo.gl/VNqht

Reuters

Expect Middle East expropriation, experts warn

03 ECONOMY

04 BRIBERY

Activity picks up but risks escalate

22 charged under US bribery laws

Companies should be aware that their risk proﬁles are likely to change for the worse as activity picks up, researchers have said. Businesses are exposed to heightened risk in areas ranging from workers’ compensation and wage claims and lawsuits arising from employee errors, according to a new report by Advisen. “Greater activity naturally means more claims,” said Dave Bradford, Advisen’s executive vice-president and the author of the report. “For example, more trucks driving more miles inevitably results in more accidents. But, more importantly, risk proﬁles can change disproportionately in many areas as business activity increases.” web. goo.gl/PnO3H

Reuters

Gaddafi prepares for ground battles On 18 March, following weeks of violence between civilian protesters and government forces, an international military coalition launched a bombing campaign against forces loyal to Libyan leader Muammar Gaddafi. US, British and French military jets and cruise missiles targeted command and control structures in Tripoli, air bases and defences as well as military units. So far the coalition has ruled out a full-scale ground invasion. But the lightly armed rebels are unlikely to be able to defeat Gaddafi’s well-equipped and well-trained army without further offensive support, according to some observers. Exclusive Analysis said that for the purpose of propaganda and as a defensive strategy Gaddafi will most likely try to force rebels and coalition forces to battle him around key oil infrastructure or inside urban areas. This will increase the risk of civilian casualties and damage to oil infrastructure. “It is highly likely that Gaddafi is prepared to inflict damage on infrastructure or force rebels to fight him around key infrastructure in order to blame the coalition for the damage,” said Exclusive Analysis. web. goo.gl/tFChg

Twenty-two executives and military industry workers have been accused of engaging in schemes to bribe foreign government officials to obtain and retain business in Africa. The allegations of Foreign Corrupt Practices Act violations stem from an FBI undercover operation, where an agent posed as a representative of a ﬁctitious African minister of defence. UK police executed seven search warrants in connection with the same investigation. “The ﬁght to erase foreign bribery from the corporate playbook will not be won overnight, but these actions are a turning point. From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent,” said assistant attorney-general Lanny Breuer. “Companies should prosper through honest business practices, not the practice of backroom deals and bribery,” added FBI criminal investigative division assistant director Kevin Perkins. The accused could spend a maximum of 20 years in prison. web. goo.gl/c6Vc2

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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‘You may well see as a consequence of the Mid-East revolutions that a much more pluralistic engaged society emerger, where a lot more creative entrepreneurial talent is unleashed’

05 TSUNAMI

Japan tragedy could lead to price hike The death toll from the magnitude 9.0 earthquake that struck Japan on 11 March continues to rise, but officially at the time of going to press the ﬁgure stood at 18,000. Economic loss estimates rose to around $300bn (€212m) within days. The World Bank said that Japan’s economy would take years to recover. AIR Worldwide estimated initial insurance industry losses in the range of $15bn-$35bn. Fitch said that, combined with other catastrophe losses this year the disaster could be a catalyst for a price hike. web. goo.gl/VsHyR 06 LIBYAN OIL

07 INTERNATIONAL RISKS

Italy worst hit by Libyan oil slowdown

Global power vacuum seen as top threat

The war in Libya is seriously affecting the country’s energy production. The countries most exposed to a drop-off in Libyan oil exports are Italy, France, Austria, Portugal and Ireland, according to political risk consultant Stratfor. Stratfor said that almost a quarter (24%) of the oil that Italy consumes comes from Libya. The ﬁgure is slightly lower for France (10%), Austria (12%), Portugal (11%) and Ireland (13%). web. goo.gl/MKRYs

Eurasia Group has unveiled its list of top 10 global risks. Number one on the list is the global governance breakdown, or the “G-zero”. In the a ermath of the ﬁnancial crisis and economic downturn, global co-operation on anything from the economy to the environment is hard to come by. Eurasia also thinks that 2011 will be a year of growing uncertainty for Europe, although it thinks the eurozone will remain intact. web. goo.gl/nB4CL

08 COMMERCIAL POLICIES

10 REGULATION

Corporate insurance ‘not ﬁt for purpose’

Ferma demands transparency rules for brokers

Serious flaws in the way corporate insurance policies are arranged are leaving companies dangerously exposed, according to a study of commercial risk by the specialist research firm Mactavish. Based on consultations with over 600 UK companies, the research painted an alarming picture of inadequate disclosure, widespread legal ignorance, managerial failures, deeply uncertain policies and a lack of understanding of how large claims are processed. “Companies are exposing themselves to significant losses,” the study said. web. goo.gl/RZqZU 09 ENVIRONMENTAL DAMAGE

Chevron ﬁned $8bn in Ecuador

Ferma has called for the revised European Insurance Mediation Directive to include binding standards of transparency for brokers in their relationship with insurance buyers, no matter what size the risk. The European risk management federation’s demands came in response to the consultation on the IMD launched by the Internal Market and Services Directorate General of the European Commission. In November 2010, Ferma and the European Federation of Insurance Intermediaries (BIPAR) signed a protocol on the transparency of intermediation in business insurance. web. goo.gl/K4A8R

Online Contents Most read stories

Reuters

Richard Fenning, Control Risks’ chief executive

Oil giant Chevron has been fined more than $8bn (€5.7bn) by a court in Ecuador for environmental damage. The US company said it will fight on in a suit that is seen as a global test case. The case, which has spawned related legal action in the US courts as well as accusations of dirty tricks and bribery, dates from drilling in the Andean nation’s Amazon region during the 1970s and 1980s. A judge ordered Chevron to pay more than $8bn to repair environmental damage but the oil major believes it is unlikely ever to pay. Chevron said the ruling was “unenforceable” and “illegitimate”. The California-based company had revenue of $198bn and net profit of $19bn in 2010. web. goo.gl/DZqNF

The ﬁve riskiest nuclear power plants web. goo.gl/t2L5j Middle East heads water security risk list web. goo.gl/PZtng Yemen crisis deepens web. goo.gl/ukaQn War in Libya web. goo.gl/tFChg

Online analysis Is the Japanese nuclear crisis being overhyped? The unravelling “nuclear crisis” (as most of the mass media terms it) is a classic example of how the media can become obsessed by risk and cause even more problems in the process. web. goo.gl/DQl35

Bribery Act delay Just because the British government has decided to delay the implementation of the Bribery Act (again) that is no reason for companies to take their eyes off the ball. Risk managers from across Europe say that anti-bribery programmes are still a top corporate governance concern. web. goo.gl/J0c7L

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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RISK INDICATOR [ VISUALISING DATA AND TRENDS ]

Algeria Population: 32m 99% Sunni Muslim There is a 55% probability that the existing political system will remain intact in Algeria, according to Exclusive Analysis.

Tunisia Population: 10m 98% Sunni Muslim Tunisia was the ﬁrst domino to fall, and the revolution here resonated with a discontented generation across the Arab world.

Libya Population: 6m 97% Sunni Muslim If Muammar Gaddaﬁ falls, there could be more opportunities in the long term for foreign investment.

Egypt Population: 76m 90% Sunni Muslim The regime of Hosni Mubarak fell on 11 February, ending three decades of authoritarian rule.

MIDDLE EAST

Middle East revolts won’t necessarily lead to liberal economic reforms

PUBLIC ACT OF SELF-IMMOLATION BY A YOUNG Tunisian man will go down in history as the spark that fired up a regional revolution across the Middle East and North Africa. Comparisons have already been made with a string of revolutions in Europe in 1848. Back then, as now, the people revolted against a lack of political freedoms and widespread poverty. Scholars of history, however, will be quick to note that the 1848 experience shows that overthrowing a government is just the first step. Building a sustainable political structure is the hard part. Calm has not yet returned to the streets of Tunis, despite the exile of Zine El Abidine Ben Ali. And big uncertainties remain over the geo-political hues that will emerge with the new order, particularly in Egypt. Uncertainty makes life hard for businesses with assets in the region and would-be investors. It is unlikely that the new military regime, which replaced Egypt’s president Hosni Mubarak, will push for more privatisations and liberal economic reforms, according to Eurasia Group Middle East and Africa lead analyst Hani Sabra. The corruption associated with offering up Egypt’s assets to foreign investors was a major reason for the revolution in the first place, he says. But if the right political structure is established, fresh opportunities could present themselves. Europe’s leaders are clearly worried about the political instability and uncertainty on the continent’s borders, which is why they have committed military power to try and resolve the civil war that has broken out in Libya. It’s tempting to see Libya as the latest in a line of dominoes about to be toppled by popular unrest. But the truth is that every country in the region has its own unique set of circumstances. No assessment of Middle East politics is complete without an understanding of the two branches of Islam, Sunni and Shi’ite, that define major aspects of everyday life and society. You only have to look at the horrendous sectarian violence in Iraq to see how bitterly and violently these differences can manifest themselves. One of the principal factors driving discontent in Bahrain, for example, is the fact that a Sunni minority rules over a restless Shi’ite majority.

Saudi Arabia Population: 26m 5% Shia Muslim 95% Sunni Muslim Political instability is possible, but it plans to spend $37bn to calm social tensions.

Yemen Population: 20m 36% Shia Muslim 63% Sunni Muslim The most likely outcome in Yemen is that a tribal coup succeeds in ousting President Saleh from power.

Oman Population: 3m 2% Shia Muslim 21% Sunni Muslim Oman’s economy is set to grow more slowly as a result of recent social unrest.

Bahrain Population: 0.678m 70% Shia Muslim 30% Sunni Muslim King Abdullah has made moves to violently suppress protesters. Saudi Arabia has also sent troops.

Qatar Population: 0.84m 14% Shia Muslim 86% Sunni Muslim Oil-rich Qatar has one of the highest GDPs in the world, making civil unrest unlikely.

Jamie Sneddon

Waiting to see how the pieces fall

UAE Population: 3m 16% Shia Muslim 80% Sunni Muslim Unrest is unlikely here, with living standards on a par leading Western European nations.

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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EARTHQUAKE

NUCLEAR SAFETY

Cost of Japan tragedy to hit $300bn

Top ﬁve

EADING CAT MODELLER, RMS estimated that the total economic loss from the Japanese eathquake and tsunami will be around $300bn, making it three times more costly than Hurricane Katrina in 2005 ($100bn). But because of the lower insurance penetration in Japan, losses to the insurance industry are likely to be much lower than other major historic losses. Insurers swallowed $22.5bn worth of claims following the September 11 terrorist attacks and $70bn a er Hurricane Katrina devastated New Orleans. Fitch Ratings said that while the earthquake in Japan will be among the largest insured losses in history, it can be absorbed by the insurance and reinsurance industries without widespread solvency problems. However, with the prospect of further catastrophe losses to come this year, it “could be a catalyst for a pricing hike”, Fitch said. The total economic cost of September 11 is much harder to calculate: would there have been an Iraq war without the terrorist attacks, for example? Including stock market falls, most place the price tag at around $2 trillion.

[ NUCLEAR ACCIDENTS ]

Japan earthquake and tsunami, 2011 Japan$300bn earthquake (or about and tsunami, 2011 GDP) 5% of Japan’s $300bn (or about 5% of Japan’s GDP)

Total economic loss

Hurricane Katrina, 2005 $100bn

3 Japan earthquake and tsunami, 2011 $20bn Hurricane Katrina, 2005 $70bn

Insurance industry losses

September 11, 2001 $22.5bn

5 Source: Financial Times

Chernobyl, Ukraine, 26 April 1986 – level 7 Considered the worst nuclear plant accident in history, it is the only one classified as a level 7 event on the international nuclear event scale Kryshtym, Russia, 29 September 1957 – level 6 Large amounts of radioactive material were released following an explosion at a waste tank Windscale (now Sellafield), UK, 10 October 1957 – level 5 A fire in the reactor core resulted in the release of radioactive material. It is the worst nuclear accident in British history Three Mile Island, US, 28 March 1979 – level 5 Accident causing severe damage to the reactor core. No new reactors were built in the US for 30 years Goiania, Brazil, 13 September 1987 – level 5 Radiation contamination resulted in four deaths Source: various media

THE BIG NUMBER

OVERHEARD

Level

Anti-Gaddafi: Libyan rebel fighters cheer as shells explode nearby during a battle with forces loyal to leader Muammar Gaddafi, outside the oil town of Ras Lanuf

‘A plant in Hungary burnt down, it was built up again and it burnt down again a year later’ Lennart Edström Electrolux >> see Viewpoints pages 15-17

‘I don’t know anyone who is frightened of getting in a car, but it’s actually bloody dangerous” Philip Osmond British Airways >> see Risks pages 21-23

‘I suddenly had a vision of myself sitting behind a desk pushing paper from one side of the table to the other until retirement in 2023. It was a terrifying thought’ Corbis

This is the level on the international nuclear event scale given to the accident at Japan’s Fukushima Daiichi nuclear power station on 18 March by the International Atomic Energy Agency. Extensive damage in the 11 March earthquake caused the plant’s essential cooling systems to shut down and reactors to overheat. France’s nuclear safety organisation accused Japan of downplaying the risk, a er Japanese authorities initially submitted a level 4 rating on the 1-7 scale.

“Soundbites”

Peter den Dekker Stork and Ferma >> see Headspace page 40

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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NEWS ANALYSIS [ CONTEXT & INSIGHT ]

BUSINESS CONTINUITY

Keep calm and carry on, the Aussie way Australian businesses’ continuity plans were put to the ultimate test by the recent Brisbane floods. But some companies have proved that, with the right systems in place, they can stay one step ahead ECENT EXTREME WEATHER conditions in Australia have greatly tested the resilience of businesses’ continuity planning. But some, like law firm DLA Phillips Fox and car rental company Hertz, passed with flying colours. DLA Phillips Fox’s corporate services director, Mark Hornsby, describes learning that there was going to be a problem. “Following extreme rain in the Brisbane River catchment area, it was fairly rapidly predicted that the river would break its banks and that large parts of Brisbane, including the central business district and the low-lying suburbs, would be inundated. “Building management of Waterfront Place, home to our Brisbane office, ordered the evacuation of all tenants just before midday on Tuesday 11 January. At that time, all our Brisbane staff were safely evacuated and a number of our immediate incident responses were implemented.” Hornsby says that the firm’s business continuity management plans worked well when put to the test. “We were able to quickly assemble and put into action the right components to ensure the safety and wellbeing of our staff was maintained, that business operations continued uninterrupted and that communication to our staff, clients and other stakeholders was timely and informed. It also worked particularly well to have a national team established, with some representatives ‘on the ground’ in Brisbane but also with many of us working remotely from other offices.” Unlike some other Brisbane businesses, DLA Phillips Fox, one of Australia’s largest law firms, was fortunate in being able to maintain business operations throughout the period via its sophisticated remote access and backed-up IT systems. It meant that the majority of staff could continue to work remotely from home or from the firm’s temporary office until they were able to return to the building. Hornsby says that there were also some unforeseen challenges. “Power outages in

LOWDOWN

Rex Features

Addressing costs and future perils

Retro rescue: Youngsters rescue what they can from the mud a er severe ﬂooding in Brisbane, Queensland in January 1974

Brisbane’s suburbs created an initial communications challenge for some staff, meaning communicating via SMS – a system we had previously established – proved critical.” Hertz, meanwhile, has offices throughout the world, so it is almost inevitable that it will be affected wherever disaster strikes. Good business continuity plans in such an organisation are crucial. As director of risk and claims management for EMEA and Asia-Paciﬁc Patrick Smith says, many organisations have continuity plans in place but have never used them. “In Australia, we had ours tested; they were resilient and they worked. In fact, they were so successful that we are using the Australian experience as an internal case study and to bench test other plans. It reinforced why you need continuity planning.” SR

Reports suggest that the Australian floods have killed 32 people and affected around 30,000 properties in Queensland. There has also been significant crop damage. On 27 January, Australian prime minister Julia Gillard estimated that the flooding would cost A$5.6bn (€4.06bn) and said the government plans a one-off levy on taxpayers to help pay for reconstruction. The tax will raise around A$1.8bn – with a levy of 0.5% applied on income between A$50,001 and A$100,000, and a 1% rate applied on taxable income above A$100,000.

Secondary perils The December 2010 and January 2011 rainfalls that severely affected the Australian states of Queensland, New South Wales and Victoria are a prime example of how secondary perils can cause widespread damage to property. Secondary perils are usually high-frequency, low to mediumseverity events and include floods, hailstorms and bushfires, among others. Although they are not usually on the same financial scale as earthquakes, hurricanes or winter storms, they can cause significant damage. Head of Swiss Re’s flood group Jens Mehlhorn says: “Secondary perils are very o en underestimated. Typically, these perils are difficult to model. Hence, there are no adequate risk assessment models available, which contributes to uncertainty when assessing these perils.”

StrategicRISK [ APRIL 2011 ] www.strategicrisk.co.uk

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Corbis

NEWS ANALYSIS [ CONTEXT & INSIGHT ]

ENVIRONMENT

Fresh fears for Hungary’s ticking ‘toxic time bomb’ MAL insists it’s under control, but Greenpeace says a polluting discharge from the plant responsible for the toxic sludge spill last year presents unacceptable risks

ESPITE ENVIRONMENTAL devastation and loss of seven lives caused by last October’s toxic sludge spill from MAL Hungarian Aluminium Production and Trade Company’s plant near Ajka, the company was still releasing poisonous substances in waste water directly into the surrounding area in February, according to Greenpeace. While the Hungarian government balances the need for strong punitive action against political and cost considerations, MAL and similar plants, both in Hungary and central and eastern Europe generally, remain a “toxic time bomb”, says Hungarian Greenpeace campaigner Balázs Tömöri. Greenpeace has been monitoring the region affected by the original spill since it ﬁrst occurred. In November 2010, it identiﬁed an additional polluting discharge from the plant, via a waste water disposal pipe, and this is yet to be stopped. Not surprisingly, MAL and the nongovernmental environmental organisation have been in some disagreement as to the nature of the discharge. MAL’s catastrophe management team blamed it on rainwater

and leakage rather than deliberate pollution, telling Greenpeace that it was relatively harmless and being treated. The company also considered that measurement of the risk should be interpreted in comparison with sewage water (which is discharged as a matter of course from the plant and allows for a higher threshold value of pollutants) rather than ground water.

Taking the easy option Greenpeace, however, contends that this discharge is unacceptably toxic and going into a stream that does not stop at perimeters of the land owned by MAL. Tömöri told StrategicRISK: “In all fairness, MAL’s emergency management team have made huge efforts to minimise losses and restore the area in the last three months

‘MAL has made huge efforts to restore the area, but the question mark around continuing pollution could really obscure this hard work’ Balázs Tömöri Greenpeace

since the initial spill, but the question mark around continuing pollution could really obscure this hard work. We think MAL should close the pipe that is discharging to avoid certain damage to people and nature.” A key danger is that the water course the pipe is discharging into runs alongside a public road with busy bus lanes. The contaminants in the discharge are understood to cause nervous system problems. While MAL’s team is endeavouring to neutralise the alkaline discharge by adding acid, Tömöri is concerned as to the adequacy of this method. “It’s essential that the acid added is mixed in properly. But this is a very small pipe. The acid is being added into the middle of the waste water channel and there are people checking the pH level of this waste water every hour – but it’s hardly the most modern technology,” he said. “A good clean-up process would guarantee international acceptance but we fear that they are taking the easiest option.” Perhaps the biggest concern is that the plant may simply run out of storage space for this toxic sludge, raising questions as to where it will look for additional storage.

Government worries The Hungarian government has expressed regret over the loss of life and environmental damage caused by the initial spill – but it will also be aware of the political and financial consequences of any action it takes. MAL can expect some heavy fines but it is in the interests of the government to keep the company viable. If it goes bankrupt, it is the government that will be le to meet the very heavy costs of clean-up. It would also lead to considerable job loss in the area. Tömöri warns: “There are other toxic hot spots in Hungary”, citing another plant, now decommissioned, which has discharged toxic waste into a storage reservoir next to Danube, the dyke of which is also the dyke of the Danube’s flood protection system. “This should be checked properly – perhaps even internationally – because it is next to an international river. A similar catastrophe here would be an even bigger disaster.” Tömöri believes that the whole of the central and eastern European region has some very dangerous sites and that a disaster like Hungary’s toxic red sludge spill could easily happen elsewhere. “Governments need to start procedures to check these facilities properly.” SR

StrategicRISK [ APRIL 2011 ] www.strategicrisk.co.uk

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In 1986, 68 of the worldâ&#x20AC;&#x2122;s largest companies joined together to create a solution for their unmet risk management needs. That solution was XL. Today, as we celebrate our silver anniversary, XL remains the company clients look to for innovative insurance and reinsurance solutions for their most complex risks. Thank you to our partners, producers and clients for your continued support and business and to our XL colleagues whose hard work and dedication helped to make a pioneering idea into a great re/insurance company. We look forward to forging solutions together in the next 25 years.

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21/03/2011 12:34

Nathan McKenna

NEWS FEATURE [ GLOBAL RISKS ]

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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INTERNATIONAL TRADE

Tricks of the trade Protectionism is nothing new, but some in the business community believe the playing ﬁeld of international trade is becoming more rather than less uneven Key points 01: Russia is increasingly focused on maximising state revenues 02: Concerns are mounting over US relations with China 03: British companies are seen as being at a disadvantage in Europe 04: France, Germany and Italy viewed as most aggressive in Europe 05: 75%-80% of markets adopt protectionist strategies

NDUSTRIAL ESPIONAGE, BLACKMAIL AND BROWN envelopes stuffed with cash. No, it’s not the StrategicRISK awards: it’s how some companies – and their governments – do business. So says Knightsbridge Company Services group chief executive Stuart Poole-Robb, echoing the World Economic Forum and Eurasia Group’s warnings about the risks of a global governance breakdown. The economic crisis is exacerbating the ‘every state for themselves’ mentality, and one of the main fears is a ﬁerce trade war between China and the USA. There’s little that doubt protectionism is on the rise, but has it reached the extent that Poole-Robb suggests? Opinion is divided. “The situation of each state looking after its own interests isn’t new,” KPMG head of internal audit, risk and compliance services David Defroand says. “To some extent this has probably always been the case, but perhaps it’s becoming more visible.” In the case of joint ventures in countries such as Russia, governments appear to be taking more interest in maximising revenues for the state rather than the corporations operating there. Control Risks global issues analyst Jonathan Wood explains that there has been increased rhetoric, particularly from the USA on its relationship with China. But that is not necessarily resulting in a drastic increase in discriminatory trade measures. He says: “The rhetoric is linked to the economic atmosphere around the recession. Many manufacturing jobs have been lost in the USA, particularly in key industries, so politicians are faced with a huge employment challenge. China makes a convenient scapegoat.”

USA in the frame

Save our souls: some fear a full-blown trade war between China and the USA

But one European risk manager told StrategicRISK that he considers the USA quite capable of introducing trade discriminatory measures in its political interests. He cites the decision in September 2009 to impose punitive tariffs on all car and light truck tyres from China for three years. “My own business has a higher than average risk of being hampered by legislation introduced with the purpose of protecting the USA’s own trade. It’s very difficult to handle, politicians are highly unpredictable, and perceptions do not necessarily reﬂect reality,” he says. Closer to home, how far are European governments prepared to go to protect national interests? In the case of some, very far indeed, according to Poole-Robb. “The EU directives on how companies should behave are being observed by UK plc for the most part. But British companies are playing uphill when it comes to competing against other European multinationals,” he says. Although these organisations recognise both national and EU »

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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NEWS FEATURE [ GLOBAL RISKS ]

» regulations, Poole-Robb believes they take

government-sponsored. “They are not necessarily after your technical or industrial secrets. They’re trying to find out how tight your margins are. Where you pose too much competition, the local competitor will adopt whatever strategy it considers necessary within the framework available to it to put you out of business or for you to be less effective,” he explains. There is a fine line between aggressive but fair competition and corruption. In the UK, some risk managers are concerned that the Bribery Act, due to come into force in October, may be putting too strict an ethical burden on British companies – for example, in barring facilitation payments to help oil ‘We do not think the Bribery the progress of deals. Poole-Robb says: “It will undoubtedly make the UK far less Act will put the UK at a big competitive in world markets.” European hard-hitters disadvantage’ Wood disagrees. “We’ve already seen Poole-Robb says the governments of very aggressive enforcement of antiJonathan Wood Control Risks France, Germany and Italy, in no corruption legislation in the USA and that particular order, are the most aggressive hasn’t produced a decline in the in trying to influence contracts. competitiveness of USA companies. Also, Germany and other Wood doesn’t see a problem, maintaining that there has countries in Europe are looking to enact similar legislation with an always been a political element in the agreement of very large deals extra-territorial impact, as is Japan.” between countries. “All governments support their national Control Risks’ RiskMap 2011 states that corruption will be the companies with some incentives,” he says. For example, the UK’s most pervasive operational risk in 2011. “The new evangelism with official export credit agency, the Exports Credit Guarantee which the Foreign Corrupt Practices Act (FCPA) is being enforced in Department, helps overseas buyers to purchase goods and services the USA is likely to intensify. With stringent laws being enacted from UK exporters. It guarantees bank loans to finance these elsewhere (the UK Bribery Act, which will come into force in 2011, purchases, as well as insuring UK organisations against nonis the FCPA on steroids), corruption should be emblazoned across payment and political risks. all corporate risk registers. “We haven’t seen companies losing out because of secret “Good intentions are not enough; the new global enforcement government deals, although there is, of course, increased regime requires boards to actively demonstrate real compliance competition as there are more players in the market,” Wood says. through the tangled web of joint ventures, agency agreements and But he does note a trend for developing countries to want projects distributors that is the everyday reality of transnational business.” to be staffed by the local population rather than a company’s own Corruption aside, how can European risk managers and their workforce, and this can affect the outcome of tenders. companies mitigate the effects of aggressive protectionism? “It’s important for risk managers to help their boards to think through the Industrial espionage implications,” says Defroand. “What if not one but three countries Poole-Robb refers to European companies in bidding wars slap trade tariffs on your imports, increasing the cost of your products increasingly suffering from industrial espionage, some of it by 30% or 40%? What can you do to manage the impact?” he asks. SR

the view that if they can ﬁnd a way around, under or over these laws, then they’re not actually breaking them. Where tenders for very large contracts are concerned – not just in the defence industry but in sectors such as oil, power and natural resources – Poole-Robb says governments are prepared to step in to ensure success for their country’s companies. “Conﬁdential negotiations are held on a government-to-government basis. Very little is put on paper for fear of leaks, so there’s little evidence to prove or disprove what government ministers have agreed,” says Poole-Robb. Such awards feature “mouth-watering side deals” – perhaps the provision of educational or medical facilities.

Saints and sinners Transparency International’s Corruption Perceptions Index 2010 grades countries from 9-10 (very clean) to 0.0-0.99 (very corrupt). No EU and Western European countries are ‘very corrupt’ but some are in the lower half of the scale. 01: Denmark 9.3 02: Finland 9.2 02: Sweden 9.2 04: Netherlands 8.8 05: Switzerland 8.7 06: Norway 8.6 07: Iceland 8.5 07: Luxembourg 8.5 09: Ireland 8.0 10: Austria 7.9 10: Germany 7.9 12: UK 7.6 13: Belgium 7.1 14: France 6.8 15: Estonia 6.5 16: Slovenia 6.4 17: Cyprus 6.3 18: Spain 6.1 19: Portugal 6.0 20: Malta 5.6 21: Poland 5.3 22: Lithuania 5.0 23: Hungary 4.7 24: Czech Republic 4.6 25: Latvia 4.3 25: Slovakia 4.3 27: Italy 3.9 28: Romania 3.7 29: Bulgaria 3.6 30: Greece 3.5

ANALYSIS

Barriers to trade Since 1995, the Trade Barriers Regulation (TBR) has given European businesses a tool for tackling trade barriers in export markets. Businesses can use the TBR to ask the European Commission to investigate restrictions on their sales abroad, discriminatory treatment in foreign markets, difficulty obtaining patents or licences or any other form of unfair barrier to their export of goods or services.

In the past decade dozens of companies or industries have used the TBR to tackle problems in export markets, as well as unfair foreign trade practices that cause injury within the EU internal market. The TBR cases has helped improve export conditions for car manufacturers in Colombia, pharmaceutical companies in Turkey, textile ﬁrms in Brazil, among others. Source: European Commission Trade

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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[ PEOPLE ] [ OPINION ] [ COMMUNITY ]

> In my opinion Libya.............. 22 Control Risks’ Richard Fenning on the opportunities that could come from the Middle East upheaval

Jonas Svedberg

Viewpoints

> Comment Viking Run ........... 18 A view from the ice

PROFILE

Here be dragons At sea, there’s no hiding place from possible disaster. The head of risk at Electrolux, Lennart Edström, thanks his early years in the Merchant Navy for helping him keep business aﬂoat

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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25/03/2011 17:15

Jonas Svedberg

VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]

LOT OF WHAT LENNART EDSTRÖM UNDERSTANDS about risk, he learnt at sea. In 1977, at the age of 20, he began a first career of 13 years in the Merchant Navy. Now he is head of group risk for Electrolux, the world’s second-largest household appliance company. The Merchant Navy taught Edström a lot about personal risk. He recalls a time when he narrowly avoided injury. “One of the ships I had been working on sank in the North Sea off Hartlepool in the UK, as a result of a dangerously flammable cargo being loaded with a pulp and paper shipment.” Rising to the rank of officer, Edström mastered the art of navigation and shiploading aboard cargo vessels and bulk carriers, mainly sailing out of Gothenburg in Sweden and Singapore. But in 1988, when his wife gave birth to their first daughter, Sophia, Edström decided it was time to head for shore. “I would like to be back there, but you always forget about the bad times,” he tells StrategicRISK. “I learned a lot about risk in those days. When you’re on a ship, you can never hide away from risk. You cannot delegate it or skip it. You have to face up to it.”

The wilder shores Edström’s first foray into the realm of professional risk management was with WASA Insurance, a Swedish underwriter. He worked in its industrial and marine division, mainly on cargo claims. In 1995 a position opened up at Stora AB, a SwedishFinnish pulp and paper maker with roots going back to the 13th century. “The risk manager there hired me for marine risk management and loss prevention,” he explains. “I would follow the cargo to find out where the claims occurred and then I’d see what I could do to rectify the situation.” In 1997 Stora’s group risk manager left and a golden opportunity presented itself to Edström. “My experience working on the ships was really valuable. Moving into group risk management, however, I needed to scrub up on lots of insurance topics that I didn’t have much experience with, like property and casualty, directors and officers, crime and fidelity.” Fortunately, it wasn’t all “rocket science”, Edström says. “I learnt quickly.” Despite his limited knowledge of technicalities, he did not lean on brokers for support. “If I’d been smart I would have used brokers much more. But I didn’t. I did much of it myself.” Seeing that the company was spending a lot on insurance, Edström decided to start implementing higher deductibles for the paper mills. “We said to the business units: ‘This is your business and you are going to have to take care of it’. We asked them to record loss statistics and report back to us at group level.” It was tough at first, he says, because the individual mills saw risk management as a drain on their profits rather than a long-term risk mitigation measure. Despite initial resistance, the business quickly began to record marked improvements. “Some of the mills started to have zero claims a year, down from 100 or so,” remembers Edström. “Giving the mills ownership over the risk was the key. In the beginning, they didn’t want to implement the retentions but they would never want to go back.” In 2005, Edström was headhunted by one of Sweden’s iconic brands, Electrolux. “I started as group risk manager,” he says. He was inspired to join the company by a clear commitment from the senior management. “In one of my interviews for the job, Electrolux’s chief executive

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and the chief financial officer sat down with me for one and half hours and we talked about risk management. Every quarter I have a meeting with the chief executive, chief financial officer and head of legal. If I have a difficult decision, I can anchor it in the group’s executive management. That makes implementing it a lot easier.” “If there’s a negative claims development in one of our product divisions, for example, I might need to heavily increase their premium contributions,” he explains. “The operations will be reluctant to do that and they will lobby back. If I go to the senior bosses and they can give me the go-ahead then I have a strong foundation for implementing that change. “It means I can say to the business unit: ‘This is what I propose you do to rectify your premium. If you don’t make these changes then I’ll increase the premium again.’ It could be a product liability or quality issue. Or it could be that one division has a loss prevention strategy that doesn’t match up with the group’s.” As well as the group insurance programmes, Edström takes responsibility for loss prevention, specifically property and business interruption. “We had some big losses in the late 1990s,” he says. “A plant in Hungary burnt down, it was built up again and it burnt down again a year later. A plant in Warburton in the UK was also completely burnt down in 1999. We had to lease a warehouse for 15 years.” Following these catastrophic losses (and the ensuing problems getting insurance cover) Electrolux’s board “handed over a big bag of cash” to the risk management department and asked Edström COMPANY PROFILE

2nd

53%

40m

54,000

largest household appliance company in the world

products sold by Electrolux to customers in 150 countries every year

jump in proﬁt to SEK4bn (€453m) in 2010

employees in 2008

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

25/03/2011 15:31

Ben Dyson, DEPUTY EDITOR, GLOBAL REINSURANCE

to make it stop. The result was Electrolux’s Fire 2000 programme to get the protection level on its facilities worldwide up to scratch. “Now we haven’t had a claim for some time and we are an attractive risk for the insurance market,” Edström says. “We still have the momentum within the group to work on loss prevention. It’s almost part of the group’s DNA now.” Product safety also falls under the risk management remit at Electrolux. “Although we are not responsible directly for product safety – that’s Operations’ responsibility – we are responsible for reporting all cases to the top management,” Edström explains. Sector product safety advisory committees report any issues quarterly into the group product safety advisory committee, which Edström chairs. He then ﬂags up any serious issues before quarterly risk ‘A plant in Hungary hearings. burnt down, it was built committee Electrolux’s corporate security chief up again and it burnt reports to Edström. down again a year later’ also “Among other things, he looks after the Lennart Edstrőm Electrolux personal security of the top management,” he says. Something that is particularly pertinent as the group is currently mulling over an acquisition in Egypt.

Captive control The group’s captive operation is another area over which Edström takes ownership. “We have two captives today,” he says. “A couple of years ago we had four. We transferred the portfolios from our Dublin- and Luxembourg-based captives into a new Swedish captive, where we write property and business interruption, casualty and business travel. “In the USA, we write casualty and workers’ compensation through another captive. We have big retentions, which means we have much better ownership over the risks.” Unlike some other white goods manufacturers, Electrolux does not write third-party business through a captive. “That’s a conscious decision,” Edström says. “The captive is there to support the core business, not to make money.” As a senior risk management professional, Edström isn’t alone in having a few issues with the concept of enterprise risk management (ERM). His main bugbear is the way that consultants sell ERM into companies. “I’m of the ﬁrm opinion that these issues should be owned by the company because every company has its own set of risks,” he says. “Consultants can advise but ERM needs to have buy-in from the operations and grow organically rather than being imposed externally.” In his view, senior management should set the organisation’s risk appetite and risk managers should implement the strategy. “Maybe there are some ambitious risk managers who would like to take control over all aspects of risk, but I think it is wrong,” he says. It is easy to see how Edström’s philosophy has been shaped by his time at sea. As a ship’s captain has to scan the horizon for danger, risk management is all about being proactive and avoiding risks before they strike, he says. With that mentality (and a bit of luck), he thinks risk managers should be able to avoid icebergs. SR

IN MY OPINION

Gulf rises to complex new challenges Risk awareness is becoming more sophisticated in GCC countries to keep pace with the new needs of the region, but smaller ﬁrms are on a learning curve

ISK MANAGERS IN THE GULF COOPERATION COUNCIL countries are increasingly adopting more sophisticated risk management techniques such as enterprise risk management, according to panellists at the fifth annual MultaQa Qatar conference. However, much of the activity remains confined to larger companies and smaller firms still lack a consistent approach across their organisations. Rahat Latif, enterprise risk management lead, corporate planning at Qatar Gas, said he had seen a big change in the risk management approach of the region’s corporations over the four and a half years he has been working there. A particular milestone was the establishment of a regional chapter of the Institute of Risk Management (IRM). “There is an increasing awareness of the role risk managers have to play,” Latif told delegates during a panel discussion at MultaQa on 15 March. “It is also interesting to note that the IRM has seen the Middle East as a key growth area. The interest has been there and it has not just been superficial. I have seen the growth of the IRM and in the number of risk management roles being established throughout the industry.” Speaking in a later presentation, deputy chief executive officer for Qatar Financial Centre Regulatory Authority, Michael Ryan, pointed out that the financial crisis and the threat of failure of systemically important institutions had emphasises the need for effective risk controls globally. “Group-wide supervision has become more important,” he said. Development projects in the region are exposing corporations to more complex risks, driving the need for more sophisticated risk management and more advanced insurance products. While noting that insurance buying was still largely confined to more traditional property risks, Oman Insurance executive vice-president and head of strategy and planning, James Portelli, said certain projects, such as the Emirates Nuclear Energy Corporation’s plans to build the United Arab Emirates’ first nuclear power plant in Abu Dhabi, were broadening risk managers’ horizons. “Traditionally projects did not push the boundaries of insurance – it was just writing a larger piece of business with slightly different wordings from the traditional ones. Now, because of nuclear and maybe some other risks, there is a need also for more education and awareness,” Portelli said. But he contended that there was still work to do on consistent risk management approaches, pointing out that some corporate buyers were tackling insurance buying and risk controls separately. “Whereas business continuity management, security, health and safety and environment is dealt with by corporate services, engineering departments and so on, insurance has traditionally been a function of finance and treasury, and there was a disconnection,” he said. “This is changing. But it’s changing more in the larger corporations – the publicly listed companies, the large government entities – where we are seeing more chief risk officers and risk managers.” SR

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VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]

Richard Fenning, CHIEF EXECUTIVE, CONTROL RISKS IN MY OPINION

Libya is not a blueprint for upheaval Control Risks’ chief executive Richard Fenning discusses today’s major risks with StrategicRISK, ranging from the war in Libya to the rise of China, ‘hacktivism’ and Somali piracy How do you see the situation in Libya and the Middle East evolving? Libya is essentially being run as one man’s fiefdom. [Colonel Muammar] Gaddafi has stopped any other institution gaining power that could rival his. Most of the rest of the Middle East is not like that. So Libya, unlike Morocco, Algeria, Egypt or Tunisia, is capable of becoming a failed state, in the sense that the basic functions of the state are not able to deliver what the population needs. It would be wrong to see Libya as a blueprint for what might happen elsewhere, because it does have this rather odd characteristic. So the intensity of what we are seeing and the possibility for dire consequences is greater. Having said that, there could be some significant opportunities as well depending on how the Middle East re-emerges from this. There could be investment opportunities. You may well see as a consequence of this that a much more engaged pluralist society emerges, where creative entrepreneurial talent is unleashed. The World Economic Forum warned of the breakdown in global governance. And we saw this at the Copenhagen Climate Summit where

world leaders failed to reach agreement on curbing greenhouse gases. There is also a tendency for countries to look out for themselves during a downturn. And a pressure on them to introduce protectionist measures to bolster their own homegrown industries. What can be done about this? Yes, there’s always that. If you look at what’s happened over the past 10 years, though, the whole move towards globalisation has continued despite the rhetoric of politicians. So in the USA there’s a huge angry commentary about the loss of US jobs to other parts of the world, but actually nobody ever does anything about it. It is just the way the world is going. You get a lot of noise about it but actually I’m not sure whether that process is going into reverse in any meaningful way.

‘China is effectively funding US military spending. So if it is all going to end in war then it will be a war that China has paid for’

What are your views on the rise of China? Can it be compared to the rise of Germany in the 20th century? Obviously there were dire consequences for the world back then. How is the world going to cope with the emergence of China as a superpower? In theory it’s to everyone’s huge advantage. Not least because China has underwritten the US deﬁcit for the last few years. The implication of your question is: are we heading for some major clash between China and the West? America has the largest defence budget in the world by some way. The reason it is able to afford a large army is because China underwrites its budget deﬁcit by buying US treasury bonds. Therefore, China is effectively funding US military spending. So if it is all going to end in war then it will, rather bizarrely, be a war that China has paid for. But I don’t think that’s going to happen. The Chinese are way too clever for that. They want to avoid confrontation with the USA. The theory is they are so interlinked they can’t survive without each other. And to a certain extent that is true. Mutual trade dependency will overcome political differences. It is easier to threaten people if you don’t have billions of dollars invested in their well-being.

FERMA

Frozen fudge is the taste of defeat on the Viking Run M

AYBE I DIDN’T PUT AS much thought into my answer as I should have done when Ferma’s president, Peter den Dekker, asked me if I’d like to compete in the annual Vikingarännet (or Viking Run) ice race in Sweden, writes Nathan Skinner. Once I’d agreed, there wasn’t much chance of backing down. And the idea of skating across a frozen Swedish lake in winter did appeal — particularly if StrategicRISK was

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picking up the tab — despite my complete lack of experience. When race day arrived in February, we couldn’t have asked for better weather. The temperature was well below freezing (meaning the ice wasn’t slushy) and for most of the day the sun was shining.This was scant consolation, however, for the fear that gripped me as our team assembled at 8am on the starting line in Uppsala. It consisted of myself and Peter, along

with Heikki Hakkarainen from Hannover Re, Erik Borjesson from Lloyd’s, Mark Vos of Crawford, and Arjen Ronner from Aon. Erik’s PA, Brenda Wallen, agreed to meet us at the halfway point with energy bars and hot soup. Standing on the frozen shore, that seemed a long way off. The Vikingarännet is a 80km ice skating race that takes place annually along the shore of Lake Mälaren, starting in Uppsala and ﬁnishing in Stockholm. A few thousand (mainly northern European) skaters take part every year. Many either injure themselves en route (usually by colliding face ﬁrst with the ice at 20km an hour), or fail to complete

the distance in the time allowed (my main concern). My limited amount of pre-race training had not prepared me for the number of cracks in the ice. Swedish ice is notoriously evil, so Swedish skaters use poles to help themselves balance. Dutch skaters, who I had trained with (once), don’t. Peter, a Dutchman, had explained that “no real man” uses poles. But that didn’t stop me from accepting them when Erik Borjesson offered. The kind Swede and insurance professional quite literally saved my skin. You’d have thought someone who writes about risk every day would have engaged in a little more risk mitigation.

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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Community update What’s the right strategy to cope with the rise of cyber risks? We’ve seen with WikiLeaks how ‘hacktivists’ can launch revenge attacks against companies. It’s really difficult because you’ve got hacktivists and then you have state-sponsored espionage where people will break in to steal information or do damage. This is a very potent threat at that state-to-state level. It is extremely hard to protect against absolutely. It’s beholden on all companies to have the best possible information protection measures that they can and for people to assume we are living in a hostile environment. I wonder if there’ll be backlash against hacktivism, and whether it will be regarded more as a criminal activity rather than the Robin Hood mystique that has grown up around it. Piracy is another big issue in the headlines, in particular the rise of Somalia pirates, but elewhere too. How has it been allowed to become such a problem? It’s kind of a medieval risk that has come back to haunt us. Fundamentally it hasn’t changed at all – it is still young men climbing up the side of your ship at night and taking it over. As piracy gets more violent and more outrageous then the response to it will get more assertive. It could take the form of attacks on pirate havens in Somalia or more aggressive responses from international maritime forces. [READ MORE ONLINE] For the full interview with Richard Fenning, go to strategic-risk.eu or goo.gl/w2g1p

The dream team: (L-R) Heikki Hakkarainen, Erik Borjesson, Peter den Dekker, Mark Vos, Nathan Skinner, Arjen Ronner

[READ MORE ONLINE] For more photos from the event, go to strategicrisk.eu or goo.gl/bI7AM

But you’d be wrong. Most of our team were happy to self-insure their personal risk. Our only gesture towards risk management was in carrying ‘ice prongs’: crafty devices that help a skater to extract himself if he is unfortunate enough to fall, crash or slip into the icy depths. I didn’t see anyone do this but I did see some bloody patches of ice and oddly disjointed limbs. Arjen Ronner, our most experienced skater and another Dutchman, has completed the legendary 11 Cities Race, but he proved that no amount of experience can prepare you for the Viking Run. He had to hike practically barefoot across

Steve Willis, Insurance Manager at International Power GDF SUEZ, has won the 2011 Arthur Quern Quality Award from the RIMS Quality Advisory Council. The award recognises Willis’ innovative insurance programme. It acknowledges individuals and organisations that innovate and demonstrate sustainable results. Willis will receive the award at the RIMS conference in May.

Ferma has invited students to submit entries in a competition for the best risk management thesis. The competition is open to any risk management student and the deadline is 30 June. A winner, who will receive €1,000 in prize money, will be chosen at the Ferma forum in October. A panel including representatives from academia, Ferma and the award’s sponsors, ACE, will judge the competition.

2km of snow trail, having decided against bringing spare footwear (competitors are encouraged to carry boots for the short hikes that connect stretches of ice). I dropped straight to the back of the pack and lost sight of all my colleagues after a kilometre, yet I somehow made it to the Lloyd’s 41km pitstop by midday with all my bones intact. Brenda handed me a cup of coffee and told me that I was only 45 minutes or so behind the main pack. Spurred on, I returned to the race almost immediately, but the last third of the journey was a slog. The ice was “fudgy” (cracked ice with snow on top, preventing you from seeing or

Swedish, Danish and Norwegian risk managers gathered in Stockholm on 24 March for the ﬁrst pan-Scandinavian risk forum. President of Swedish risk association Swerma, Charlotte Barnekow, told StrategicRISK her members would also be attending events hosted by the Danish and Norwegian associations. “Many of the issues that we face as a profession are the same across Scandinavia. It is good for us to come together and share ideas.”

avoiding the gashes). My legs and shoulders were burning by the time I made it to the ﬁnal pitstop before the ﬁnishing line, where a steward told me I’d missed the cut-off point by 15 minutes. With dusk descending I was forced to retire from the race at 67km. My colleagues did their best to console me by calling me “brave Brit”, but it was hard to hide my disappointment. Fortunately there are plans to make the event an annual affair so perhaps next time I’ll do a better job of practicing what I preach. A little more proactive risk management and it could have been a whole different story. SR

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AT JLT SPECIALTY LIMITED WE DON’T RELY ON OFF-THE-SHELF SOLUTIONS We take time to listen and engage with clients, markets and colleagues so that we can understand aims and objectives, put strategies in place and successfully deliver them. To learn more about our services email tony_tyler@jltgroup.com or call +44 (0)20 7528 4133

JLT Specialty Limited. Lloyd’s Broker. Authorised and Regulated by the Financial Services Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: 6 Crutched Friars, London EC3N 2PH. Registered in England No. 01536540. VAT No. 244 2321 96. www.jltgroup.com.

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11/02/2011 14:24

Risks

[ THREATS ] [ OPPORTUNITIES ] [ MANAGEMENT ]

> Risk atlas Climate change.....24 The countries that pollute the least are most at risk > Risk ﬁnancing Chains ...........26 Growing interest in trade disruption insurance

RISK PERCEPTION

Alarmed and dangerous Pic credit

Fear, uncertainty and doubt: it sells papers and boosts viewing ﬁgures, but what are the » consequences of a misperception of risk?

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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Rex Features

RISKS [ COVER STORY ]

T’S A SCARY WORLD OUT THERE: MUGGERS AT THE bus stop, terrorists on the Underground. And that person coughing in accounts, do they have swine ﬂu? It’s all worrying stuff. But just how dangerous is everyday life really? We live in a society high on fear but with almost no understanding of risk. Stirred up by a sensationalist media that tweaks deep-seated human uncertainties, many people respond in a very irrational way to their fears. And that can put business in a very tricky position, especially those professionals whose jobs it is to assess risk and how to deal with it. “Most people just don’t react rationally to facts,” says British Airways head of risk Philip Osmond. “For example, when there is news of an airliner crash, this can enhance fears of air travel, despite in reality people being far, far safer in the air than in their cars.” And recent events have shown just how lethally dangerous an irrational response to fear can be. After watching the horror of the 9/11 terrorist attacks unfold on television, many Americans sharply reduced their air travel. This led to increased car use, meaning increased road traffic accidents. As a result, an estimated additional 1,500 people died on US roads in the attempt to avoid the fate of the passengers who were killed in a devastating – but so far unique – attack, according to a study published in 2006. “I don’t know anyone who is frightened of getting in a car, but it’s actually bloody dangerous,” Osmond says. “Yet there is this common feeling that ﬂying is unnatural; that hurtling along in an airborne metal tube at 38,000 feet and 600 miles per hour doesn’t feel right. In the same way, hurtling along at 80 miles per hour with controlled explosions going on under the bonnet doesn’t make much sense either. But people just don’t think about that.”

The effects of risk avoidance Irrational fear is particularly a problem in situations where the consequence of a negative outcome is so terrible that people are reluctant to tolerate any level of risk whatsoever.

A good example is the MMR scare in the UK. In 1998, Dr Andrew Wakefield published a study in The Lancet suggesting a link between autism and the single vaccination for measles, mumps and rubella. This was widely reported in the media and, as a result, vaccination rates plummeted, which led to a rise in measles. Despite the study being subsequently utterly refuted – the General Medical Council has ruled he had acted “dishonestly and irresponsibly” in doing his research and even Dr Wakefield admits his claims were “unfounded and unjust” – many people are still unwilling to give their children the vaccination. “People are just not willing to take a risk when the consequences – in this case their child becoming autistic – are too awful for them to contemplate,” says head of risk for London Underground, David Hancock. In circumstances like this, companies can find themselves in a situation where they have to be seen to respond to public fears, even if rational analysis would perhaps demand a different reaction. “We see this all the time on the railways,” Hancock says. “Statistically, train travel is very, very safe, but because of the fatalities that have occured in the rare instances of a crash, we endeavour to make the public aware of the huge amount of money we spend on safety. Perception is

INSIGHT

Top 10 factors affecting risk perception 1. The media The media can increase the sense of threat, and decide what we should be worrying about. Foreign criminals, teenage gangs, and avian ﬂu are treated differently in different news outlets.

likely to expect those things to happen to them again.

4. Entertainment The success of particular ﬁlms – like disaster movies – can inﬂuence how people perceive the risk of certain activities, such as air travel.

2. How risk is explained The statistical tools used to explain data in scientiﬁc journals can inﬂuence how it is interpreted, and how the public and media react to it.

3. Personal experience If an individual has had negative experiences, they are much more

6. Familiarity of the risk The more o en you safely experience a ‘risky’ activity, the less likely you are to fear it. To the uninitiated, rock-climbing may look dangerous, but it will seem much less so to the seasoned climber.

7. Necessity of the risk 5. How you see the world How you perceive risk is shaped by your views. For example, a le -wing person is unlikely to view industrial action as a ‘risk’ in the same way as a more right-wing person. A successdriven person will be more afraid of failure than someone more laid-back.

If calculated risk is part of your day-to-day world – as it is for a trapeze artist or a stock market trader – you are much less likely to be frightened of the consequences.

8. Recent events A commuter stepping onto the

Underground the day a er a terrorist attack will probably see another attack as more likely than they did the day before the bombing.

9. Education The better able an individual is to analyse a situation, the more rational their response to any risk will be.

10. The scale of the risk Individuals are more likely to overreact to risks – however unlikely – if the consequences of a negative outcome are unbearable to them.

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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Nuclear winter: the risk threatened by Japan’s Fukushima plant taps into one of the public’s greatest fears

Nuclear safety scale 01: Anomoly: variation from permitted procedures 02: Incident: incident with potential safety consequences on-site. Insignificant release of radioactivity off-site. 03: Serious incident: very small release; public prescribed limits. Local protective measures unlikely. 04: Accident without significant off-site risks: minor release; public exposure of the order of prescribed limits. Local protection measures unlikely except for some foods. 05: Accident with off-site risks: limited release of radioactivity. Partial implementation of local countermeasures. 06: Serious accident: significant release of radioactivity. Full implementation of local countermeasures. 07: Major accident: major release of radioactivity. Widespread health and environment effects.

everything. Risks don’t actually exist – hazards exist – what risk managers do is just future gazing. In that sense, ‘Most people just perception is actually the ‘truth’.” don’t react rationally And it isn’t just in response to life-threatening events that risk to facts. An airline crash perception can distort reality and shape can enhance fear of the future – it also influences how employees work in more subtle ways. flying despite air travel “Concepts of risk can be self-fulfilling,” being far safer than Hancock says. “If you imagine that you won’t manage a project well, the being in a car’ likelihood is, you won’t.” Philip Osmond British Airways Additionally, going on a gut reaction rather than facts can also cause employees to downplay real risks. Factory floor workers may not be as worried as they should be about safety, because they’re constantly exposed to a risk and become complacent, or they are influenced by media stories portraying health and safety as a waste of time. The picture is further complicated because many companies depend on a degree of risk as a way of gaining a competitive advantage. “Often you have to break away from the herd, and that always involves taking risks,” Hancock says. “Certain industries, such as banking, depend on it, and that has to be managed.” Other sectors, like education, face the opposite problem: they are expected to operate on something as close as possible to zero risk, despite this being almost impossible to achieve. “We see bizarre situations, like parents bringing their children to school on a motorbike and then expecting teachers to keep them safe indoors and not even allow them to play outdoors,” Hancock says.

Learning to live with risk It would seem that, across the board, human beings are predisposed to irrational reactions to risk, placing many companies in an awkward situation. But there may be a straightforward solution. “If you read a typical psychological explanation of why this happens, it will argue that there is something wrong with people’s brains,” says Professor Gerd Gigerenzer, director of the Max Planck Institute for Human Development and the Harding Centre for Risk Literacy. “But I don’t think this is true. There is now a whole industry in the form of the media that has set out to deliberately distort and create misunderstanding. We have to educate people to deal with this. That is the key to helping them understand risk.” According to Gigerenzer, the way information – particularly statistics – is presented is often deliberately confusing. For example, the results of a particular survey may reveal that the risk of death or injury associated with a particular activity has risen from 1:1,000 to 2:1,000 – a statement of absolute risk. Not so dramatic perhaps. But phrased another way – in terms of relative risk – there was a 100% increase. That’s the way to grab headlines and shift your agenda or product from a scientiﬁc journal to the mainstream. “We live in a society where we have the right to clean water, but not clean information,” Gigerenzer says. “There is an example of a study into the health risks associated with third-generation contraceptive pills that was skewed and created huge fear. Women in the UK stopped using it and there were around 14,000 more abortions that year. We cannot trust our media and there is no society without trust. We need to teach people how to be more risk literate.”

Hancock agrees that education is key to helping people better understand and think through fear. “The problem is partly that people are reacting emotionally,” he says, “but more importantly they are reacting in this way because they don’t have the tools to make an informed decision. We need to change this. Risk is seen as a controlling thing by both businesses and individuals, but I think a proper understanding of it can be very empowering.” Gigerenzer agrees. “We need to educate a new generation to deal with the modern world,” he says. “We need to teach them how to live with uncertainties and not look for certainties were they don’t exist. There will be more surprises this century, and people need to know what questions to ask – whatever comes along.” SR CASE STUDY

The millennium bug that didn’t bite At the close of 31 December 1999, our world was due to end. As the clocks struck midnight, the great silicon meltdown would begin as computers across the world, unable to cope with the new date, flickered and went quiet, taking with them our civilisation’s life support systems: health, medicine, power, water, transport. We all knew that the ‘Millennium Bug’ had the power to do this because we had read endless articles about it in the run-up to New Year’s Eve 1999 – and not just the sensationalist tabloids, but in the pages of the serious press too. Yet, despite all the warnings, when dawn broke on 1 January 2000 it revealed a world with a bit of a hangover for sure, but otherwise pretty much fine. The Millennium Bug is one of the great irrational risk reactions of our time. From a single paragraph in a 1993 issue of the Canadian Financial Post, headlined ‘Turn of century poses a computer problem’, to a 1999 headline in London’s Evening Standard – ‘Life-saving hospital equipment and 999 services in London face total breakdown on January 1’ – the media stirred a self-perpetuating storm of hysteria. The first sources were computer scientists who thought there might be a problem although – crucially – had no idea how serious it would be. But pretty soon the real risk posed by the Bug was lost as business, IT and the media abandoned the facts and hyped up the fear. In the end, countless hundreds of millions of dollars were wasted preparing for a disaster that was never actually going to happen.

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]

RISK ATLAS ENVIRONMENTAL RISKS

The next 10 catastrophes Climate change is most likely to strike in the countries least able to cope with the effects, according to Maplecro ’s new index

HOSE COUNTRIES THAT PRODUCE THE LEAST BY WAY OF greenhouse gas emissions are most vulnerable to the effects of climate change, according to new research. The huge earthquake and ensuing tsunami that struck the east coast of Japan in March is the latest horrifying example of the power of Mother Nature. Fortunately for its citizens, Japan has the resources to assist the victims. Cruelly, according to Maplecro ’s Climate Change Vulnerability Index, the countries most exposed to climate-related catastrophes are those least able to cope. Bangladesh and India top the table among other countries at most risk, characterised by high levels of poverty, dense populations and reliance on drought-prone agricultural land. India’s massive population and increasing demand for scarce resources make it particularly sensitive to climate change. The industrial giants of China, Brazil and Japan are all listed as ‘high risk’. Wealthy European nations make up the ‘low risk’ countries. Russia, the USA, Germany, France and the UK are all ‘medium risk’. The National Centre for Atmospheric Research recently highlighted America’s growing threat of severe and prolonged drought in the coming decades. In its Strategic Defence and Security Review, the UK also warned that climate change represents a potential threat to its security. Rising climate risks could also hit foreign investments into vulnerable countries, warns Maplecro principal environmental analyst Matthew Bunce. “Organisations with operations or assets in these countries will become more exposed to associated risks, such as climate-related natural disasters, resource security and conﬂict,” Bunce says. “Understanding climate vulnerability will help companies make their investments more resilient to unexpected change.” SR

‘Understanding climate vulnerability will help companies make their investments more resilient to unexpected change’

Rank Country

Category

Bangladesh

extreme

India

extreme

Madagascar

extreme

Nepal

extreme

Mozambique

extreme

Philippines

extreme

Haiti

extreme

Afghanistan

extreme

Zimbabwe

extreme

Myanmar

extreme

Key Extreme risk High risk Medium risk Low risk No data

Map, data and indices courtesy of Maplecro

[READ MORE ONLINE] Download a PDF of this risk map at www.strategic-risk.eu or goo.gl/wrNha or go to maplecro .com for more maps and indexes

Matthew Bunce, Maplecro

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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IN ASSOCIATION WITH

EXPERT VIEW

Michael Bruch is head of R&D at Risk Consulting, Allianz

Tools and processes must keep ahead of climate upheaval

8 4 2

5 9

Bangladesh

India

Maplecro rates Bangladesh as the 1 country most at risk because of extreme levels of poverty and a high dependency on agriculture, while its government has the lowest capacity of all countries to adapt to predicted changes in the climate. In addition, Bangladesh has a high risk of drought and the highest risk of ﬂooding.

Climate vulnerability could adversely

2 affect India’s appeal as a destination for foreign investment in coming decades. Almost the whole of India has a high or extreme degree of sensitivity to climate change, according to Maplecro . This is compounded by a high level of poverty and agricultural dependency, it added.

Karratha

Risk of water stress in South-east Australia

SPOTLIGHT ON AUSTRALIA

Carnavon Yulara

Geraldton

Perth Rockingham Bunbury Busselton

Northant

Kalgoorlie Boulder

Esperance Mining areas

Albany

Adelaide

Vast swathes of Australia are rated at ‘extreme risk’ of water stress because demand is exceeding 90% of total renewable water resources. The issue is particularly pressing in the south of the country. Nearly one million sq km of land is at ‘extreme risk’ of water stress, which represents 12.8% of the total land area, warned Maplecro . High demand for water from the industrial and mining sectors is compounding the problem, as illustrated in the map, le .

INSURERS SUFFERED AT LEAST $36BN in catastrophe losses in 2010, according to Swiss Re. This is the highest loss year if major hurricanes are excluded and the fourth highest overall in the past decade. Devastating floods in Pakistan and Australia; cyclone Yasi – climate change seems to materialise and affect natural catastrophes worldwide, including regions that haven’t been hit in the past. From an insurer’s perspective, these developments have major ramifications for businesses on various levels. Internal risk models of insurers and reinsurers are currently not adequately reflecting the growing severity and frequency of natural catastrophes. Risk management tools and processes therefore have to be adjusted to maintain sustainable (re)insurance business models now and in the future. In addition, accumulation of values in areas prone to natural hazards increases the vulnerability of businesses. Having adequate building codes, early warning systems and loss prevention measures in place, and being prepared to take the right contingency actions, is critical to avoid future losses. But carbon emission reduction efforts also offer business opportunities. This is reflected in significant growth rates of wind or solar industry. Those projects are becoming larger in scale, which leaves them more prone to risks such as natural hazards, breakdown or design failure. The insurance industry plays an important role as technology enabler by identifying, analysing and offering mitigation solutions for those risks.

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]

RISK FINANCING SUPPLY CHAINS

Chain reactions An increasingly complex world is putting supply chains under more pressure than ever before. Can insurers respond with the type of cover that global businessess need?

Natural catastrophes and man-made disasters

300

Number of events 1970-2009

250

Man-made disasters Natural catastrophes

200

VENTS OF THE PAST YEAR HAVE PROVIDED A GRAPHIC demonstration of the risk faced by global supply chains. The Chilean earthquake brought the country’s transport infrastructure to a halt, while the volcanic ash cloud halted flights across Europe. More recently, there was the catastrophic flooding in Australia, which closed a major international port, and now the political unrest in the Middle East could have a significant impact on international trade. And it is not just high-profile events such as these that can disrupt trade and break supply chains. More prosaic incidents, like a fire at a key supplier, a strike at a port, or an IT failure, can have dramatic implication for a business’s supply chain. And as supply chains become ever more extended and as costs are taken out to improve efficiency, the potential for disruption has increased. “Supply chain risks are high on risk managers’ agendas. They are hugely aware of this. It is increasingly at the top of their list of exposures,” says Airmic technical director Paul Hopkin.

150 100 50 0 1970

1975

1985

1990

1995

2000

2005

2009

Source: Swiss Re

“In the past few years, there has been demand from sophisticated buyers to protect supply chains and business revenues. High-proﬁle natural catastrophes and political unrest have raised interest and increased demand,” he says. Sawyer says the number of enquiries for supply chain interruption cover has risen by 20%-30% over the last 12 months, following a 20% increase the year before. The number purchasing insurance has also increased, rising by around 10% over the past year.

Assessing the impact A recent survey by the Business Continuity Institute found that nearly three-quarters of companies experienced at least one supply chain disruption last year, with an average of five disruptions experienced. The impact of these disruptions can be costly. One in 10 companies put the financial cost of the disruptions at over €500,000, while one in five respondents said the company’s brand or reputation had suffered as a result of third-party failures. Zurich global supply chain proposition manager Nick Wildgoose says: “During the recession, insolvency [of suppliers] has been an issue for supply chains. And although the rate of insolvencies is dropping, it continues to be a risk as companies expand and pressure is put on cashflows. A bigger concern is political risks, such as what is happening in the Middle East.” He adds: “The breadth of exposures is considerable. Supply chains are more global in nature and therefore more sensitive to disruption.” Technology group Invensys vice-president of risk management and insurance Chris McGloin says: “The disruption arising from natural catastrophes has always been an issue for supply chains. What has changed is that people expect things to happen quickly, so if there is a disruption, it will have a significant impact. You need to focus on the interdependencies.” It is not surprising that brokers and insurers are reporting a growing interest in trade disruption insurance cover to protect their supply chains. Rupert Sawyer, a supply chain specialist at broker Miller, says the number of enquiries relating to supply chain insurance has increased significantly this year.

1980

Covering all eventualities While interest in the supply chain insurance is increasing, risk managers say the insurance market is struggling to provide a comprehensive response to supply chain risk. Traditionally, insurers have focused on business interruption arising from property damage, but they have struggled to provide cover where the disruption arises from an event in which there is no physical damage, such as a strike at a port. Miller and Lloyd’s insurer Kiln developed a trade disruption policy over 20 years ago, which broke the link with physical loss or damage, providing cover on a ‘named perils’ basis.

Change in GDP

2009

2010

2011

2012*

USA

-2.6%

2.8%

2.2%

2.4%

Eurozone

-4.0%

1.7%

1.3%

1.5%

Germany

-4.7%

3.6%

2.1%

1.6%

France

-2.5%

1.5%

1.3%

1.8%

Italy

-5.1%

1.0%

1.1%

-5.0%

1.7%

* forecast ﬁgures

1.7% Source: Euler Hermes

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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Per cen tage cha nge

Germany

The concept of corporate insolvency is different from one country to another, which makes international comparison difficult. To overcome this, Euler Hermes monitors the change in insolvencies over time. The graph represents the percentage change over time from a global insolvency baseline (from 2000).

Spain

Netherlands

Belgium

Austria

Portugal

Italy

France

Insolvency Index

2005 Sources: national ﬁgures, Euler Hermes estimates

2011

‘We need a simple product covering a complex situation. There are relatively few insurers that are gearing up to do it’ Chris McGloin Invensys Since then, a few other insurers have entered the market, most recently Zurich, which launched a product in 2009 providing cover on an ‘all risks’ basis as a way to cover non-physical damage business interruption. Yet this class of insurance is still in its infancy and the market is small in size. Kieron Russell, an underwriter in Kiln’s enterprise risk management group, says that not many companies buy trade disruption insurance. “Not everyone is aware of it and is comfortable enough to purchase it,” he says. Tom Teixeira, life sciences practice leader in the global markets international division at Willis Group, says: “The key challenges in the carrier community for this type of risk are availability of required capacity and pricing. Various solutions are being discussed and strategies being formulated.”

Getting the solution right Airmic’s Paul Hopkin says insurers are not offering the breadth of cover that risk managers would like. “Insurers have the ability to respond by offering contractors’ extensions, o en linked to insured perils, and they have the desire to respond to non-damage business interruption, but they need a signiﬁcant amount of information, which is o en difficult for the insured to obtain. Pricing the risk and understanding the risk is difficult.” Chris McGloin at Invensys says a more “joined-up” response from insurers on physical and non-physical damage business

interruption is required. “We’ve always looked at supply chain risk, but we have been looking at the insurability part more recently. As a business we take on risk, but we want the insurance market to take on the catastrophe exposure. “We need a simple product covering a complex situation. There are relatively few insurers that are gearing up to do it.” Zurich will therefore be hoping that its ‘all risks’ approach will respond to the requirements of risk managers. Meanwhile, Kiln is developing the breadth of cover it can provide, adding elements such as cover for disruptions arising from the failure of IT networks, product recalls and regulatory investigations. Miller’s Sawyer concludes: “Trade disruption has been an area where insurers have for a long time failed to grasp a rapidly growing need for insurance to match the new virtual supply chains where companies no longer ﬁt the cosy model of traditional, owned, industrial manufacturing.” It’s time for insurers to catch up. SR

WHAT IS TRADE DISRUPTION INSURANCE? SUPPLY CHAIN INTERRUPTION OR trade disruption insurance covers the ﬁnancial consequences that occur when a company’s supply chain is disrupted and/ or interrupted beyond its control. The disruption may be caused by: political events, such as a trade embargo; a physical event, such as a closure of a port or a strike; a natural peril, such as a windstorm; or a commercial event, such as the insolvency of a key supplier. It differs from traditional business interruption policies, which are linked to physical damage.

Trade disruption insurance is targeted at businesses with an extended supply chain, in particular those employing a ‘just-in-time’ approach to manufacturing, or outsourced production and service functions. But trade disruption insurance is a complex area, and the market for this type of cover is relatively limited. Risk managers say that it is o en difficult to fully describe and document the risks to which the supply chain is exposed, which makes it hard for underwriters to provide appropriate cover and price the risk.

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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The StrategicRISK European Risk Management Awards 2011 are sponsored by

Congratulations to our ﬁnalists JOIN US on the EUROPEAN RISK MANAGER of the year Igor V Mikhaylov Mobile TeleSystems OJSC Annette Schutt Fiig Novo Nordisk Elaine Heyworth Everything Everywhere John Ludlow IHG Colin Campbell Arcadia Group PLC EUROPEAN RISK MANAGEMENT TEAM of the year Tetra Laval Dixons Retail PLC Arcadia Group Ltd Tesco PLC Capital Shopping Centres PLC ENTERPRISE RISK MANAGEMENT PROGRAMME of the year Amlin PLC UK Power Networks SIBUR – ZAO SIBUR Holding Hoerbiger Holding AG Aeroports de Paris BEST RISK COMMUNICATION of the year Aviva PLC Zurich Financial Services SAP London Borough of Lambeth Tesco PLC MOST INNOVATIVE USE OF IT OR OTHER TECHNOLOGY Lambeth Council Science for Humanity Sonae Sierra Financial Information Systems Aon Benﬁeld Analytics

SR_AwardsFPA_Apr11.indd 1

BEST RISK TRAINING PROGRAMME BBC Amlin PLC Tesco PLC Yorkshire Water Services Ltd SIBUR Holding BEST RISK MANAGEMENT APPROACH IN THE PUBLIC SECTOR London Underground (TFL) London Borough of Newham Ealing Council London Borough of Lambeth Woodleigh Outreach Support Service RISK MANAGEMENT YOUNG ACHIEVER of the year Daniel Davies Network Rail Rachelle Banham Hertfordshire Constabulary Claire Bromley John Wood Group PLC Nicolas Vioix Westﬁeld Michael Szonyi Zurich Insurance Company RISK MANAGEMENT PRODUCT of the year Trimble Capital Shopping Centres PLC Royal Bank of Scotland PLC Maplecro Wolters Kluwer Financial Services THE BEST BUSINESS CONTINUITY APPROACH of the year London Borough of Newham The Co-operative Rentokil Initial PLC SAP AG Gategroup LIFETIME ACHIEVER StrategicRISK’s Lifetime Achiever Award will be presented at the awards ceremony

25th May 2011 when we reveal the winners! StrategicRISK will reveal the winners of the European Risk Management Awards 2011 at a networking lunch. Places are limited so make sure you reserve your table today!

DATE, TIME & VENUE Wednesday 25th May 2011 12pm – 3pm Waldorf Hotel, London

RESERVE YOUR SEATS ONLINE www.strategicrisk.co.uk/awards2011 BY TELEPHONE Katherine Ball +44 (0)20 7618 3492 BY EMAIL katherine.ball@strategicrisk.co.uk PRICE Single seat: £150 + VAT Table of ten: £1,400 + VAT

23/03/2011 17:14

istockphoto.com/apatrimonio

Governance

[ ETHICS ] [ COMPLIANCE ] [ REPORTING ]

> Case study Eurotunnel .......... 31 Eurotunnel saved €21m on its insurance premium by implementing alternative safety measures to those proposed by the regulators

REGULATION

How to stay nimble amid the hurdles Regulators are running risk managers ragged as they struggle to meet ever-more complex general requirements as well as the needs of their business. We check out the obstacles in their path

S MORE AND MORE ACRONYMS DESCEND ON them, corporate risk managers must feel as though they are under siege. Each new set of letters from Brussels, London or further afield represents another law, regulation or directive, and more obligations to manage on behalf of their companies. The noose is tightening across all sectors. “The burden of regulatory risk is much greater than it’s ever been, even more than it was five years ago,” says Airmic chief executive John Hurrell. The danger, he adds, is of companies focusing on compliance rather than on the specific risks associated with their business. Most companies face a set of general regulations – including rules covering bribery, health and safety, and corporate governance – besides sector-specific regulations such as those for food hygiene, energy, solvency and insurance. Until the past few years UK policy has been relatively lighttouch, being based on comply or explain and/or an industry code of conduct. But that’s changing across the board as compliance becomes more specific and regulators more aggressive.

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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Reuters

GOVERNANCE [ ETHICS ][ COMPLIANCE ][ REPORTING ]

Bribery America is where most new regulations start. The USA’s Foreign Corrupt Practices Act has been ensnaring miscreant companies far beyond American shores for years. No international trading operation is immune from the law’s main agent, the Securities and Exchange Commission (SEC), which is now much more powerful and better-funded than it was before the Madoff scandal of 2008 revealed its weaknesses. The SEC is also involving similar international authorities, such as the UK’s Financial Services Authority, in its pursuit of offenders much more than it has done previously, as Italy’s energy giant ENI and Germany’s Daimler discovered. ENI and its former Dutch subsidiary Snamprogetti were fined $365m (€258m) last year for violations of the act after bribing Nigerian officials. “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,” according to Robert Khuzami, director of the SEC’s Division of Enforcement. “But the billion-plus dollars in sanctions paid by these companies show that ultimately there is no hiding or profiting from bribery.” (The unseemly scramble for Nigeria’s oil and other assets has netted the SEC no less than $1.28bn in sanctions.) ENI, which used a UK solicitor among other go-betweens to pay Nigerian officials through secret bank accounts, did not respond to StrategicRISK’s request to explain how it had reformed its governance procedures in light of the fines. As for Daimler, its $91.4m disgorgement penalty, not counting $93.6m in fines on related charges, was for “a repeated and systematic practice” of bribing government officials across half the world. Trading of derivatives Similarly, much of the new wave of financialsector regulation originated in the USA, for instance regulation covering the trading of derivatives. Unfortunately, some of this has rebounded on corporates. In the aftermath of the financial crisis, the European Commission followed the American ‘We now have repudiation lead and started work on a policy for pushing trades through clearing houses with more risk (the rejection of a transparent pricing and collateral requirements, claim) and it’s largely instead of individually over the counter between firms. unrecognised’ Generally, this is seen as a good thing, Bruce Hepburn Mactavish except for all those many non-financial companies whose treasurers employ derivatives not for speculative purposes but to hedge risk in physical transactions with counterparties (such as to cover the period between the manufacturing and delivery of products). America is moving towards a dispensation (a ‘carve-out’) for non-financial companies, but it soon became clear to the European Association of Corporate Treasurers (EACT) that Europe is not. The policy was taking shape in a way that would threaten a long-established commercial tool that posed no risk to financial

stability. Indeed, without this tool the reverse would be true, as large amounts of cash would be tied up as collateral in a central clearing system. EACT members went to Brussels to lobby regulators to soften the rules and permit the trading of such derivatives outside clearing houses. The draft legislative package is now working its way through Brussels with wording altered accordingly. “If it had gone through unmodified, it would have had an impact on corporate derivatives,” explains EACT president Richard Raeburn. He’s keeping his fingers crossed that the package survives intact. Health and safety The Gulf of Mexico disaster, the largest peacetime oil spill in a century, has launched a new wave of risk-based regulation on the oil and gas industry, particularly in the USA where two detailed reports, including a president’s commission, found that the previous regulatory regime was unfit for purpose. It has been scrapped in its present form. As Peter Voser, chief executive of Royal Dutch Shell, explained in February: “The reality is that the picture has changed for the deep water industry. There will be increased regulation, and more public scrutiny of safety. To put it simply, our industry needs to rebuild trust with the communities we work in.” In Big Oil as in other industries, the management of reputational risk – or trust – should be paramount. “You can’t pick and choose what you want to comply with, but firms should put their best efforts into those compliance issues that bear on a company’s reputation whether its health and safety, product liability, the Bribery Act or anything else,” says Airmic’s Hurrell. “We urge companies to say ‘let’s put the reputation of this organisation at the heart of our risk map’.” Solvency II The most far-reaching regulation to hit the insurance industry in decades, the capitalboosting Solvency II directive, is rapidly approaching opening day on 31 December 2012. The results of the fifth quantitative impact study, QIS5 – basically a dummy run to assess the quality and financial integrity of firms – were released in mid-March. For consultants such as Deloitte, QIS5 presented “a host of real-life rather than merely theoretical opportunities to address Solvency

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Tunnel vision: the work to repair €290m of damage caused by the 2008 shuttle train ﬁre

II” before it comes into force. So what did the results tell us? Firms can do better, is the summarised assessment of Sean McGovern, general counsel of Lloyd’s. “QIS5 was a worthwhile exercise, but it is vital that appropriate lessons are now drawn from it and reflected in amendments to the Level 2 measures,” McGovern says. “Further work needs to be done,” he adds. “While we remain supportive of the aims of Solvency II, the shortcomings identified in QIS5 – particularly around non-life catastrophe risk –need to be addressed.” However, as the Institute of Risk Management’s head of thought leadership Carolyn Williams adds, there’s still room for manoeuvre in Solvency II. “The directive is not a code-of-conduct approach, but there’s leeway in the regulations for firms to develop their own risk models. It’s more a matter of satisfying the regulator that proper procedures are in place.” Corporate governance With corporate governance regulations tightening, most publicly listed companies are vulnerable to class actions under various sets of regulations and laws. One such unsuspected Achilles heel may be shortcomings in insurance management. According to a two-year study, released in March, of some 600 UK companies by risk consultant Mactavish and PricewaterhouseCoopers, boardrooms

could be exposing firms to “repudiation risk” – the rejection of a claim – because they failed to assess “the financial materiality of insurance to their business.” The study revealed “serious deficiencies” in the insurance arrangements of many firms across most sectors. The result is that claims are increasingly being disputed in court, delaying payouts in some cases for so long that the company’s survival is threatened, particularly in an era of more highly leveraged balance sheets. “The balance of risk is shifting to corporates rather than to insurers,” says Mactavish chief executive Bruce Hepburn. “If the insurer is unable or unwilling to pay a claim, pressures on business can become severe. We now have repudiation risk and it’s largely unrecognised.” Environmental regulation For firms most vulnerable to environmental regulation, risk management should be a key concern for the entire board including the non-executive directors, as BP has learned to its cost. In the wake of the Macondo catastrophe, chairman Carl-Henric Svanberg pushed BP’s directors out of the boardroom and into the executive suite so they can develop a better feel for the company than they can possibly glean from piles of documents at board meetings. As it happens, this is what private equity directors routinely do. McKinsey’s global managing director Dominic Barton pointed out recently: “What’s especially needed [in publicly listed companies] is an increase in the informal time that board members spend with executives and shareholders. “The non-executive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to the company’s business, and 70% of that time consists of informal meetings and conversations.” Airmic’s Hurrell agrees: “It makes very good sense for directors to know as much as possible about a company. They should not rely on the chain of command but should drop down through the layers to gather as much information as they can.” Perhaps it’s a question of attitude. As the IRM’s Williams suggests: “What matters in the long run is that firms approach regulation as a business benefit and not because the regulations require it.” SR

CASE STUDY

Eurotunnel puts the fire out Sometimes the best argument to use with regulators is superior knowledge, as Eurotunnel has learned in the wake of the shuttle train fire in 2008 that caused €290m damage. The bill was so high, the company believed, because the safety regulator, the Intergovernmental Commission, had insisted on rules that required trains to stop in the event of a fire rather than to clear the tunnel first, as has long been established practice on railways. Thus firefighters had to travel 25km from the surface, by which time the fire had taken hold. In the subsequent investigation, the company proposed an alternative procedure based on four “safe stations” spread out

along the route with permanently installed firefighting facilities. “Eurotunnel had no say in regulation, but it believed it had built up enough experience a er 17 years of operation to propose its own solutions,” said a spokesman. “We were in a much better position to discuss safety with the commission.” A demonstration was conducted in Spain and a prototype tested in the tunnel before observers from the commission and insurers. Impressed, they signed off the safe-station concept. The net benefit is a €21m reduction in the insurance premium – “Eurotunnel will recoup the investment in the first two years” – and a victory for experience.

www.strategic-risk.eu [ APRIL 2011 ] StrategicRISK

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Theory & Practice

[ INSIGHT ] [ CASE STUDIES ] [ BEST PRACTICE ]

When chance really could be a ﬁne thing

forecasts. But these new sectors are also stimulating innovative business ideas. Deloitte Consulting LLP director Will Sarni says US engineering giant GE was early to use its expertise with energy, transportation and engineering to move into the water sector. “All industries, whether consumer facing or business-to-business need water, and water scarcity will drive innovation,” he says.

The real market movers are those that are able to embrace risk as part of their business models and use it to their advantage. But when the stakes are high, how do you make sure you come out a winner?

NY GAMBLER WILL TELL YOU THAT the flip side of risk is gain. The most entrepreneurial and successful businesses seize the bull by the horns and negotiate an advantage, turning what others fear into a lucrative business opportunity. For example, some of the world’s most war-ravaged and inhospitable states are also rich in resources and minerals, waiting to be mined by the boldest market movers. Meanwhile, inherent business risks – such as those posed by climate change and the uncertain financial markets – also provide innovative enterprises with niche market opportunities customised to manage and exploit risk. Here are five ways that you can incorporate risk directly into your business strategy.

IDENTIFY THE LIMITS OF YOUR RISK APPETITE When Shell goes into a challenging new territory to probe for oil, it carries with it not only the expertise it has gleaned from similar forays in the past, but also the knowledge that it can absorb any large losses. In the same way as a fund manager juggles the potential of returns across a range of investment opportunities, serious risk should be limited to a percentage that can be easily absorbed by the non risk-affected returns of the business.

istockphoto.com/creacart

STRATEGY

Even if your services are only required in rare circumstances, if you are the only person capable of delivering them, sooner or later your speculation will pay off

LOOK FOR POTENTIAL GAINS INHERENT IN BUSINESS MODELS A music producer may run a recording studio on the basis of safe return, satisfying clients on a day-to-day basis. But, if one of the clients records a hit, royalties from the hit album can bring a huge one-off gain. The risk in certain business models is

entrenched in a similar way. This type of risk requires no extra cost outlay, and sits on top of the company model like a recurring lottery ticket.

NEW RISKS BRING NEW IDEAS Mining for oil has been a risky business for many years, but there are always new risk sectors emerging for businesses to exploit. Take the rising signiﬁcance of climate change and environmental sustainability. Companies now evaluate their carbon footprints and water usage as part of their future growth

TRACK UNDERLYING RISKAFFECTING POLICY Although risk is necessarily unforeseeable, that does not mean that it cannot be quantiﬁed within parameters. Managing director of London-based consultants Hargreaves Risk and Strategy John Hargreaves advises a group of housing associations that pool together to share their analysis of risk issues. At the moment, the convergence of cuts in UK social security payments and underlying changes of government policy towards the housing sector mean that the nexus of risk is changing fast in this sector. Hargreaves says that this means predicting future returns for housing associations need to be recalibrated according to the new risk environment that they are operating in. “Tracking the impact of changes in regulations and policy can be vital to assessing risk in any sector,” he adds.

YOU WILL ALWAYS BENEFIT IN A CAPTIVE MARKET If you are offering services in risky sectors, seek a niche where your company expertise cannot be easily matched. Even if your services or goods are so specialised that they are only required in very rare circumstances, if you are the only person capable of delivering them, sooner or later your speculation will pay off. A good example was pioneering fire-fighter Paul Neal ‘Red’ Adair, who developed a reputation that made him the first port of call during disasters affecting oilfields. Cataclysmic disasters involving oilfields may have been few and far between, but when they happened, it was Red who got the call. And because of this, he could charge pretty much what he liked, as he pointed out himself: “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur!” SR

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KNOWLEDGE British Standards Institution Whistleblowing Arrangements: Code of Practice (2008) The code deﬁnes whistleblowing as the process whereby someone within an organisation “raises a concern about a possible fraud, crime, danger or other serious risk that could threaten customers, colleagues, shareholders, the public or the organisation’s own reputation”. COMPANY CULTURE

Speak up now to prevent whistleblowing Why an open culture and positive reporting will net more black swans than formal procedures alone Rob Wilson is senior manager at PricewaterhouseCoopers’ forensic services practice

HISTLEBLOWING programmes are the channels through which your people can raise concerns about anything from health and safety to fraud. In the best-case scenario., these channels become a safety net for risk management. But would your net catch the right risks? Whistleblowing has some negative connotations and is perceived by many as only a means to identify problems. Building a broader strategy, however, allows you to focus on positive reporting: a ‘speak up’ strategy incorporating the full range of ways employees can seek guidance from and raise issues to line management. So, how does this help with low-probability, high-impact risks? An open culture is fostered by encouraging employees to trust and communicate with their line managers. This way, issues will come to light sooner and can be resolved. Staff should feel more comfortable raising difficult issues, giving you a chance of identifying ‘black swan’ events at an earlier stage.

And not only will your net catch the risk issues, but you will foster a positive attitude in your people, which may have indirect beneﬁts to your bottom line. The biggest challenge is getting people to buy into the open culture. How do you make it work?

This will make the system more useful and thus used more widely. Identify who will be able to use your reporting system. This is a great way of managing your third-party and supplier risk. It can help with Bribery Act compliance, for instance, as well as strengthening your key relationships.

SECURE COMMITMENT FROM THE TOP In an open culture, people with serious concerns are more likely to use other speak-up arrangements, rather than formal whistleblowing mechanisms. And an organisation’s general attitude to business ethics is cultivated by its chief executive, board and senior management through the policies they design and the examples they set. Senior management must also be involved, supporting the implementation and monitoring of whistleblowing reports and outcomes.

DEVELOP AN OUTCOME-BASED POLICY Be clear about the purpose of your whistleblowing policy and how it ﬁts into a broader speak-up strategy.

CHOOSE THE RIGHT MECHANISMS Determine what combination of direct (through the management chain) and indirect (through an independent team) reporting mechanisms are needed and whether these will be in-house or through external service providers. Providing a range of reporting mechanisms increases the chances that people will trust at least one of the options.

TALK TO MIDDLE MANAGERS Effective communication, guidance and training must be in place to embed the programme. O en, the missing piece in an effective programme is the support of middle management. They can become disillusioned, feeling targeted by those below or unsupported by those above.

Worse, they can be blockers to the system, increasing the risk of whistleblowers going public. Appointing local champions within management can help with both communication and buy-in. Research suggests that where whistleblowers use a local champion, they report their concerns formally within the organisation constructively. Champions build trust and help direct issues to the right team.

REPORT, MONITOR, EVALUATE AND ADAPT If you don’t measure it, it won’t get done, but measure the wrong thing and the wrong thing will get done. Appropriate measures will change as your programme matures, so evaluate and adapt regularly. What balance of measures is right for you? The number of reports, investigations, convictions? You get out what you put in. An effective speak-up strategy is a great way to build an open, ethical culture while maintaining your risk management safety net. Capturing good ideas as well as risks will not only protect the bottom line but will also build value in your business. SR

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THEORY & PRACTICE [ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]

FRAUD

How to spot a con man Jeff Katz is chief executive of Bishop International, a London-based corporate investigations company

Corbis

If you want to avoid damage to both your ﬁnances and reputation, you need to make sure you do your research

ON MEN – AND WOMEN – COME IN all shapes and sizes, ages and nationalities. Their schemes run the gamut from the opportunistic to the carefully planned. The objectives may vary from conducting a simple advance-fee fraud to the more exotic Ponzi schemes, like that operated by Bernie Madoff. Most con men have designs on their victims’ bank accounts. But, if you are a company executive and the con man’s target is your company, you may find that the damage to the reputation of the business is far worse than any financial loss. They may act the part of a sophisticated financial adviser or may manufacture a career history that appears to make them suitable for a senior executive role. So what can be done to avoid being tricked by people with designs on yours or your company’s finances and reputation?

OBTAIN A CV AND REVIEW IT If someone is asking you for something, especially money, you need to know who they are. If they haven’t been asked for a CV for a while, they may need a few days to update one. But if they prevaricate for too long, you can bet something’s not right. In the 1980s and ’90s, con man Barry Edward Gray was an assiduous reader of the business press, who looked for contentious situations and would then contact one of the parties to a dispute, saying he was a private investigator commissioned by the other side to dig up dirt. But, he would say, he hadn’t been paid and was willing to spill the beans about what he had been asked to do. All he wanted was his expenses, typically a few thousand pounds. He got away with this for decades because no one ever asked him to provide proof of who he was.

LESSONS IN LEADERSHIP

This is not just insurance risk management … Marks & Spencer head of insurance John Windsor on never accepting glass ceilings

INTERVIEW CAREFULLY Interview the person in an office setting. If there are gaps in the CV, ask for an explanation. Look for things that don’t make sense. If an employer is listed without details of the department worked in or the job title, ask about it. If an answer seems vague, press for more details. An honest individual with nothing to hide will always provide as much detail as required.

DO SOME ONLINE DIGGING Don’t rely on an individual’s own website. Even the most novice computer user can check Google or other search engines. Look for plenty of positive information online from independent sources.

SPEAK TO OLD COLLEAGUES Don’t rely on an individual’s references. You need to independently identify former colleagues to talk to. In 2008, Terence Freeman was set to be hired to run a hedge fund. Research showed that he had worked for a business not on his CV. By speaking to someone there, it was revealed that he had recently married a Russian woman. The marriage certiﬁcate showed that his original name was Terence Sparks. Further research showed that Terence Sparks was a disqualiﬁed director. He wasn’t hired for the job. A few months later, he was arrested for swindling investors out of £44m (€51.4m). SR

Could you briefly describe your role? I look a er the commercial insurances and the commensurate risk management for Marks & Spencer Group. This includes the purchase of classes of insurance from aviation through property and casualty to life. We also oversee and administer ‘local’ overseas programmes. How did you get into risk management? Like most people, I fell into insurance. I started in the insurance department at Taylor Woodrow, then I moved to a subsidiary of Sun Alliance, then into corporate insurance management at Brinks MAT, and from there to an international commodity trading company. I joined Marks & Spencer almost 25 years ago. How is your performance measured? On many things: budget, scope of cover achieved, ‘client’ satisfaction, project delivery, influence, claims recovery, risk management, profile and relationships. Sometimes it’s easy to demonstrate success, but when things are running smoothly it can be difficult to highlight achievements. When a major crisis comes along, provided you deal with it well, you can demonstrate your value. How have you been able to progress your career? Hard work, application and a large element of luck! My advice would be to get qualified and make a nuisance of yourself – don’t accept glass ceilings. Make as many contacts as you can because you never know when they will come in handy. And don’t be afraid to step outside of your comfort zone. SR [READ MORE ONLINE] For more lessons in leadership from top risk professionals, visit www.strategic-risk.eu or goo.gl/rGpor and download the report, published by StrategicRISK for Airmic

StrategicRISK [ APRIL 2011 ] www.strategic-risk.eu

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Special Report

INTRODUCTION

IRECTORS’ AND OFFICERS’ LIABILITY INSURANCE IS very much a buyers’ market. Over the past seven years, European companies have benefited from increasingly advantageous prices and terms as a result of continuing high insurance capacity. Yet it is unrealistic to assume that the market will be able to sustain the double whammy of reduced premiums and high business acquisition costs indefinitely. While the credit crunch and economic recession may not have produced the volume of claims expected, other factors are emerging that will increase losses. Regulators and criminal prosecutors are becoming less forgiving of bad corporate behaviour. Directors and their insurers are having to dig deep to fund the legal expenses of investigations and defending allegations. So-called ‘first-party’ claims are growing, with companies seeking compensation from directors for perceived mismanagement and for fines levied by regulators or criminal courts. Bankruptcies are leading to a flurry of claims. These trends have been seen across Europe, particularly in Germany, where the new VorstAG regulation is creating problems. As recently as 25 years ago, few European companies bought D&O cover; it was a US phenomenon. Now it is not so much a question of whether to buy, but how much. The increasing global reach of companies has brought a growing need for worldwide D&O policies. But global cover does not work for all jurisdictions, so there will always be a place for locally arranged covers. Few commentators see signs of the D&O market hardening in the short term. But history shows it doesn’t take many large losses or an industry-wide shock, such as the recent Japanese earthquake, to trigger a sharp swing in insurance cycles. History also shows that the really big losses are not predictable. If they were, they would never have been allowed to reach that magnitude. Prudent risk managers will enjoy the buyers’ market. But they will alert senior managers to the fact that it won’t last forever. SR

Contents [ D&O LIABILITY INSURANCE ]

Directors’ cut D&O rates may be falling, but with claims on the rise, how long before the market hardens? Those who can, D&O New laws in Germany are putting company directors in even greater need of appropriate D&O cover Buying local Global companies must ensure adequate worldwide cover while also addressing local-level risks