Scarce capacity for emerging risks as relevant to Asia as Europe

One leading insurer who took part in the discussion reacted to the risk managers' comments by stating that they can only cover risks that have been adequately analysed and modelled. Underwriters cannot be expected to commit capital without experience of the risk, he pointed out, and called upon the whole market-risk managers, brokers and insurers-to work more closely to tackle problem areas. The discussion on synergies between risk management and insurance took place at the inaugural PARIMA event that was hosted by CRE Editor Adrian Ladbury.hideThe event was attended by a good number of risk managers from around Asia and included Rob Tutchener, New York-based Global Head of Group Risk Financing for Rio Tinto, the international mining group, which has a number of captives based in Singapore. Mr Tutchener was on the opening panel debate and in combative mood as he stated clearly that he believes the insurance market is currently failing to deliver the goods for large and complex groups such as his own. "From a client's point of view there are more restrictions on risks than in the past in terms of exclusions. They [exclusions] are ever-increasing therefore ever more exposures are excluded or you simply cannot buy the overall limit or sub limits that are needed. Therefore there is a lot more at risk than in the past," said Mr Tutchener. Bob Sweeney, Hong Kong-based Vice President Risk Management for DFS Group, luxury good retail group and a founder member of the PARIMA committee, agreed that the market does appear to be more limited than in the past. "There does seem like there are more exclusions especially for larger industries. One reason for this is that the big insurers want to lead programmes not follow. What I want is an insurer to partner with which we can work with and create measures to tackle risks in the long run," said Mr Sweeney. Ergu Genya, CEO Asia Region for event hosts AXA Corporate Solutions, responded on behalf of the insurance carrier community as he said: "As an underwriter of risks you have to define the spectrum of risks, some are insurable and some are not. "Basic risk assessment is quite important and if companies are committed to do this then risks are identified and can be quantified. But you need an independent view. Risk management is more important than in the past and the insurance market is doing more to handle the emerging risk problem. But of course you need enough volume to mutualise the risks because we want balance. This is why service and knowledge is more important than ever." The debate about how to cope more effectively and swiftly with apparently difficult to insure emerging risks has been rife in Europe over the last couple of years and featured heavily in CRE's annual Risk Frontiers survey of risk managers across the continent. It has also re-emerged recently in Germany in particular as risk managers complained about ever-rising demands for more information from insurers to help them work out how to underwrite the risks. German risk managers complained that insurers are asking for too much information and do not really know what to do with it anyway. Mr Genya said that the discussion about information and transparency is as relevant in Asia as elsewhere. He again defended the insurer's corner. "Basically underwriters need relevant information to carry out exposure rating. They have to understand the exposure. This requires constant dialogue and a long-term relationship. Also business continuity has to be taken into account because timing is important," he explained. Craig Paterson, Divisional Director of JLT Asia's Risk Consulting Practice, pointed out that this question is not just about the information itself and the volume of information but what the information really means. "A risk manager, broker and underwriter can all look at the same information, but think it means three different things. So it needs to be analysed carefully and discussed," he said. Mr Sweeney agreed with Mr Genya that the key is dialogue, adding that it is important to also roll up the sleeves and take a real look at the risks under discussion: "We invite our partners to come to our locations and this really makes the information come alive. This is really key," he said. Mr Tutchener said that to an extent risk managers have to be prepared to sell their risks to the market, particularly when capacity is limited as in high risk and high value sectors such as mining. "We put all our information on a website to which underwriters have access. This includes things such as meaningful engineering reports. By doing this we are trying to set ourselves apart from the other companies in our sector because, given the limited capacity, we want the insurers to underwrite our risks not others," he said. "We also provide plenty of information about our overall risk management strategy. If an organisation does not have an ERM approach or cannot demonstrate it then it will find there is less choice. We believe we are probably the number one risk in the mining sector because of the work we do on the risk management side, because of our engineering and deductibles. This all adds up to being a long-term partner," continued the risk manager. Mr Genya was asked whether insurers really take good risk management practice, in particular enterprise-wide risk management, into account when they underwrite risks rather than just loss prevention and control. He said that AXA CS certainly does. "We ask: 'What is the risk management position?' Is it backed by a CRO and what is the attitude towards risk management and whether enterprise risk management is aligned with overall strategy," said Mr Genya. Some European risk managers and brokers have suggested that one way to tackle this problem is to use captives to effectively incubate the newer risks and thereby build up experience over time. Mr Tutchener said that he uses captives in two main ways. First for high frequency risks that can be modelled and thus enable the risk manager to seek ways to reduce the frequency if not the level of the losses. And second, to take catastrophic risk out of the equation and take it out to the reinsurance and insurance market to protect the balance sheet. "This can be done for less esoteric risks such as property damage and business interruption," said Mr Tutchener. "I have to say that we buy the largest limits in the sector but there is still not sufficient capacity to replace a smelter and cover business interruption therefore there is a restriction on capacity available to protect the balance sheet," he added. Craig Paterson, Divisional Director of JLT Asia's Risk Consulting Practice based in Hong Kong, said that captives could be used to help 'incubate ' new risks but does not see it as a complete solution to the challenge. "There are upsides and downsides in this regard. The basic question for risk mangers is: 'Would you really like to gamble your own money on large and difficult to quantify risks?'" But Mr Genya said that it is not that simple. "There is more to it than that. You also have to consider the price of the risk, whether risk managers are prepared to pay for the cover and market conditions. Price may be the trigger," he commented. Eric Schaap of Aon Risk Consulting pointed out that there are also alternatives available such as index linked securities and catastrophe bonds when traditional capacity may not be able to offer solutions. "Also from a captive perspective risk managers can use protected cell companies to isolate the risks," he added. Asked whether more companies may follow oil giant BP's lead and basically take most of its risk out of the market and use captives instead, Mr Genya was doubtful. "Captives are a great tool to share risks but will never replace the insurance industry. The insurance industry is very powerful. The industry is making good progress on more difficult and emerging risks but we need more long-term bespoke programmes. We have to go back to the fundamentals so that we can nurture risks and be more specific with companies. Mining is a difficult sector because it is high volatility and high value and can involve long delays in production following a loss. The plants are huge so the size of the risks are huge. This is a challenge for obvious reasons," he said.

Scarce capacity for emerging risks as relevant to Asia as Europe

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