Opinion split over the potential role of capital markets in corporate risk–Germany

The theory is that large multinational corporations have the spread and scale of risks, usually managed through captive insurance companies, to make the transfer of risk directly to the capital markets more feasible and cost effective than in the past. In August of 2011, French power giant EDF announced the completion of Pylon II Capital, a catastrophe bond worth €150m that provided five years of reinsurance protection against windstorms in France. It was thought that this would be the first of many to come. But little has occurred in the market since then. Following discussion with German risk and insurance managers as part of our European Risk Frontiers survey opinion appears divided on the real potential offered by this market to large corporation buyers.hideAlexander Mahnke, President of the DVS and CEO of the Insurance Unit at Siemens Financial Services, said: “Yes we hear of the potential. Then you start the discussions with the reinsurance carriers and it does not happen.” But the DVS president does not rule out hope and urged fellow risk and insurance managers to keep exploring the options, particularly as appetite for risk transfer is so high within the capital markets. Risk and insurance managers must be able to explore areas that are not within their traditional insurance expertise, he added. “Designing a product such as this is challenging but it is one of the most interesting questions we have right now because the cash is available in the market. This is intellectually stimulating and underpins the relevance of our functions as risk and insurance managers. If it is going to happen, then it best happens now before the market changes,” he said. Klaus Braukmann, Head of Insurance at Continental AG, said that, as far as he could see, there is little ‘alternative’ about what is on offer currently from the capital markets. Rather, he said, what is currently on the table is simply reinsurance capacity attempting to replace primary insurance capacity in a highly competitive market. “There is a lot of talk, but when it comes to money on the table all of a sudden it becomes very regular reinsurance. Is this not really primary capacity replacing reinsurance capacity rather than securitisation?” he asked. Mr Mahnke agreed with his fellow DVS committee members that there is a degree of uncertainty about what is really on offer and whether it really is something different. “If you think about financing risk in a larger context such as equity and debt financing, suddenly you are not that far from some of the solutions that are proposed. The question is whether you can actually make it happen. Is it a show case transaction or is it just ART?” asked Mr Mahnke. Dr Eberhard Faller, DVS Committee Member and SVP Corporate Insurance at BASF AG, noted that the traditional costs involved in capital market solutions are much higher than the average insurance or reinsurance deal and therefore would probably be prohibitive for a corporate customer. Mr Mahnke also pointed out that it may be difficult to convince the capital markets that it makes sense to carry the risk of one company rather than a diverse basket of risks. Despite his concerns about the potential cost of corporate risk transfer to the capital markets, Dr Faller said that he and other risk and insurance managers really ought to explore the options. “If you look at our insurance strategy to 2020 then we are looking at new risks and products. I would not be too pessimistic that by 2020 there would be a BASF solution of this kind,” said Dr Faller. “This could be the first time that we move away from an insurance premium to a collective structure, not equalisation reserves, but a single bet with the market only on our risks. There are potential advantages such as the ability to spread over three to five years and you could consider certain attachment points or specific perils that you cannot currently find coverage for in the market. Also you may be able to structure the cover so that it is not claim-related, a totally new trigger and product. I think we should very proactively investigate this,” added Dr Faller. But this kind of approach will certainly not be to the taste of all risk and insurance managers or companies. Christian Böhm, Risk and Insurance Manager for Freudenberg & Co, said that his company is quite conservative and would rather wait and see how the market develops before diving in. “If you mentioned a structure in the Cayman Islands or Bermuda I would probably be asked why such a structure and why not in Germany. Therefore I suspect we would wait and see,” he said. As Mr Henne, Committee Member of DVS and Risk and Insurance Manager at EPCOS AG, concluded, the big question currently would inevitably be over cost. “The question would be whether this would be cheaper than standard insurance and I am not sure that it would be currently,” said Mr Henne.

Opinion split over the potential role of capital markets in corporate risk–Germany

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