Capital markets offer viable option for large corporations–Switzerland

But it is unlikely that such capital will be simply and easily put to work. This potential market will take some time to come of age, if at all, they said. Dominik Ebneter of Swissport International is actively looking at the options. He said one risk that regularly sits towards the top of the exposure list is a pandemic. A genuinely global pandemic would bring air travel to a standstill and thus hammer Swissport’s business. “We would struggle severely to deal with such an event. The interruption of revenue would be incurred immediately. In addition many airlines across the world could go out of business and this would increase our credit exposure immediately. We have discussed this with our insurance partners but currently insurance for this exposure is untenable. The accumulation risk would be too high…the Ebola crisis showed just how exposed the insurance industry would be to such a global pandemic. Insurers would also be exposed if they have a life business too. This is a problem for the insurance industry,” said Mr Ebneter.hide“One solution that I am looking at is a catastrophe bond. We are at a very early stage but there is a possibility of creating an insurance-linked security (ILS), backed by the capital markets and not the insurance market, that would protect our balance sheet,” he continued. Stuart Martin of Bombardier said that he understood why Mr Ebneter would consider this option but asked whether it would not be more cost effective to use a captive to retain and manage the risk and build up the fund over time. Mr Ebneter agreed that this would be a potential route but pointed out that if 25% of the group’s annual turnover of CHF3bn was hit by a pandemic then the capital needed to fund the captive would simply be too high. Mr Martin said, however, that on the same basis, the cost of the catastrophe bond would presumably be very high. He wondered whether this would be a risk that governments should consider funding on the same basis as Pool Re in the UK or TRIA in the US whereby the state backs a terrorism pool. Sabrina Hartusch, current president of SIRM and risk manager for Triumph, the Switzerland-headquartered underwear and lingerie firm, said that she could see how a capital market instrument might work for her firm because its demand is dependent on the weather. “The fashion industry is also highly driven by the weather, particularly the beach season. If I went to the CEO and said if I can predict what will happen with demand because of the weather so you can invest more accurately in production and this is backed up by a risk transfer solution I am sure it would spark interest. I just think that nobody has raised this question with the CEO,” she said. One big problem with the whole alternative risk transfer market, however, is the focus placed on it by past New York attorney general Eliot Spitzer who campaigned fiercely against the use of products such as time and distance policies. This attracted the attention of accounting bodies such as the Financial Accounting Standards Board (FASB) in the US. They ultimately determined that such products were not actually insurance but really revenue smoothing tools. Also, more recently, US tax and insurance regulatory authorities have been taking a long, hard look at the transfer of US risk from US-based insurers to reinsurers in the same group based elsewhere such as Bermuda. “A lot of people were bitten by Spitzer and so backed away from this part of the market because it was deemed to be profit smoothing and many companies were fined. People are now more reluctant to play in ‘grey’ markets such as this. When I was working for National Express Group my captive was investigated by the US regulatory authorities, along with many others. Our ART programme run through the captive met all of the compliance requirements set. It still rang alarm bells. People do not want such headaches and are backing away, which I think is a shame because some of these solutions are genuinely valuable,” said Mr Martin. Mr Ebneter pointed out that he does not see a problem with the latest capital market solutions. He said that, as with the fashion industry, his company is also heavily exposed to the weather, if only because it is responsible for de-icing its customers’ aircrafts. “This is a very seasonal business. If we have strong winters then that is good for us. If they are mild then it is not. There is a natural hedge because we are active in this market in both North America and Europe but it is not perfect. Therefore we are looking at a weather derivative-type solution. Treasury takes care of financial-related hedging such as interest rates and currency, but this is operational risk and that is why it is with me,” he said. “This compares with insurance that is nothing other than a put option that hedges a company’s P&L and balance sheet against the financial downside an insured event otherwise would have,” added Mr Ebneter. Hans Mazenauer, Managing Director of Risk Frontiers sponsor HDI-Gerling’s Swiss operation, said that it is difficult to make a direct comparison between what is offered by the insurance and capital markets. “Insurance should not only be reduced to the role of providing capacity. We also provide a number of services that are appreciated or even demanded by the market such as claims handling, policy issuance, fronting, risk engineering and the like,” he said. “We are operating in areas that are very transactional, sometimes with relatively small deductibles, and these are areas that are not attractive to capital markets,” added Mr Mazenauer.

Capital markets offer viable option for large corporations–Switzerland

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