First Risk Frontiers Asia study reveals local risk landscape

The inaugural Risk Frontiers Asia survey has been more than six months in the making and has involved in-depth interviews with 50 risk managers across the region and in a variety of industry sectors.

In keeping with the Risk Frontiers surveys carried out by our sister publications – Commercial Risk Europe and Commercial Risk Africa – this report aims to produce a comprehensive guide to the changing risk landscape in Asia, as well as the use of insurance and other methods of risk transfer employed by risk managers.

The surveyed managers were asked a series of questions about their risks, their roles and responsibilities and their use of insurance – from captives to global programmes, to combining employee benefits with general insurance and placing them both under the management of the risk division.

While the answers showed some regional disparity, not least between more mature insurance markets like Singapore and Hong Kong, compared to less developed domiciles such as Vietnam, the findings were broadly in line with those found in the surveys of Europe and Africa.

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Big three risks

When asked to rank their top three risks, 20% of risk managers cited technology and cyber risk.

The appearance of natural catastrophe and environmental risk as a top-three risk (cited by 6%) reflects a geographical bias for Asia – both the greater exposure to earthquakes, tsunamis and extreme weather among Asian states, and the concern about a protection gap (between losses and insurance penetration) in many regions.

But another major risk – the link between unexpected political or economic events in one part of the world and the knock-on economic effect elsewhere – reflects not just the political instability felt around the world but also the risk implications of an economically interconnected world.

As Hideharu Sasaki, chief executive of Mitsubishi Heavy Industries, says: “There is political instability risk all over the world, such as Isis, terrorism, Trump, North Korea, and China.”

This unpredictability in the current terrorist methodology from groups like Isis – and how it relates to staff safety – is something that was highlighted by a small percentage of risk managers. As Leslie Teo, regional director of security for a US bank, tells Commercial Risk Asia: “The current terrorism landscape is borderless. It is not a territory, it is the internet.”

So while there are more reports of terrorism, there are fewer patterns to follow, says Mr Teo. “It is much more unpredictable now that the targets only become apparent after an attack. Terrorism has become entirely different.”

Corporate governance and risk reporting

With many Asian countries choosing to crack down on corporate corruption, it is no surprise that 80% of risk managers say they face greater risk reporting demands.

In October 2015, the Organisation for Economic Co-operation and Development (OECD) launched new G20/OECD Principles of Governance and a number of Asian market authorities have adopted the guidelines as part of their own corporate governance initiatives.

The respective authorities include the Indonesian Financial Authority, the Philippines Securities and Exchange Commission, which is developing a corporate governance initiative for the next five years, and the Association of Southeast Asian Nations, which is updating its Corporate Governance Scorecard to include the principles.

In addition, China, Japan, India and South Korea, as members of the G20, have also promised to adopt the principles.

Meanwhile, the International Standards Organisation launched a new anti-bribery standard that received the backing of risk managers. “As an experienced risk manager, I personally believe that an organisation cannot create financial value without moral values,” says Franck Baron, Pan-Asia Risk and Insurance Management Association (Parima) chairman. “Ethics and a strong culture are pillars of long-term successful organisations.”

The promotion of corporate governance is also welcomed by some risk managers as a chance to raise their professional profile, particularly in some of the less developed Asian markets. Vietnam’s regulator is introducing the Corporate Governance code next year and this could “raise awareness about risk governance as part of a corporate governance framework and give more job opportunity and security to risk professionals”, says Thu Ly, corporate governance and risk management consultant at the International Finance Corporation, a member of the World Bank.

The other major change affecting most Asian regions is the introduction of sustainability reporting. Some companies however, are choosing to get ahead of the regulatory curve by voluntarily starting this process. “We are doing the sustainability reporting on a voluntary basis because we value transparency and accountability,” says Victoria Tan, head of risk management and sustainability at Philippines-based conglomerate Ayala.

Ayala is treating sustainability data the same way it would treat financial data, says Ms Tan. This includes the adoption of the GRI G4 reporting framework, engaging an external assurance consultant and even holding an annual Sustainability Summit, attended by more than 250 senior officers across the group.

“For a business to thrive, it has to ensure that it cares for the environment, works for its people and for the community, and respects cultural boundaries” says Ms Tan.

Insurance terms and conditions

Insurance terms and conditions have generally remained stable and pricing has gone down across the region and in almost all lines, due to fact there is still excess capacity. The exceptions would be natural catastrophe cover in certain regions and property damage.

Most risk managers will unfortunately have to return any savings from the soft market due to cost savings being sought by most Asian companies. Others plan to only cover what is necessary through better risk assessment or use better underwriting data to get better cover, or to use the soft market to get more tailored insurance rather than reduced premiums.

But the continued soft market conditions do concern some risk managers, who are worried that high levels of competition have led to unsustainably low prices and coverage too broad to be meaningful. The fear is that this uneasy equation will lead to the systematic collapse of certain key markets.

Despite the soft market conditions, there are still some companies looking to reduce the amount of insurance they purchase. “We only cover what is necessary based on proper risk assessment,” says Li Chai Wong, assistant manager, risk management at Genting Plantations.

Other companies’ risk transfer strategy has been to take insurance as the ‘instrument of last resort’. “As much as possible, we try to take advantage of our market position to transfer risks through contracts to third-party suppliers and vendors,” says Gordon Song, head, group risk and internal audit at Lazada Group. “Given that we operate as a platform, we are also reviewing the way we structure our insurance programmes, such as possibly passing on these costs to our merchants instead of taking them on our own.”

Studying the survey responses gathered during the course of 2016, it is clear that some risk managers have a not entirely positive view of the insurance market despite, or perhaps because of, the fact that they work so closely together and are reliant on each other.

For example, despite spending a decade working in the insurance industry, Bernado Mochtar, head of enterprise risk management (ERM) at Indonesia-based ABM Investama, believes that insurance can hinder risk management because it is too focused on post-loss rather than pre-loss. Risk managers have worked out that insurers primarily want to sell insurance products and this leads them to negatively view insurance as a commodity product, rather than a risk management tool.

New solutions

When asked what new insurance solution would make their lives easier, the answers are varied and comprise a combination of: new or emerging insurance lines (non-damage business interruption cover, project risk for infrastructure products); improvements to existing lines (cyber, terrorism, supply chain, commercial credit insurance); and improvements to the insurance process rather than specific coverage (online risk reporting for claims management, better claims processing for large property claims, closer alignment of risks and exposures).

The answers reveal not only some of the priorities facing risk managers but also the limitations of the insurers in providing adequate cover.

Asked whether he believes the insurance market is able to deliver adequate solutions, Patrick Abdullah, vice-president, ERM at Astro Overseas, the international arm of the Malaysian media group, is pretty clear. “For traditional and existing risks, yes. But for new risks, no,” he answers.

It is a familiar complaint and risk managers cite a number of areas where insurance is currently lacking. These included cyber and technology-related risks.

David Piesse, CRO at IT security firm Guardtime, says: “I don’t think the current [cyber insurance] products are adequate and that would be the view of risk managers around the world.”

The absence of certain types of cover may be because insurers see the risk as too big and offer coverage that is too small, says Mr Piesse. “The insurers are aiming at the mass market with low rates and minimal cover. But that is how the insurance industry deals with new risks. Insurers come in very slowly before they bring in the reinsurers. They wait till they understand the risks before they look to improve the product.”

The risk managers also bemoan the lack of organisation among many of their insurers when it comes to issuing new policies. Many of them are still incapable of providing a fully worded policy before a loss is suffered by the buyer.

Consequently, many corporates are left with little contract certainty, which can result in lengthy court cases when a claim is made and the policy is not enacted, according to Supaporn Chatchaisaeng, senior vice-president, insurance office at Thailand-based conglomerate CP Group, and a Parima board member.

For Asian risk managers, another concern is international insurers’ ability to cater for their regional demands. “Traditionally, insurers will look to London first and Singapore second,” says Saurabh Verma, chief insurance officer at Reliance Industries. “For example, there are plenty of products on the property side but once it becomes sophisticated, it gets referred back to London and that is time consuming.”

The final criticism levelled at insurers is one that has been voiced in all regions and that is a lack of innovation. For all the talk of digital disruption, wearables, parametrics, telematics, the Blockchain, the Internet of Things and Big Data, the corporate insurance market still lacks forward thinking.

“We have a good idea of what insurance can and cannot do,” says Steve Tunstall of Tunstall Associates, and Parima general secretary. “We would like to know what insurance can do in the future, because our companies move pretty quickly but insurance companies do not.”

The concern among risk managers is that insurers are failing to keep pace with developments in the corporate world and lack vision and innovation. “Where’s our Steve Jobs?” asks Mr Tunstall. “Who’s going to lead us to the next level? It’s pretty hard to see at the moment.”

Employee benefits and general insurance

The notion of bringing both employee benefits (EB) and general insurance (GI) into the risk manager’s portfolio was rejected by exactly half of the risk managers, despite the consensus that many HR departments do not know enough about insurance.

At the majority of companies, EB are both purchased and managed by the human relations (HR) department. One concern among risk managers is that the HR department does not know enough about the insurance products they are buying. “HR know the needs of employee is, but they do not have enough experience in the insurance market,” says Mujalin Boonrod, insurance senior manager at Thailand-based accounting and IT services firm Minor Global Solutions.

It is a common concern and one that goes both ways. “This depends on the sophistication of the risk management department in managing EB, which has been the traditional realm of HR departments,” says Linda Hoon, group head, risk governance at IHH Healthcare.

A consensus among the proponents of combining EB and GI is that risk managers would be best placed to arrange the purchase and terms and conditions of employee benefits, while the HR department continues to administer the policies on a day-to-day basis.

Other risk managers are not wholly sold on the change in arrangements and making risk managers responsible for both GI and EB. “General insurance yes, employee benefits I’m hesitant and I’m probably at best less than 20% convinced that it should come under the risk management department,” says Lazada Group’s Mr Song. “The only benefit I see is economies of scale in managing the broker relationship.”

The idea of formally merging the GI and EB function may be a step too far, for now, for many risk managers and their respective companies. But the idea of HR and risk managers working closer together is supported by many of the survey respondents.

“There is no one-size-fits-all model for insurance and employee benefits programmes. However, in my view if EB is managed by HR, it should cooperate with the risk manager to review the programme and to ensure that it brings the best benefits to not only the company but also the employees. The risk manager can help HR to balance risk and people factors to select the best quote,” says Mr Song.

Clearly, some risk managers work more closely with their HR colleagues than others and this would appear to be the differentiating factor in how the merit of combining GI and EB is viewed.

“I am fully in favour of very strong partnership arrangements with our group HR to design and place employee benefit programmes,” says David Ralph, senior vice-president, risk management at Hong Kong-based telco PCCW. “It is not like other lines of insurance where we just need data to feed to underwriters and the programme design/structure is just a technical issue that the risk management team determines. With employee benefit programmes, we cannot just merge it into the existing risk financing regime.”

Global programmes

Just over 60% of risk managers either employ a global programme or plan to do so in the near future. For the remaining 38%, a domestic-only focus and a concern about the amount of work and decision-making involved in coordinating a global programme, not least navigating all of the different regulations in each country, is enough to dissuade them, for now.

These findings should be encouraging for insurers that have complained about the lack of adoption of global programmes among Asian-based corporates. But as international insurers continue to promote the benefits of global programmes and risk managers continue to look more holistically at their use of insurance and other risk transfer tools, then it is surely likely that more global programmes will be used to cover certain types of risks.

Taiwan-based electronics company Qisda uses a global programme for expatriate employees and travel insurance. “For other employee benefits and based on the nature of the risk profile, we decided to take local approaches,” says Danny Lin, AVP, risk management and auditing office at Qisda.

Singapore-based Changi Airports International uses a global programme, says Guan Seng Khoo, director of risk management, who explains the thorough vetting process that precedes its implementation: “We do have global programmes. Once we find a partner, a lot of work goes into the due diligence and ensuring that they know the geographies we are investing in. We work with the brokers to get the recommendations because if you go to the insurers, they tend to be product managers who know about their area but not our holistic needs.”

Global programmes do have benefits, says Dr Khoo, citing better relationship management and pricing, while also conceding that global programmes are not yet as prevalent in the region as they should be, in part due to the limitations of local insurers. “Asian insurers still lack the global connectivity and product expertise at the moment, but I think most demand for global programmes will come from the emerging markets.”

Captives

Risk managers are similarly divided over the use of a captive. There is a slight difference though in that most of them see the benefit of a captive in terms of better capital management, more visibility on risks and a greater control over insurance spend. The only dissuading factors for many risk managers are the size of their organisations and the respective regulatory regimes, many of which are not set up to cater for captives.

For example, in Indonesia the captive concept is not recognised by the Financial Services Authority, known locally as the Otoritas Jasa Keuangan, and they are instead classified as standard insurance companies, making them less appealing options for companies.

Consequently, companies such as ABM Investama, the investment arm of Indonesian energy group Tiara Marga Trakindo, that are keen to manage their own risks and insurance spend, have set up segregated accounts to fund their risks.

“From an internal perspective we have a captive but from the perspective of audit, we do not. So regulation is in fact a big barrier to the development of the captive sector in Indonesia,” says AMB’s Mr Mochtar.

Meanwhile in Malaysia, the big buyers of corporate insurance regularly employ captives, some of which are used to cover employee benefits and other self-financing risks, as is the case for Petronas, the state-owned oil and gas company. A big benefit of this approach is the ability to control risks, says Raziyah Yahya, general manager, risk and insurance at Petronas.

“Our captive writes parent-only risks and all operations are included. It is financed by only our own equity and this helps us determine what we are actually buying,” she says.

The biggest change in the use of captives may well come in China. There is currently no captive sector in the country but according to Keith Xia, head of risk management, business reputation and responsibility, global risk management at InterContinental Hotels Group, this could rapidly change as more Chinese companies expand overseas and see other ways to manage risk.

Furthermore, China’s regulators are prepared to make changes to encourage a more active captive sector with the Chinese Insurance Regulatory Committee consulting with international consultants, brokers and insurers on how to establish a suitable regulatory framework for captives and mutuals.