Risk managers must work with capital markets to deliver long-term transfer solutions–Australasia

However, they noted that harnessing the new capital to ensure it stays in the insurance market and delivers long-term transfer solutions will not be easy. It will require smart thinking from risk managers and collaboration between all interested parties. “For the last decade there has been convergence between the insurance and banking sectors. That continues to occur and the products continue to evolve. I think there is absolutely an opportunity for capital markets to become involved in that and help address some of the issues in risk transfer, particularly in servicing a wider range of risks and emerging risks,” said Marc Turner, Director—Risk & Governance at advisory and consultancy firm HTM Group. His comment echo the sentiments of Jason Disborough, Managing Director—Global at Aon Risk Solutions Australia, who said that alternative capital is ‘jumping the firebreak’ between reinsurance and insurance, signaling a very exciting time for primary insurance buyers.hide“Potentially it might mean that insurance pricing will stay relatively flat as competition for your business will increase. But if this capital that comes into the market can’t do anything quickly in traditional insurance lines it will probably exit. This means it will probably look to underwrite new and emerging risks, which presents an opportunity for risk advisers and most importantly for buyers to explore new and emerging risk categories where solutions may become available,” said the broker at the annual GRC conference in Melbourne, Australia. “I see it as a wonderful opportunity to use this capital more innovatively around emerging risks and try and design solutions that are more relevant to organisations,” he added. Anthony Ventura, Chief Risk Officer at WorkSafe Victoria and RMIA board member, agreed that new capital from the likes of pension and hedge funds could supply interesting solutions for risk managers. This capital is only looking for around 5% to 7% return on investment as opposed to around 12% for the traditional insurance market so is under less pressure, he explained. “This gives them (capital investors) a bit of room to be a bit smarter. We as the risk manager need to work with these organisations to better inform them about what our risks look like and what they cost our organisations,” he told Commercial Risk Europe. However, experts from the world of risk management and transfer question whether the alternative capital will stay in the insurance market over the long term and not exit once traditional investment options deliver more favourable yields. Eamonn Cunningham, Chief Risk Officer at shopping centre giant Westfield and Risk and Insurance Management Society Australasia board member, warned that ‘a reasonable amount of capital will simply go to the brightest home on the day’, so as quickly as it has come into the risk transfer business it could just as easily exit. Phil Hunt, Risk Manager, Governance and Risk at nursery education provider Goodstart Early Learning, said: “If the new money comes in through the established network that recognises that there are opportunities to use that capital to cover these yet to be identified or underinsured risks then I think it will stay in the market for a while.” “But if it is only coming in to compete with the existing lines of business, which are already a low cost in the soft market, then all it will do is soften the market even further so that the returns on that capital investment will not be what investors expected and they may exit,” he added. Mr Turner warned that capital markets may not have properly thought through their foray into the insurance world and will swiftly exit if losses mount as a result. “Organisations can pursue opportunities but to their own destruction because they haven’t taken a reasonable approach. That is a risk and a challenge facing the capital markets that might not have triggers in place to flag when getting involved in the world of insurance, or certain areas of it, may not be a good idea. Often there may be inadequate exit strategies. If they get their fingers burnt then obviously they won’t be around long and any benefits brought to risk transfer would be lost,” he said. There are doubts over the extent to which the new capital will remain available, said Kerry McGoldrick, Enterprise Risk Manager at retailer Woolworths, which raises questions over how organisations will perceive the alternative capital and use it in risk transfer. “The nature of the risk transfer then becomes pivotal. For a long-term programme I think the board and executives might be concerned that the capital will move at some point, so I suspect they will be less enamoured with that option than they might be for capital that is required over shorter-term risks of one, two or three years,” said Mr McGoldrick. John Nagle, Chief Executive of Lumley Insurance, agreed that the potentially flighty nature of the alternative capital might be an issue for top management and board members. But he added it could be used creatively, particularly if core risks are covered by traditional insurance. “It depends what you are looking for out of this new capital. Maybe you can prove to the board that your core programme is covered with safer and traditional insurers and that you have an opportunity to try something different with this new capital,” he suggested. Aon’s Mr Disborough agreed that ensuring the alternative stays in the market will be a ‘real challenge’. “I think it is down to the risk industry to prove it can use that capital responsibly and cleverly, so it stays,” he said. Fellow broker, John Saunders, Senior Vice President of Marsh Pty Ltd, concluded: “If we use it smartly, perhaps in areas that are traditionally not insurable, when the returns in other markets rise the capital providers might stay because we have generated a new business area where they can see they will be able to write these risks for the next twenty years.”

Risk managers must work with capital markets to deliver long-term transfer solutions–Australasia

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