Recovery? What recovery?-Belgium

CRE: What are the risks posed by the economic recovery and how can they most effectively be managed?

Marc Mathijsen: ING is in a special situation following the problems caused by the financial crisis. The European Union recently gave an opinion on ING with regard to the TARP situation and we have been asked to split the banking and insurance business in what is being called disentanglement. This is like splitting one plate of spaghetti onto two plates. This is a challenging process because we are focused very internally currently as all the support functions have to be split because we are still operating as a group. The second line of defence for the corporation is legal, compliance and the like and the danger is that we focus too much on ourselves and internal recovery rather than the business itself. Generally speaking all companies have been forced to review their strategies and medium term plans. It is now a significant time for the western economy as companies work out how to redesign business plans.

Jean-Marie Schollaert: The reaction and risks faced vary from industry to industry and are not necessarily linked to the recovery but rather the crisis. In the pharmaceutical industry one of the big challenges is that less money is allocated to healthcare by governments and all business models in the sector are based upon a certain level of demand and this is changing.

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Diane Mintjens: The banks are perceived as the originators of the crisis and have a huge reputational risk. As a result they are spending considerable money on campaigns to clients and focusing upon how we can progress without state guarantees and the agreement of the European Union. But we do need to focus on our clients. The sector’s reputation is not as it was before and we have to win back the confidence of the customers.

Gaëtan Lefèvre: We are active in a business to business market and not consumers. I think we are now seeing the first signs of recovery. We are in two main areas, equipment and engineering, and these are long term businesses. Over the last two years there has not been enough money for investment in the long term and this has been our main challenge. We are actually in different cycles in different sectors. For example in the steel sector demand stopped immediately and in one month we had zero turnover. Now we are seeing quite a lot of new work, so there are signs of an economic recovery.

CRE: What does this mean for the role of the insurance risk manager? What role could and should they play in a recovery?

Marc Mathijsen: For me at least there has been an increased focus by top management on risk and insurance during this disentanglement process. This is a very complicated process that requires warranties and a lot of liaison with the legal department and the like. It has become less and less pure contract management and more business management. We are considering big strategic changes such as whether we ought to change the private banking model to say that we should possibly sell third party products, with private fidelity funds for example.

The question is now what do you need to do with third parties that is in the best interests of the clients. At the same time there are new exposures to consider, Lehman Brothers type exposures.

Therefore I think the message to the board is keep it simple. Get back to basics with no complicated structures. If you can’t understand them, don’t think about it. Return to the core business. To achieve this we have to work with management on the strategy.

Jean-Marie Schollaert: There is an evolution occurring anyway that is not linked to the crisis and is the normal evolution of the profession and our role. The risk manager is moving to more of a coordination role so that they become specialist of nothing but generalist of all and coordinators. Real risk management is not done yourself but by others within the business. This is not linked to the crisis itself. Maybe companies are more risk aware because there is less money available.

Diane Mintjens: Yes. Perhaps the evolution has been speeded up.

Carl Leeman: The crisis has sped up this process of risk awareness particularly when combined with other factors such as the arrival of ISO 31000 and Coso models and the like. Is this a good thing? Yes, but it is sad that we had to have these things to make senior management aware of the necessity to have a risk management system in place. This says something about the profile of people who work in risk management in a number of countries and the attitude of a lot of companies toward risks. Perhaps this is driven by a failure of memory. Remember, companies themselves do not have memories, only the people who work for them, and of course those ‘institutional’ memories come and go with the people or the outsourcing of functions. Risk managers need to be seen as positive and not someone who just arrives with trouble or who’s only added value is to buy insurance. We have to be seen as solution providers, bringing security and avoiding surprises in whatever direction the company wants to go. Not the guy in the dark suit who enters the room with a suitcase full of problems and no solutions.

Gaëtan Lefèvre: It is totally about timing in risk and finance. It is important that you give the tools and knowledge to the product manager, the engineer, not necessarily final solutions so they can find solutions to the problems.

Carl Leeman: You should also not be afraid of being laughed at. If you said two years ago that the company needed to look at a crisis management plan for a volcano’s dust cloud and its impact on the supply chain what kind of reaction would you have received? There are many things also that just cannot continue at the same pace because of the risks that they create and I am not sure that people are taking this seriously today. The potential for class actions across Europe is one example, particularly in relation to the environmental liability directive. I have been in meetings that were organised in preparation of this particular directive. To my surprise that meeting room was packed with U.S. lawyers trying to lobby the process. They first want to be part of the creation of the law in order to be able to offer to handle it for you in a second phase. We need to be aware of this at an EU level, in order not to end up with the same costly and ridiculous tort system as in the U.S.

It is clear that big U.S.-based law firms are actively trying to expand there, only for the lucrative business in which everybody else is a loser, in as many parts of the world as possible. We have to oppose this.

CRE: Are you all worried about the rise of class actions across Europe as may be introduced by DG Sanco?

Marc Mathijsen: This has already arrived in the Netherlands. Maybe our profession needs to move towards a more directional and coercive function whereby we push towards management solutions to such problems and following the crisis we have to take quick hard decisions.

Carl Leeman: The whole problem is that these days there is huge pressure on fast decision-making. Things get more and more complicated with new laws, new regulations and new techniques. On top of that no one wants to take any risk anymore.

All this creates a highly flammable cocktail that we have to handle on a full-time basis. In such cases our fast-moving society and existing technology drives us easily to ‘copy and paste’ solutions, which can be very tricky. If you put a lion in a cage with bars it is a perfect protection but not if you put a snake in that same type of cage, it can easily escape. This can be a serious problem.

Also look at Toyota’s recent recall problem. The company wanted to expand worldwide and used suppliers that it had not used before. It had never had problems before as they carefully selected their very limited number of suppliers and had built an image as a very reliable company. Its quick expansion worldwide meant it grew its suppliers and could not control them as well. We all know the consequences of this choice.

CRE: What about emerging risks? There seems to be a lot of concern currently among risk managers about them and the ability of the insurance market to help deal with them effectively?

Annick D’Hont: Risks have to be analysed as a first step. We know they are there but the biggest issue is trying to understand them and find support within the company. The first step is therefore to create awareness of the risks within the company. But everything moves so fast, even if an insurer can find a solution could it be adapted to every sector without being too vague?

Jean-Marie Schollaert: The insurance market is very prepared to cover emerging risks so long as they know what they are and this takes time and risk engineering resource. But if they do understand the risks they will follow with coverage.

Carl Leeman: Yes such risks may be well covered and you will receive the money but it will not load trucks to supply clients and provide raw materials to suppliers. Also I think it is worth considering that Solvency II will make it more difficult for insurers to follow emerging risks. There will be consolidation among insurers and less capacity and willingness for underwriting so even if you agree with Solvency II it will create a problem in this sense.

Marc Mathijsen: If an insurance company places a very large contract do you need to allocate capacity per risk?

Erik Hartkoren: This is not done so much account by account but more by segment or line of business on a portfolio basis. We are of course supposed to deliver a level of return on that capital so it does determine the risk appetite.

Diane Mintjens: Do you think that prices will increase for large risks because of Solvency II?

Erik Hartkoren: This could be the case. Cost of capital is the issue and perhaps has been ignored a little in the past by many insurers. Today’s pricing tools do account for the cost of capital and it will be more important when calculating the return on capital deployed.

CRE: What do Belgian risk managers think about Solvency II—will it be good for buyers of corporate insurance?

Carl Leeman: You have to comply with the rules and tick your boxes to make sure that you are in line with the regulations so it is a procedure issue and a technical issue and both are bad for clients. Many insurers are looking at this as a gift from heaven because they can now blame price increases on Solvency II.

Diane Mintjens: So it is not Solvency II itself that will increase the rates but it will be used as the excuse!

Erik Hartkoren: Certaintly the rating tools will be adapted because it is part of the cost of capital.

Rudi Casteels: It all depends upon how strong the insurer is and what way Solvency II is applied. The medicine is not mandated and will be applied differently at national levels so there will be those that cheat and those that stick to the rules will be punished. Look how France got to the World Cup through Thierry Henry’s hand ball. People will try to cheat.

Erik Hartkoren: Yes but we are all interested in a stable industry and those who ignore or try to cheat the rules will be punished—particularly as CEIOPS will be given more teeth to force action amongst national supervisors that are dragging their heels.

Carl Leeman: Remember that no one in the industry was waiting or asking for Solvency II. The fact is that the insurance industry has always been the Cinderella of the financial world. The financial authorities created the Basel II rules for banks and they felt they had to do something similar for the insurers and came up with Solvency II.

Erik Hartkoren: I expect the large companies will cope but I was recently at a conference of the Dutch Insurance Association that was attended by small and mid-sized insurers and the fact is that the smaller companies are just not prepared. It was the same in banking when operational risk was introduced, the consultants were overjoyed because at the end of the day it only really works for them.

Carl Leeman: In the beginning the small and medium insurance companies were afraid and the big ones were happy because it looked like a good way to get rid of the smaller and niche insurers which are sometimes thought competitors for the big insurers. Now the situation seems to have changed as the big insurers are informally asking the risk & insurance management associations to help them with lobbying against SII because they increasingly realise the huge cost and workload involved to be compliant.

Officially you receive mixed messages from the insurers because if they are publicly listed companies they are not going to say that they are not ready because it will have an immediate impact on the share price.

CRE: What will the impact be upon your captives—will it be more difficult to justify them to your CFOs?

Diane Mintjens: We have a captive for strategic reasons, as a risk mitigation and insurance tool and Solvency II will not make a big difference because we need it for the group worldwide to ensure that all entities are covered. There may well be an impact but it will not impact the decision about whether we have one or not.

Carl Leeman: If you really need a captive for the business then you have to look at the total economic reality. Now that the business is regulated you will need to increase your capital and this could have an important effect on your total cost of ownership of a captive. But remember captives are not for the man on the street. Companies who own them look after them well and know how to use them efficiently. They will have to ensure that they are compliant and may have to hire new people to fulfil the additional administration. So it will have an effect.

Annick D’Hont: We have a captive and also use it for strategic reasons and use fronting insurers. This will not change because it is a strategic decision of the CFO.

Marc Mathijsen: Under Basel II captives were not recognised as a risk mitigant to reduce operational risk charges but some regulators did provide capital relief on a different basis. Therefore it makes sense for the regulators to talk to each other. If captives are formally recognised under Solvency II then they should be under Basel II but I have never seen a link. As a member of EFIRM [European Financial Institutions Risk Managers Forum], the top 25 banks in Europe, we are lobbying for the recognition of captives. Overall it is an expensive process. We have a small captive in Luxembourg and estimate that the cost of QIS5 will be about €20,000 and that is just for the exercise not ongoing costs.

CRE: What about global programmes? This seems to remain a hot topic among risk managers. Are you happy with the way they are managed and how could they be improved?

Gaëtan Lefèvre: We have a global programme for liability and construction risks and it runs quite well but in big countries like China, India and Brazil we have a local policy too with a link to the global programme to avoid compliance problems. We also have local service companies for the certificates and the like.

Carl Leeman: Do your Chinese operations pay for the cover they get from the master policy?

Gaëtan Lefèvre: The indemnity comes from the master and the local policy pays local taxes.

Annick D’Hont: You can pay taxes twice. You pay the local premium and taxes and then for the master programme you can pay tax again. No one seems to be able to give an answer about how to do this more effectively. We are trying to set up a construction project in China and it is difficult to gain a license because of this.

Carl Leeman: This was not a problem until Zurich brought it to the table two years ago. A lot of people told them to shut up but you do have to look at the three Cs—compliance, cost and commerciality.

Annick D’Hont: And it is not just for evolving markets. In Canada we had had a huge problem with H1N1 and the need to pay local taxes and no one told us about this and we are now trying to sort it out. The global broker we used did not know and it was the local broker who told us. Again in Canada we found that our global construction policy does not work locally.

Jean-Marie Schollaert: It is difficult with clinical trials. We have one liability cover worldwide but now you need policies that are trial and country specific. You may have a certificate but you then need one if you are doing trials in Ghana or Botswana.

Carl Leeman: If we, as service providing companies, would work like some insurers work in these areas we would go out of business. We can not tell our clients that we are unable to provide similar services without being compliant with existing regulations in other countries and we are not talking about exotic locations.

The Participants

Our thanks goes out to those individuals who took part in the discussion:

• Marc Mathijsen, ING—[email protected]
• Carl Leeman, Katoen Natie—[email protected]
• Diane Mintjens, Dexia—[email protected]
• Annick D’Hont—annick.e.d’[email protected]
• Jean-Marie Schollaert—[email protected]
• Gaëtan Lefèvre—[email protected]
• Erik Hartkoren, Regional Manager Benelux, of the Risk Frontiers survey sponsor XL Insurance Company Limited
• Rudi Casteels, Client Relations, XL Belgium