Focus must firmly shift to risk management as market hardens

Europe’s risk and insurance managers need to focus firmly on risk management, mitigation and loss prevention as insurance budgets shrink at the same time as the corporate insurance market continues to harden, delegates at Ferma’s virtual seminar were told. This focus must also involve the use of data and modelling to more accurately measure risk, carry out realistic scenarios and stress tests, as board members become increasingly interested in insurance spend. If risk and insurance managers are to retain more risk and maximise their captives as part of the cost containment effort, they will need to show that they have done proper calculations and really understand their total cost of risk. These were some of the key conclusions of the participants who took part in the plenary session ‘How do you define your exposure?’ at the seminar. François Malan, chief risk and compliance officer at Eiffage, a French civil engineering construction company, summed up the position neatly as he said: “The focus has to be on risk mitigation. You have to do your best to reduce the risk because in a hard market, mitigation should be the way to achieve lower premium spend. You need a partnership with your insurers so that they take your risk management process into account when setting premiums. My message is: risk management, risk management, risk management.” Olivier Moumal, director, internal audit risk and compliance at Belgium’s biggest telecommunications company Proximus, agreed. “Insurance is only part of the equation. Risk mitigation and prevention, and knowledge about your company, is the key. Insurance is only the residual part,” he said. Mr Malan added that the rise of Covid-19 and increasingly interdependent nature of business risks generally means that the focus has to be firmly on risk management first, ideally on an enterprise-wide basis, and insurance second. “Due to the increasingly interdependent nature of risks, it could be useful to bring people from other departments to assess risks. Covid has shown that we certainly need to improve the way we identify risks and is a reminder that risk mapping is by no means bulletproof – we must not forget black swans. We also need more focus on the potential consequences of risk and less on the actual sources. That is clear,” he said. Mr Malan said it is really important for risk managers, their fellow managers and bosses to appreciate that insurance is only one tool in the risk management toolbox. “Don’t forget: not all risk is insurable – 80% of the risks on my risk map are not insurable. These are risks such as talent, competition and regulation. For these you must find a solution internally via risk management. For the 20% that is insurable, in a hard market you have to focus on those risks that have a critical impact. In a soft market you can buy the nice-to-have insurance, but in a hard market you have to focus on insurance for what you need to survive. Insurance is only one tool in the risk management toolbox,” he said. Another important reason for focusing on risk management and mitigation is the possibility that, over time, the economy becomes even more intangible and technology-based, so the proportion of insurable risk continues to shrink. The inability of the standard commercial insurance market to deliver workable and affordable pandemic cover is a clear example of this. And there are many in the market who believe that cyber risk will become increasingly difficult to transfer, as evidenced by falling capacity and widening exclusions along with price rises in many markets. Rebecca Tielemans, managing director, risk management segment leader at Marsh Benelux, posed this big question: “We are seeing an acceleration in digitalisation and this is an evolving risk. Unfortunately, we are seeing a lot of claims that are also giving us a lot of insight on loss prevention and potential future risk transfer strategies. But I may ask the question: Will this risk still be insurable in the end?” Tobias Bunz, group insurance expert at German-based electric utility company E.ON, believes cyber risk will remain only partially insurable. “Partly yes and partly no. This risk becomes larger and larger and my impression is that, while the insurance market offers some solutions, not all risks can be covered by insurance. Therefore, the market provides a partial solution, not overall,” he said. For Ms Tielemans, the rise of such challenging risks combined with the hardening market means that brokers and risk consultants have an increasingly important role to play in risk analysis, working out what is cost-effective to retain and transfer, while ultimately seeking new solutions. This, coupled with budget constraints driven by the pandemic, is also leading to more and more engagement with board members on risk, she added. “This is what makes it so interesting for us as a broker and risk consultant. We are having discussions with risk managers, board members and CFOs who are seeking objective data to make more informed decisions. We are carrying out risk modelling, looking at the underlying factors and triggers, frequency versus severity to help us better understand the risk profile of a company. The market is what it is – we are doing the best we can and we are already seeing board decisions on mitigation and retention. We are seeing more interest among boards,” she said.

Focus must firmly shift to risk management as market hardens

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