Mission Impossible? – Johny Merlot
AL: How is the role of the risk manager changing in France and in general?
JM: “I think our job is changing. A lot of current risk managers came from insurance companies and brokers and are therefore specialists with a lot of experience and knowledge. Young people who join the profession straight from college and have not previously worked in the insurance market do not have the same expertise or experience and so I think the profession is changing. Such people do not have the same knowledge of stakeholders or sufficient experience and this is leading to a new approach to the job. Perhaps we are slowly losing expertise and it is becoming a more financial job only fulfilling pure financial goals.”
hide
AL: What impact is this having upon critical relationships with important partners such as insurers? Could this change make life more difficult for risk and insurance managers as the market changes?
JM: “You can split the job into two parts. First, the risk management and then the insurance management. But this can be dangerous because if insurance is considered in isolation and the only target is to make savings then it appears inadequate. We have a lot of stakeholders and people must deal with all of them, even in a hard market. We have experienced five years of a soft market but now I think we are going into a hard market. Therefore relationships are important. Risk managers take risks by damaging the quality of relationships by focusing only on costs savings.
“This trend is not only driven by the credit crisis. It is difficult to demonstrate to top management why a price of an insurance coverage which is 100 should become 120 a few years later. It is difficult to explain how this should occur from a technical standpoint and how we agree a price with the insurers. But if we don’t make the effort then we risk facing some nasty surprises in future.
“Consider how we create wordings with insurers via a real exchange and dialogue. If you do not have specialists to deal with this, based both on financial, legal, risk and insurance management expertise, and you have only a financial approach that seeks a lower price for the capacity and limits and deductibles you risk ending up with inappropriate cover for the risks. This is difficult to explain because it concerns words. We talk about the real sense of meaning, the spirit of the policy that we agree. But it is now becoming more difficult to have such an exchange with the insurers.”
AL: Many leading risk managers across Europe have recently voiced concern about the ability of the insurance market to deliver adequate solutions for emerging risks. Will this breakdown in the relationship between insurance buyers and their carriers make this even harder to achieve? How can this problem be solved?
JM: “It is the core of our job to maintain capacity and create new products, to have a strong feeling for the risks and analysis of those risks. I am not alone in being concerned that a lot of value of our companies is not covered by the main programme, probably about 70% of the value of the company is not insured. Risks such as intellectual property, loss of knowledge and specialist teams are very difficult to apply a real value to and so is not insured. The problem is that insurers need figures to appreciate and evaluate risk. If that is hard to find then perhaps we need to find other ways to manage such risks.
“Look at a company like Google which has a stock market value that is something like six times annual turnover. If it was to lose a key team of engineers that is a tangible asset loss. If a big database is destroyed this is a catastrophic loss. But this is not necessarily insurable. Maybe you can buy key man coverage. But the value of such a company today is the capacity to create and develop patents and new and innovative offers with specific know how. So the major value of modern companies is not tangible assets and the challenge is to work out how to protect that intangible value.”
AL: What practical experience have you had at Orange with emerging risk problems and solutions?
JM: “At Orange (the cellular and internet arm of France Telecom) we have created Orange labs, Orange Valley which is our online version of Silicon Valley within our group domain. We are looking at a lot of solutions and creating new business and tools. This is a big challenge for us because new products in newer markets are sold at a low price. There is a lot of competition for cell phones in Africa and Asia for example and so you have to provide a new application within the cell phone that meets what people want, even if it is only a way of delivering jokes. We have to understand how people want to use their cell phones and organise and customise their applications. This is how the group will develop and we have to explain to the insurers how our business model is changing inside a new ecosystem which is also changing itself.
“I look at the position of the insurance and reinsurance companies on electro-magnetic fields, they do not want to cover this type of risk because they have no real hard information or knowledge of the risk. To them it is a phantom risk. But actually this is changing. A lot of firms do give good information about cell phones, radiation and the like. We have worldwide agreements about antenna and their positioning so that people do not have problems with this, so it is changing. At the same time people want their cell phone to work everywhere, every day, but they are scared of antenna. They want the equipment but not the risk. It is like when people buy a car they don’t say they are afraid of having an accident or perhaps the airbag will crush my face! No. They finally accept the risk. But in the telecommunications world some people do not want to accept the risk. It is a difficult problem because whenever you create a product in any market you always try to manage risks. That is why we monitor scientific research carried out on health and safety and EMFs, we also comply with exposure levels and limits controls. Nevertheless, some people want all things easier, but with no risks and at a lower cost.”
AL: What kind of impact will the reaction to the recent economic crisis and new rules on risk and insurance management have upon the ability of the insurance industry to deliver solutions?
JM: “The fact is that you can’t have long term, high quality and high services at a very low price. So this is a big challenge for our profession into the future. To cope with new regulations such as Solvency II, for example, the industry will have to find new ways to create reserves. Part of the profits made by the insurers will have to be placed with counterparties to convince the regulators that they are strong companies with good reserves and maintain their credit ratings. There is a price to pay for that. That is why I think we are at the end of the soft market as insurers are also organising price increases to create reserves to pay for Solvency II.
“It is always the same problem. When it is a soft market insurers can play on the stock markets to try and boost returns. But, when we have a crisis like we have just had they have to come back to the ‘technical price’ and, if you add Solvency II to the mix, a lot of companies will need to change their strategy. I think you will see a lot of mergers and acquisitions in the insurance market over the next two to three years. I think companies from China and other countries will come to Europe.”
AL: Would the arrival of fresh competition from outside Europe be welcomed by French insurance buyers?
JM: “A lot of risk managers are very interested in new capacity. This is why I hosted the workshop at AMRAE with Yoichi Tamura, Deputy Executive Operations Officer and General Manager of Tokio Marine Europe Insurance and Masayuki Kawase, Executive Manager of Corporate Planning at Mitsui Sumitomo Insurance Co. (Europe), the Japanese carriers. A lot of French risk managers are interested in what they have to say and offer because it is important for insurance buyers to have a choice. I advise new companies to start at the excess layers, not take the primary business and see how the loss story develops. These are very well-established companies in Japan. They are looking to expand and I think they will be very strong companies for European buyers.”
AL: What kinds of new risks can such companies expect to face in Europe. What about the prospect of class actions in Europe that the European Commission may issue a White Paper on this year?
JM: “I think we have sufficient regulations in France to manage clients’ claims. We have rules to cater for that. A system of class actions in Europe would facilitate claims inflation and the cost of suits overall and this is a bad system. The lawyers would push people to make claims via class actions and this is not a good way to tackle this. It is important that the rights of consumers are protected. But we also have to ensure that the rights of businesses to do business are protected. I think that class actions would hamper innovation and business. However, I see it coming slowly but surely in Europe. New rules have been introduced in some countries like the U.K. and I think it will be very difficult to escape this system. We have professional judges here in France and the Minister for Finance said back in 2005 that we would need to find a balance and avoid the excesses of the American system, which is a good way to look at this. But, even if you keep the door shut the lawyers will come through the windows because it is a very interesting opportunity for them.”
