Increased intensity-France
Commercial Risk Europe: Does your company operate in a more risky environment than five years ago, what are the new risks and how does it affect your job? What new risks do recent events in Japan suggest?
Anne-Marie Fournier: I believe it is not possible to say whether the volume of risks is objectively higher or lower today than in 2005. On the other hand, it is certain that sociological, economic and social conditions, and the global climate and social contexts, have made the consequences of risks more visible, more immediate and more serious for the population and the environment and therefore more expansive for those who have generated the risks.
Hervé Borel: I have no doubt about it. There are more commercial risks, natural catastrophes and supply chain risks.
Laurent Barbagli: The answer to this question depends on the sector in which your company operates. My group’s strategy is, and will continue to be, based on the development of our presence in emerging markets. The fact that we’ve been in emerging markets and will keep operating there means that there are more risks for us to manage. We have plenty of assets in such countries and that has an impact on plenty of risks, such as those related to exports, travel and security. But another risk for me is the volatility of the insurance market.
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Gilbert Canameras: In my view, the definition of what constitutes a major risk is very subjective. I’m not sure whether there are more risks today than before. There are risks that have become more important at a specific moment in time than at others, and the question is to understand whether it will be possible to transfer those to the insurance market.
We want to cover every single risk that can affect us. I work in a mining company and we have to take risks. Political risks existed ten years ago as much as they exist today. With natural catastrophes it is the same. The media talks a lot about them and the statisticians may tell you that they occur at a higher frequency. But in the end the question is will we find capacity in the market?
Kadidja Sinz: Overall the level of risk in the economy and the world has increased. With natural catastrophes and the climate on one side, and risks created by the reorganisation of the economy towards a global marketplace and more interrelated companies on the other. Concerning the emergence of new risks we keep hearing about cybercrimes, the new media and others but, if you dig into it, it is all about the way information is obtained, shared and distributed. Information is a great thing, it helps to achieve progress, but on the other hand it has created new risks that need to be anticipated and managed.
CRE: Have the events that took place in Japan earlier this year—the earthquake, tsunami and nuclear crisis—created new risks for your companies in areas like supply chain or others?
LB: The answer will depend again on the sector in which the company operates. In the case of our company, the general answer is no. Our activity implies that raw materials are located near our plants, and none of our plants have been affected. It can affect us in terms of the global capacity of the insurance market, but that will depend on the insurance contracts we have in place. For groups that have long-term contracts and have little presence in Japan, or other countries seen as sensitive, it is a manageable risk.
Gérard Lancner: A number of companies were surprised to learn that materials used by suppliers came from Japan. We follow our suppliers and subcontractors closely, but not necessarily the suppliers of our suppliers and their subcontractors. The Japanese disaster disturbed the provision of certain raw materials, machinery or equipments they used. So it encourages us to increase our efforts to understand our supply chains, and even those of our commercial partners.
CRE: How do you accurately identify, measure and manage new risks? What tools and technologies can be used and what other people in the company can help manage such emerging risks?
LB: Risk managers have become ever more involved with other parts of the company. This is a well-known trend. In terms of tools, I believe most insurance buyers are modelling natural catastrophe and political risks today. But risks in emerging markets are not always possible to put into a model. That’s something that has changed in our job. As a result, for instance, we have performed thorough in loco risk audits in emerging markets with the help of consultants.
HB: Every year we do a group-wide risk mapping exercise. It is a bottom-up approach where each part of the group sends to headquarters a map of their main risks. I take part at the end of the process, when we analyse the results. We look at frequency and severity of risks and I identify those that can be insured or not. This annual exercise enables us to see the evolution of our most important risks.
KS: The level of attention given to risks at board level, as well as the questions of shareholders and regulatory issues, are important drivers of risk management too. They have raised the importance of having a proper knowledge of risk.
CRE: How much of your corporate risk is actually insured and insurable? Are you worried that the proportion of this insurable risk is falling and what must brokers and insurers do to help find solutions for such difficult risks?
GC: It is not possible to quantify. The moment that a risk becomes a certainty it is not insurable any more. Take the situation with asbestos for instance. But I’ve always trusted the market. I think the market’s capacity to offer solutions is sometimes uncanny. We talk about political risks, well ten or twenty years ago they were only insurable via government-owned entities. But today we are seeing the unusual development of a private market for political risks insurance. So at the same time that some risks become uninsurable, we can find coverage for others that did not exist before.
LB: The capacity for classical insurance coverages has decreased for the most complex countries—the likes of Iraq, Syria and Pakistan. Groups that operate in such places need to knock on the right doors to find insurance. They need, for example, to go to markets like Dubai in order to find coverages that they cannot buy with global insurers. But, in general I would say that the ratio of insurable risks has not decreased. In fact, in some cases, there is capacity in the market for new risks.
AF: It is impossible to quantify, because, by definition, an emerging risk has not emerged yet. It’s an issue that evolves every day. We must also note that if certain sectors have less insurance coverage today, the opposite is also true. We purchase much more insurance than five years ago, and we have increased the levels of coverage for a number of events and responsibilities. Insurers and brokers must maintain their appetite for risk and react with their eyes set on the middle and long term, instead of overreacting in the short term and waiting for the next crisis.
HB: The ratio of insurable risks is smaller today. We are able to insure 30% of our risks, as a rough estimate. If we look at supply chain and logistics risks, as an example, for several years there have been only a couple of insurance companies that offer a product to cover these areas. We have a large number of suppliers. When such products were launched we evaluated them and realised that they would not provide the level of coverage we need.
KS: Certain risks will never be insurable, like those related to finding new markets and investing in innovation. So I don’t think that the question is about insurable risks versus all the risks a company faces. Are companies sometimes frustrated because there are certain risks that they would like to take on with the help of insurance companies but cannot? The answer in this case is probably yes. I think that there is room for innovation, for creativity and for using our expertise to always go one step further.
CRE: Are you happy with the ability of insurers to offer innovative solutions?
GC: In general, I don’t think they have a problem with innovation. Of course, in the case of very specific risks they may not have the capacity to do it, as the technical part can be too complex. One example close to my industry is the difficulty we have to buy coverage for non-consecutive immaterial damages for aviation. Today there is no market for that. But I have an insurer that gives me a tailor-made solution. It is certain that we have to demand such solutions. Insurers cannot know and offer coverage for all kinds of risks.
KS: The dialogue between risk managers and insurers is key. It is a dialogue that is happening today and should continue to happen. We must share information. If we can share data about risks and historical scenarios, that will make a real difference.
CRE: Is the insurance market able to help you adequately manage your cross-border risks through global programmes?
GC: Personally, I have no problems implementing my global programmes. We may even say that insurers today are much more likely to intervene in local markets when global programmes are involved, even if that means purchasing domestic insurance for legal reasons. Insurers that work with global programmes look much more comfortable today, they are presenting us with solutions, especially in the settlement of losses.
LB: One issue concerns emerging markets where big insurers don’t have a local presence. In places like Syria and Iraq they tend to work with local correspondents who are not automatically integrated on the global programme. Why can’t large insurers devise a more automatic solution in these cases?
And for countries where insurers are not present at all, maybe they could come up with umbrella coverages for corporations. I don’t think such coverages exist today when the global insurer doesn’t have local capacity.
And there are emerging markets that need to be covered outside the global programme. They are often well covered this way, but our classic global insurers don’t provide the complementary coverage at the corporate level that we need.
GL: It is very difficult to make the local programmes work in tandem with the global programme—when we have an obligation to buy a local policy. Difficulties can arise, especially in the case of losses, between the interpretation and application of the local policy and the willingness to provide coverage at a global level. It is necessary that our insurers and brokers be vigilant and guarantee that the coverage is similar at the corporate and local levels.
CRE: Do they actually provide you with this?
GL: They do but they must reinforce their vigilance, because in some countries, especially emerging markets, we sometimes have astonishing surprises.
LB: In the case of losses, international insurers must play the role that is expected of them, no matter if the local insurer is part of the same group or not. In this context, in some cases, the willingness to pay is key.
CRE: How can risk managers, brokers and insurers work better together to tackle emerging and difficult risks?
LB: It is important to make clear the market’s economic model. For me, the client of the insurer is the risk manager, not the broker. But in practice it is not always like that. Secondly, the fact that I am the client of the insurer should not be a problem for the broker, provided that I see the broker as part of my team that works from the outside.
GL: It is important to avoid replicating the functions. There are three players in the relationship and each must play their own role, which must be well defined and identified. I always urge risk managers to systematically review the roles of each participant and make clear what they expect from insurers and brokers. I note that insurers are eager to go ever further today when it comes to offering services like advice, engineering and claims management. So the role of the broker tends to be naturally reduced.
LB: But there are also fields where brokers can probably explore further. For example, let’s say you are a large client of a big international broker and you are based in France. You want to receive worldwide advice from your broker. It is not always the case though.
GC: It is far from being the case.
LB: Voilà. But the point is, to put it in a simplified way, a large French client is not the client of the French office, but of the global broker. We need the global view, the benchmark and the data that we can take to our boards and explain why a risk is not insurable in Europe, or why it is only insurable for a certain price and at specific conditions. Only global brokers can deliver this global view.
GL: The main role of the broker is related to its advice activities. It can add other services, but the main one is to provide advice, both at headquarters and at the local level. When we have international programmes we often receive advice from the brokers’s head office, but it is more difficult to get advice from local markets. That is probably related to the problem of the remuneration of local brokers.
GC: Which is a very important issue. If an account is based in France the local representative of an international broker does not have the same motivation as their French colleague. They don’t own the contract, they manage the contract on behalf of their colleagues back in France. What we must ensure from international brokers is that they keep their networks motivated to provide the same quality of service.
CRE: And are you happy with the way you pay for the services of brokers?
GL: Amrae signed last year an update of the agreement we reached with the brokers’ association back in 1995. It deals not only with remuneration, but other issues concerning the relationship between brokers and the insured. On the remuneration side, though, we want to address with clarity the debate that has been going on for a long time about transparency. Transparency means that we can know what we are paying in terms of services provided, and also who pays whom.
CRE: But if the role played by brokers is being reduced, you will want to spend less money with them too, right?
LB: I would prefer to talk of an evolution of the structure of remuneration. The value added by brokers is evolving. For example, when brokers help you with projects you will pay them for their advice. It is not necessarily associated to the payment of an insurance premium.
GL: We don’t want to reduce our payments to brokers. We want to pay for services that we really need. We are prepared to pay the fair price for such services. The notion of a global commission has clouded the subject, and today we want to have clarity on what are the services we are paying for.
AF: It would be a good idea to have a scale of remuneration for brokers that is defined by objective criteria and employs measurable elements. It should include data like the time spent with the client, the quality of involved profiles, the sort of missions delegated to brokers in relation to the services internalised by insurers and the fixation of global fees.
HB: We don’t pay anything but the brokers’ fees. In our contracts we demand transparency about the remuneration of brokers. There is a tendency among some large brokers to try and be remunerated for the volume of work they bring to insurers, and that’s something that does not interest us.
CRE: Do insurers and reinsurers provide adequate capacity to French risk managers currently at affordable rates and what is the price trend—hardening or softening?
LB: I really don’t know. Insurers often say that prices will go up, but it usually doesn’t happen like that. Anyway, risk managers and insurers alike have been stressing that the trend for the future is that prices and conditions will be increasingly defined on a case-by-case basis.
GL: The return from the holiday season will be very important and will provide us with some signals. The big reinsurance meetings that take place after the holidays are where it all begins. The signals about the evolution of the market will come from reinsurance.
I believe there is enough insurance capacity today, and strong competition especially in the French market. So I don’t think that insurers in France can afford to increase their prices, because we have options to choose from.
Therefore, for the market to get harder, it needs a concrete trigger. And the trigger is reinsurance costs.
KS: Our view is that the market is stabilising. It is unlikely that the market will soften further. It is possible that some prices will go up, and in certain lines they need to go up, but it is really difficult to read right now in which areas this will happen in the short term.
HB: We don’t have capacity concerns at the moment. We have no difficulty to find insurers to meet our needs. But I have no doubt that the market is set for a turn. Particularly because of the natural catastrophes we have seen of late. As usual the turnaround will occur suddenly.
The Participants
CRE would like to thank Amrae and those who took part in the Paris roundtable:
Gilbert Canameras, VP Finance, Risk Manager at Eramet, President of Amrae
Laurent Barbagli, Director of Risks and Insurance at Lafarge, member of Amrae’s board
Gérard Lancner, Head of Risk Management, Insurance, Internal Audit and Regulatory Matters at Yves Rocher, CEO of Amrae
Hervé Borel, Insurance Director, Alstom
Anne-Marie Fournier, Vice-President and Risk Manager at PPR, Vice-President of Amrae
Kadidja Sinz, Country Manager France, XL Insurance
