Risk management and retention vehicles proven to add tangible value

Speaking on the opening day of the event held in Melbourne, Australia, he also challenged the notion that the risk landscape facing major organisations is changing, and called on the insurance industry to better address gaps in insurance coverage. Addressing attendees during the Insurance and Risk Financing workshop at the event jointly held by the RMIA and the GRC Institute, formerly the ACI, Mr Disborough dispelled what he described as four key myths. Namely that risk management doesn't add value to organisations, risk retention vehicles no longer add value, the insurance market will inevitably harden and that the risk concerns of major organisations are changing.hideAccording to Mr Disborough, research carried out for Aon's Maturity Index, developed in conjunction with the Wharton School of Business at the University of Pennsylvania, finds that risk maturity delivers shareholder value and, specifically, more stable financial performance over time. "The Index shows that organisations are increasingly recognising the wide range of benefits achieved through making substantial investments in risk management-particularly in the areas of delivering improved shareholder value and returns on investments," said the broker. "Those organisations that are demonstrably more risk mature will perform better than those that are less mature. Maturity improves stock price and lessens volatility, thus justifying risk spend and making a company more resilient moving forward." "This is the holy grail of what you as risk professionals are after. If you can show that risk management activities actually increase shareholder value then surely the existence of your function and profession should not be questioned in the foreseeable future," he added. Mr Disborough noted that Aon's Australasian Risk Survey, now in its eleventh year, shows that the median Total Cost of Insurable Risk (TCOIR) is lower at organisations with formal risk management and risk financing departments. The 2013 survey found that the TCOIR was $2.58 less per $1,000 of revenue at those organisations with a dedicated risk management function. Or to put it another way, TCOIR is 46% higher for those organisations without a formal risk department. Mr Disborough then moved on to discuss the benefit of risk retention vehicles. According to Aon's latest Australasian Risk Survey, the use of such vehicles returned a median TCOIR of $5.24 per $1000 of revenue, compared to $5.92 for those organisations not using retention options. This equates to a 13% higher TCOIR for those organisations without a risk retention vehicle, including a captive. "Our survey finds that in four of the last five years the median cost of insurable risk has been less for those organisations that have a risk retention vehicle. This is statistically significant and demonstrates that they do add value even in soft market cycles," said the broker. "At the end of the day it is all about trying to optimise the utility of captives to prove to CEOs, CFOs and the board that they can be used as a vehicle to optimise total cost of insurable risk, used as mechanisms to effectively manage your risk appetite and determine what you then want to transfer to the commercial insurance or reinsurance market," he added. Mr Disborough also said that an influx of new capital is driving fundamental change in the insurance industry, which suggests soft market conditions are here to stay. Over the last few years, against a backdrop of low interest rates, pension funds and other traditional investors have started moving into property catastrophe reinsurance. This trend has 'substantially increased in the last 12 months, potentially changing the world of reinsurance forever', said Mr Disborough. Some of the additional capital will come through as traditional reinsurance, which will lower the cost of treaty cover for insurers and 'probably put downward pressure on rates over the long term', he explained. However, this convergence of capital is 'jumping the firebreak between reinsurance and insurance' and will potentially not only deliver a continued soft market, but more innovative solutions for buyers of primary insurance, he added. Finally, Mr Disborough challenged the notion that the risk concerns of major organisations are changing. He again pointed to Aon's Australasian Risk Survey, which shows that brand and image remains the top concern of respondents for the sixth consecutive year. The latest version of the survey reveals little change in the most feared threats from the previous year. Continued weakness in the eurozone, slowed economic growth forecasts for China and India, persistent fiscal changes in Japan, elevated unemployment figures and uncertainties surrounding US fiscal policies, have seen market environment-or economic slowdown-rise one place to the equal top concern. Regulatory and legislative changes remain the third most feared risk, with business interruption rising just two places to four and human resource risk a non-mover at five. "Risk perceptions have not changed much over the last five years and brokers must try and help risk managers transfer a higher percentage of these traditionally uninsurable risks," said Mr Disborough. Whilst insurance solutions exist for some of the highly rated threats, brokers need to push the boundaries for clients and better explain how existing solutions can be used, he added. "I think I have proven all of these four statements wrong," said Mr Disborough in conclusion. "The risk concerns of people in the audience aren't really changing; risk advisers and brokers just need to do something about them. Our research shows that risk management does add value to organisations. The insurance market, it seems, will not necessarily harden for reasons outlined. Finally, risk retention vehicles do certainly add value; it is a fallacy if people say they do not." In order for brokers to remain relevant in this environment they need to provide tools to help risk professionals demonstrate the value of risk management, he continued. "We also need to provide solutions that can lower the total cost of insurable risk and continually demonstrate that the combination of risk management and retention provides a far lower total cost of insurable risk than transferring everything to third parties," he said.

Risk management and retention vehicles proven to add tangible value

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