Risk managers battling to navigate choppy financial waters-Risk Frontiers

Ben Norris (BN): How will you cope with a long-term recession—what could and should a risk manager do to help their company deal with such a challenge?Gary Marshall (GM): What has affected us all as a broad swathe of business—both from the recession and the financial pressures brought about by, and through, the financial crisis-–is less money and less inclination for flexibility in the marketplace. Those things have a direct and continuous impact on us. We have less revenue coming in, we have to be tighter on cost and we have less people employed.There are many companies that are hunkered down and are watching the pennies and that affects every area of the risk management programme. You can see it in the way that we can retain staff, the way we can buy into specific risk management programmes, or not as the case may be, and the number of people that we have to police certain aspects, including running compliance programmes. There is not an area of the business that is not affected because of what has happened. That is not to say we wouldn't have been mean and lean anyway, but there is mean and lean and then being additionally blown off course.hideAll of this means risk managers have to be continuously looking and trying to understand where the next risk control issue may come from. You may be stretched to breaking point in some areas and you have got to be aware of the possibility that you could end up with a big hole somewhere through which things could fall. And it could be something that is absolutely vital.That is the threat that we all have. That somewhere in all of that mix, as you are trying to manage, things go wrong. So it is about sensing those changes and adapting—that is so important to the risk management process. BN: So if all departments, including the risk function, are being asked to do the same with less money, from the risk management department’s point of view is there anything you need to do differently?GM: First of all there is the awareness issue. If you are aware then you can start to cover. It is not a case of moving chairs on the Titanic or trying to make yourself feel comfortable that you have covered one hole and then go looking for another. What you are really trying to do, all of the time, is get other people involved in the risk process by providing a bit of smart training or communication. You are constantly on the lookout for something that is more cost effective but does the same thing—so you might switch providers for example, with some added risk control benefit. This can come into the insurance arena as well. We have just brokered a deal that has given us a bit of additional risk management money which then means we can be a bit smarter in some other areas that might have had less cover otherwise.You might also need regulators to be a little bit more flexible around certain issues which otherwise might impact upon you. So everybody is trying to call for flexibility or breathing space—that is not unreasonable. Unless you are in there doing something about all this, the next storm may blow in and you easily be affected by it. It is about ensuring that you have got yourself into a reasonably good position and you can see your landscape and then make the decisions as you need to. BN: Is expansion on your company’s agenda in these difficult times and if so how are you helping your company to achieve its goals?GM: I am beholden to the fact that my company, over the last few years, has decided not to have a European profile. We can nevertheless export to Europe, and the UK has been subject to imports from Europe, so there is plenty of work to be done in that area. However, at the moment all of our asset base and all of our focus is upon making sure our UK business model is inherently sound. BN: Is this a path that you think other businesses may decide, or are deciding, to tread given current financial conditions? Is this a decision risk managers are helping them to make?GM: As I said, we have retrenched from our past history with European subsidiaries and there seems to be a lot of strategic belt tightening and restructuring going on elsewhere. However, there are others out there that take a different view. There are people deciding to take those risks and that is the end of it. I am not sure if entrepreneurs ever want to listen to risk managers around questions such as do we go down that road and do we want to invest in that new technology?What we have got to do as risk professionals is make it very clear to management, or at least give them sufficient heads up, on what we think about the areas that we are investing in. What are the costs hidden or otherwise of an expansion or development. For instance, if you are dealing with a really old production plant in another country and the regulations are changing in that country and you can see it might be heading for a fall then I think you need to stand up and make the point—because nobody else is likely to say it. Or at least make sure that management have people in place to advise on due diligence. As risk managers we look at some past, classic expansion decision-making for well-known names around the world and you wonder where the due diligence took place. I have seen some cases where you couldn't believe they would make the same decision if they had carried out due diligence. It looked like they had just walked straight over the issue.BN: What are the scariest insurable risks currently? Are you confident that you have identified, measured and adequately managed your cyber risk for example?GM: I am concerned about cyber risk. Particularly about this whole area of rapid communication after an event and how quickly that can go viral and how much damage that can cause a company.In general it is often the more sudden things that are most scary. Most of our main insurable risks in Polestar tend to be around natural disasters, or predictable type scenarios. What would definitely concern us is if we had an unlimited exposure, or one that was bigger than we expected, for a given scenario. We do not want to have a tail that wags the dog.BN: Has the insurance market done anything over the last 12 months to help you meet new challenges such as supply chain and cyber risk? What needs to be done to foster more innovation?GM: The thing that I would be most interested in is better general coverage in areas such as disease claims. The answer from insurers, particularly in the area of asbestos, has been to write the cover out of every general liability policy.I think it is fair to ask why haven’t we got that sort of exclusion written back in? We are much better able to manage the risk today but we still have it excluded. So that is an area that concerns me—disease claims and how we are covering those presently. It’s all about getting the price right of course, but it is also about understanding the risk profile. So I think insurers can do more in that area. Of course everybody is talking about supply chain and about making that more customer friendly. There has always been cover in a limited way, under a BI supplier’s extension, or a customer’s extensions and so on, but we are trying to move towards a more modern solution. The question I ask for Polestar is it something that is still attractive to us?BN: Insurers argue the issue is a problem of information gathering. But risk managers argue it’s hard to get a grip on supply chain as everything is moving so fast. What is the way forward on this issue?GM: You cannot throw your problems at somebody else and say deal with those. That is not fair. But there is room for a market place discussion around whether or not we have routes to information that will take us closer to the kind of decision-making needed. It is worth noting that I have this problem with other aspects of business lines that I deal with. Depending on price of cover, in the end you may say that I cannot afford it and so sit there and rely on what you have got already. That does then tend to beef up your management effort rather than your risk transfer. If it is too expensive we are not simply going to say ‘that is fine I will take it because it is there’. The alternative is to spend the insurance cost to better risk manage your supply chain and ensure better resiliency. It is not sensible for us to get into a debate in which all we are saying is we cannot afford this cover. It is an opportunity to turn round to people and say but we could this, this and this, and then get people agreeing with you at board level.BN: And are risk managers gaining the attention of top management? Are boards starting to listen?GM: One of my bosses said a few years ago that we are entering a new environment where you will not even start to believe the way we are going to work—and that is probably true. That certainly relates to the people I deal with. Do not try and equate the past with what you can do in the future. The disconnect has occurred and we are in a totally different place now. The internet and the speed at which you can source information has definitely contributed to that.The dividing lines between roles are getting blurred and there are overlaps where you spread into somebody else’s function and other people spread into yours. Trying to maintain demarcation is a very dangerous thing to do. The board is now expecting that people are going to come through to them and provide a useful service. As time goes by the most useful services, the ones that add value, will be elevated, I am sure.BN: How could and should the insurance market—insurers and brokers—improve the service offered to you? Should the EC force the brokers to accept no payments from insurers and finally clear up this conflict of interest matter?GM: I believe in transparency. I believe any broker worth its salt will be transparent. If they are not transparent in today’s climate and age they are doing a disservice to themselves and to the customers, particularly their significant customers. So there is now a discussion about what remuneration consists of, and there is an expectation that that discussion will bring all lines of remuneration onto the table.Some will be directly paid by the insured, some will be indirectly paid by others. You want to see the process and ensure it is quite clear what you have got and why it is there. If we felt that it was an abusive process and not to the benefit of our relationship with the broker then we would raise that issue. If it turns out certain remuneration was a way for the broker to enhance his own remuneration, but does no harm to us, then we would say nothing about it. It would simply be a way to foster a bit more income around the root processes that they are involved in.If there is no transparency and nobody knows what is going on then you are in an intolerable situation. But I am happy with current levels of transparency and the remuneration that has thrown up. But if I went back 15 years I would acknowledge readily that we had no idea whatsoever what was going on. So transparency must continue.

Risk managers battling to navigate choppy financial waters-Risk Frontiers

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