Risk appetite and investment must adapt to the new normal: Bouquot

Risk financing models need to be reviewed in the wake of the pandemic-driven economic crisis, believes Brigitte Bouquot, a vice-president of France’s risk management association and former president. She also praised plans announced by the French government to provide incentives for companies to retain more risks by building up reserves via instruments such as captives. In a session during the second day of AMRAE’s virtual conference late last week, Ms Bouquot and other experts discussed how the global pandemic has driven companies and authorities to find new ways to finance companies’ efforts to build resilience against risks at a time when they also need to invest in the pursuit of growth. In this process, it is not only companies, but also shareholders, investors and other players that all have a role to play, argued the risk manager. “It seems to me that we have lost our way and companies have not done enough to allocate capital to risk financing in an orderly way,” Ms Bouquot said. Ms Bouquot supported a review of the current risk financing model that is occurring among French companies because of the crisis and rapid hardening of the insurance market. One positive move could be to adjust dividend expectations of shareholders, so that more money can be dedicated to making sure the company can tackle the risks that it must take in order to achieve growth, she said. “Shareholders must accept that the resilience of the company, and of the world, can be built up. We have the technology but it requires time and investment, and that may require lower profits in the short run,” she pointed out. Ms Bouquot stressed, for instance, that it has become harder than ever for companies to transfer risks to the financial system via the insurance markets, especially in the case of interconnected risks. This is a problem that has been dramatically highlighted by the current pandemic. “At the end, the company is its own insurer and will bear the world’s risks, and it must invest in innovation, resilience and diversification,” she said. That is why, according to her, the idea to provide incentives for companies to build up risk provisions via captives or other tools, as proposed by AMRAE and embraced in December by the French government, is an important step forward. “It is the real economy that must first invest in resilience, and, after that is achieved, the financial system,” Ms Bouquot said. “After that, states can intervene in matters of sovereignty.” In another session, Florence Lustman, chair of France’s insurance association, the FFA, expressed support for measures that would allow companies to retain more risks, but noted that legal changes must be implemented to make it possible. “Captives are a good idea,” she said. “(But) in France, for fiscal reasons, there is a limitation on the possibility of mutualising risks. We need to do it within a one-year period. For large risks and high-intensity risks, it is necessary to perform the mutualisation over time. So, we need to change tax rules a little, maybe aligning them to Luxembourg’s,” suggested Ms Lustman. During the conference, economist Patrick Artus, an adviser to financial group Natixis, also stressed that France needs to create incentives for investors to take more risks in order to finance companies, as the economy tries to emerge from its Covid-19-related slump. One of the ways to achieve that is to relax Solvency II rules, reducing reserve requirements that apply to riskier investment policies pursued by insurers and reinsurers, he said. Ms Lustman agreed with this idea, as part of a broader review of the European Directive that is currently underway. “Solvency II is very recent and had not been tested in a crisis situation,” she said. “The main issue revealed by the current crisis is (the way it deals with) volatility.” She noted that, at the beginning of the pandemic, insurers’ reserves were badly hit, as investment officers had little room to manoeuvre in a quest to mitigate the impact of the capital markets’ slump. Ms Lustman also said insurers have been called to help with funding Europe’s transition to a greener economy, but Solvency II’s investment restrictions prevent them from doing it with risk-taking investment.

Risk appetite and investment must adapt to the new normal: Bouquot

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