Italian risk management community seeks progress on supply chain and cyber

Italian risk management association Anra held its annual general meeting in Milan at the end of March, followed by a half-day conference focused on big data, blockchain and the rise of the digital age. Commercial Risk Europe editor Adrian Ladbury was invited to pose the main questions from this year’s European Risk Frontiers survey of Europe’s leading risk managers, which is being carried out in partnership with leading Ferma member associations and again sponsored by HDI Global. Some 62 Anra members took part in a poll of CRE’s European Risk Frontiers question at the association’s AGM last month. The poll’s results were then compiled and discussed on stage at the end of the day with Alessandro De Felice, president of Anra and chief risk officer for Prysmian, and two leading Italian market insurers – Nicola Mancino, country manager for AGCS and Orazio Rossi, country president for Chubb. Following are the results of the poll and the ensuing discussion, which suggests that this year’s survey is going to deliver the European risk and insurance management community some serious food for thought. Q1: Who should be the risk manager’s best friend within the organisation? CFO not surprising but should be closer to audit Orazio Rossi: I am not surprised to see that the CFO is identified as the most important friend of the risk manager, as in most companies the risk manager reports to the CFO and it is always best that your boss is your friend! But, in my opinion, the risk manager’s most important friend was not actually included in the list – the CEO or the board collectively. I am pleased to see that business continuity managers are also regarded as important friends or allies because business continuity and resilience is actually how company objectives are set and business performance judged, so this is positive. Nicola Mancino: I am also not surprised by this result. The CFO is usually the risk manager’s boss but also this is the person who puts in place the numbers and overall strategy, and knows every corner of the company and must know where the risks lie. It is natural that a good CFO works closely with the CEO, so this gives the risk manager a strong link to the top. Alessandro De Felice: Actually, I would have expected audit to be more important than the CFO, because it is really important for the risk manager to closely cooperate with the audit department. Given the recent trend with regulations, risk management is more about governance, risk and compliance, and making sure it all fits within a coherent framework and is integrated properly within the company culture. So, I really do believe that internal audit and risk management should work together transparently, sharing information and under the three lines of defence approach. It is a fact that a rising number of our risk manager members are also taking charge of internal audit too. Q2: How is risk management viewed within your organisation? Making progress but still ‘astonished’ by continued tickbox and cost-cutting focus Nicola Mancino: This is surely a different result than we would have seen ten or even five years ago. Of course, it is positive that over 50% of respondents said risk management is viewed as a fundamental part of strategic planning. But, at the same time, it is worrying that some 30% said it is regarded as either a tickbox exercise or annoying expense. The 15% that said it is regarded as a way to cut cost also shows a poor perception of what risk management is really about and what positive benefits it can bring when done properly. This shows that the profession still has to work hard to sell the benefits it brings to wider management. But, still, over 50% as a fundamental part of strategic planning is positive. Alessandro De Felice: I would say that the focus on cost reduction is probably a reflection of the high level of volatility within the European and world economy currently. But I am astonished that 30% say risk management is viewed as either a tick box exercise or annoying expense. This underlines how important the role of Anra is to help promote and explain the value of risk management. At our annual conference last September, we discussed the need for a new language so that we use the same language as top management and help show the value we can bring. This is obviously an ongoing journey that Anra must, and will, support and drive. Q3: How is insurance viewed within your organisation? Positive news but more work needed to sell real value of insurance Nicola Mancino: The relatively large number that identified legal duty is perhaps explained by the fact that motor insurance remains a very important line of business for companies as well as individuals. But again, I think the fact that the vast majority of the response, 76%, voted for ‘essential capital management tool’ and ‘helpful cashflow tool when losses occur’ shows the right result overall. It is very encouraging that the majority voted for essential capital management tool. Orazio Rossi: There are about €11bn of commercial premiums in Italy per year and about 30% of that is motor insurance, the biggest line of business, as Nicola points out. This, I believe, explains the relatively high number of respondents who said insurance is viewed as a legal duty. On the whole, I have to say that in Italy commercial insurance is still underdeveloped and underappreciated. I think the wider business community has to appreciate that in any year, between 60% and 70% of all those premiums go back to the clients in terms of claims paid. Q4: Will the recent trend of major mergers and acquisitions in the commercial insurance sector – most recently AXA’s bid for XL Group – finally force a hardening of the corporate insurance market this year? Minor impact so far but future less clear Nicola Mancino: It is still too early to judge the impact of recent and planned M&A activity on the market. We have seen little evidence so far that it has steered the market. I think other forces are more likely to change the market, such as the overall economic cycle. Economies are overheating and a reduction in quantitative easing will play a role. We have seen some changes in the insurance market in some parts of the world and in some specific lines of business. Some of the larger corporations with loss-hit accounts are seeing harder negotiations, but this is on an account-by-account basis and not an overall market shift. Orazio Rossi: We have seen hardly any hardening of the market so far. There have been changes in some lines of business for sure. Financial institutions have seen a hardening in the market but it has not been dramatic. Reinsurers will adjust their capital allocation but we have not seen an impact yet in the primary corporate and commercial market. US primary rates are reportedly rising and this may influence terms and conditions here in Europe in future, but this may also attract new investors again and so limit the impact. Alessandro De Felice: There is a big difference between large corporations and the middle market. Clearly in the larger corporate space, mergers create an opportunity for other insurance companies because the combined capacity of the two companies does not usually match what they previously offered as separate companies. But on the other hand, the larger corporate market is less product driven and, of course, risk managers have stronger negotiating positions, thus limiting the impact. Q5: Should a risk manager be involved in managing supply chain risk? Q6: Is your supply chain risk insured? Risk managers need to be involved in supply chain risk but underinsurance remains a concern Orazio Rossi: Contingent business interruption is one of the most complex products to underwrite because you need a lot of information, and complicated information, to properly assess and price the risk. Very often this information is simply not available and perhaps this is why this insurance is not so commonly bought. But this is, of course, a very important risk and should be one of the main focuses for any company. Management of the supply chain is quite complex because it is not just about managing your key suppliers, but also the suppliers of your suppliers. Clearly, the further away from your tier one suppliers you move, the more difficult the critical information is to find and analyse. Nicola Mancino: I am a little surprised by the percentage of respondents that are not insured. But the further question is whether you actually know your supply chain. This is really an area in which we all have to work, where innovation is needed and in which big data can play a role. There is a lot of data available now on the internet and already in systems, which can be gathered and analysed to help improve analysis and understanding of this risk. A lot of very large companies are concentrated on supply chains but find it hard to find the right information, even on key suppliers. This is why contingent business interruption capacity shrank so dramatically in 2001 following the terror attacks on the US on 11 September, when the last strong market hardening occurred. Alessandro De Felice: The question of whether your supply chain is risk managed and insured are two different things. I am not really surprised by the relatively low level of insurance in this area. After the Japanese earthquake, Thai floods and Tianjin explosion, huge economic losses were caused but it was found that not many companies had transferred their contingent business interruption losses through insurance or other ways to mitigate or control their supply chain exposures. Q7: Do you have adequate cyber insurance? Q8: Do you prefer standalone cyber coverage or included within existing lines? Cyber: Italian companies feel underinsured and want standalone cover Nicola Mancino: This question about whether risk managers feel they have adequate cover comes as no surprise to me. Few companies are confident that they are compliant with the GDPR. The Italian association of IT security recently revealed that only one in three companies believe they are compliant and have adequate insurance coverage, and this really is a matter of concern. On standalone cover versus extension to existing cover, I am not surprised that the majority would prefer it, because it is so much clearer. It leaves little room for discussion and dispute in future. Current coverage can be overlapping and really not that clear whether you are covered or not. With standalone cover, it is clear what you are covered for and what you are not. There is no competition between capacity within the programme. Orazio Rossi: The first thing that customers should do when looking at standalone cyber cover or extensions to existing lines is check whether the property policy does, or does not, have an exclusion, because they may already be covered. Over time I think this discussion will be irrelevant because, in my opinion, cyber will become the fourth wave of insurance. First, we had marine, then came the great fire of London in 1666 that gave birth to fire and property insurance. Then after the Second World War, citizens gained rights and so liability insurance was born. Cyber will the fourth wave because the economy is now digital-based. I see industries in which cyber will be the core policy with property added on. On this basis, this has to managed on a standalone basis and not as an extension to existing traditional property and liability policies. Alessandro De Felice: I am a great supporter of cyber coverage extensions to existing lines of business. I think that it is really dangerous to buy standalone coverage because of the overlaps with property and liability policies in particular, not so much marine and cargo, D&O, or personal accident. This is redefining business interruption third-party damages on different terms. Last week, I was at the Italian insurance brokers association meeting and this was discussed. For once, the brokers and the customers all agreed! Large corporations should negotiate their cyber cover clause by clause on the basis of existing policies. What the market is offering as standalone cover is really a worry because I see clauses that really are not clear. The cyber cover does not cover elements of property and liability, and the property and liability policies do not cover elements of the cyber risk, so there are dangerous gaps. I agreed with the brokers that the best way ahead is to extend existing lines. We need a more exact definition of coverage and terminology. Orazio Rossi: There is no doubt that cyber is a young line of business and we can also discuss how insurers classify this risk. It is, however, still destined to be a very important line of business. But I agree that the coverage has to evolve. Alessandro De Felice: You have to consider that the world is changing fast and there is a diminution of value everywhere. You have to ask if a network and data is a physical asset or not. If it is a physical asset, then it responds in a different way. This is not about buildings and machines anymore. Otherwise everything is cyber, or nothing. Q9: You have one choice to make the insurance market more efficient. What is your choice? Insurers need to adopt new technology to streamline the business Orazio Rossi: I am not surprised with this result. The adoption of new technology is obviously the way to cut cost in this market. Yes, we can compete on price, but we really have to give values to exposures and also recognise the value of the distribution system via the brokers. Over the last three years, risk managers have obtained good value but what we have really seen is three years’ value against a return period of what should be 50 years, and so the price is not right. This is not the way to cut cost from the system. I think technology is the right way. We are less advanced as an industry in technological terms compared with others and essentially use the same processes as we did 100 years ago, except the main form of communication is email rather than post. I still see papers piled on desks, so we really have room for important advances forward. Nicola Mancino: I totally agree with Orazio. At AGCS we have, for example, a proof of concept under development designed to manage captive programmes using blockchain technology. This is really the only way to make the process more efficient. But while technology offers so much, it will only really add value if we can also abandon all legacies because this is where the real cost lies. I am very worried about taking new technologies but not abandoning the old legacies. This could actually result in more cost. It is very important that we do not let that happen. Alessandro De Felice: You have to ask: what is the point of insurance? It is cost allocated to cover the risk plus a risk margin. The day that an insurer is able to directly link the quality of the risk underwritten with the capital required, we will really have the thing that we need. Then we will see real competition based on real prices for the risks being underwritten. It is not the best solution for this market to be based on portfolio analysis as it is today. In this respect, technology may change a lot in the insurance business.

Italian risk management community seeks progress on supply chain and cyber

Want to read this article?

Read Next

Taiwan earthquake claims unlikely to cause capital event

Market softening could move towards rate cuts for downstream energy buyers

Q1 2024 records $20bn in nat cat losses: Gallagher Re

AM Best warns of insurers’ growing reserve risk

IFRIMA mourns the death of board member Jorge Luzzi

Taiwan earthquake claims unlikely to cause capital event

Market softening could move towards rate cuts for downstream energy buyers

Q1 2024 records $20bn in nat cat losses: Gallagher Re

AM Best warns of insurers’ growing reserve risk

IFRIMA mourns the death of board member Jorge Luzzi

Want to read this article?

Read Next

Taiwan earthquake claims unlikely to cause capital event

Market softening could move towards rate cuts for downstream energy buyers

Q1 2024 records $20bn in nat cat losses: Gallagher Re

AM Best warns of insurers’ growing reserve risk

IFRIMA mourns the death of board member Jorge Luzzi

Related Articles