Big risks need big response–UK

Please click on the links below to access the articles. Big answers needed for big risks Raising the bar Ever expanding headaches Just missed it Y2K all over again?hideMr Twiggs said that Clariant’s IT people do assess the risk and the analysis shows that the score comes out ‘very well’ and is within its self-insured retention limits. Bruno Laenzlinger asked the group, however, if IT are the right people to carry out a comprehensive analysis. Filipe Gomes of Willis said, in his experience, the answer to that question is yes. “People who are not working in the IT security department usually have difficulties in understanding these intangible risks that are changing very quickly. Also, the teamwork between operational risk management and IT security has room for improvement. IT people tend to be located in a different department, frequently in a different building. The process to assess, mitigate and transfer the risk, involving a broker and the insurance industry is an opportunity to get a better understanding on cyber risks and improve the cooperation between operational risk management and IT security,” he said. Mr Laenzlinger said that he would suggest the involvement of additional competence for a comprehensive assessment, especially taking into account business interruption scenarios. David Howells of Tetralaval added that it is necessary to identify the controls and risk management processes within the IT department and start from there. “The business units do comment on the analysis and the cyber exposure still comes out as a low figure and I consider our SIR to be low. However this is driven by our claims history,” added Mr Twiggs. And Mr Laenzlinger pointed out that XL has been involved in ‘numerous’ discussions on cyber topics because there are so many claim scenarios possible. “Needs and exposures vary greatly depending on the specific industry,” he added. The German roundtable focused very much on innovation provided by the insurers or rather the lack of it. The group was asked if they believe the insurers are doing enough on innovation in areas like cyber. Mr Howells said: “You can create a class of insurance but if it is not on my list of risks I am not going to buy it. If you have a risk and you need to insure it you have to try and find the cover. If you cannot find the cover then you can go to the capital markets. If it is a pure business or strategic risk then you will probably not be insuring it anyway. The real point is delivery, joining up all the branches worldwide in a consistent manner, with protocols, consistent reporting and the like. This is still innovation in the insurance market!” On the possible impact of Solvency II on the corporate insurance market in Europe Mr Twiggs said: “If you have a unified standard across the industry and if Solvency II is providing a level playing field beyond which insurers can adopt different models then it has to be a good thing.” He said that for the group’s captives it uses QIS 5 to judge business strength. “I think we are seeing an awful lot of hot air from the pressure groups. We are considering captive relocation and the highest level from a regulatory perspective is a key factor. Why are we doing this? Perception. There is still an idea that captives are set up in offshore domiciles to avoid tax. I am ready for the serious discussion with fronting companies that adopt their own solvency test,” he said. Mr Howells asked Mr Laenzlinger of XL what he thinks will be the impact of Solvency II on insurers and price. “I would assume Solvency II has its impact because it is a costly exercise to have to cope with the SST [Swiss Solvency Test] requirements and procedures. Without a strong financial basis an insurer is obliged to raise capital which can be a hefty burden today. These effects might bring up prices over time. I am not aware of any companies that have struggled to meet Finma’s requirements [the Swiss regulator] here in Switzerland. Generally speaking, it will change to a certain extent the insurance environment but probably not so much here in Switzerland,” he said. Mr Twiggs said that he cannot imagine that the costs will be that much different and surely not big enough to affect the cost of capital. Mr Laenzlinger pointed out that the SST has an impact on how insurers structure their investment portfolios. “That may have an effect on returns,” he said. Mr Howells rejoined: “I don’t see the banks putting up interest rates because of Basle III. That is a cost for them but it should not affect their pricing. We, the customers, do not put up our prices because of regulation, it is just a cost of doing business that you have to manage and you have to find savings elsewhere.” Mr Laenzlinger did say that he believes the new capital adequacy rules will lead to less so-called naive capacity in this market over time. Philippe Guerry of MF pointed out that if you have too high a margin then you don’t necessarily care about costs. “But if your margin is already low then it could have an impact. So yes it will raise the cost awareness of the insurance industry but, given the actual highly competitive market it will not necessarily affect prices. If your capital costs are too high, the options for an insurer are to reduce your involvement or withdraw from some markets, branches or clients,” he said.

Big risks need big response–UK

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