‘Sinnkrise’ hits German risk managers

German risk manag-ers are currently wrapped up in a debate over their very role within their organisations and how they should liaise with brokers and insurers. Experts believe that this growing professional uncertainty has been caused by the recent economic crisis and the appropriate German word for the phenomenon is ‘Sinnkrise’. Some risk managers firmly believe that they are in charge of all risks in a company. This, of course, comes very close to running the whole enterprise and thus what a chief executive is supposed to do. At the same time there is an opposite view among risk or insurance managers of large corporations as some question whether there really is a need or justification for a separate risk management position at all. The very fact that there is such a range of job titles and definitions is also perhaps a reflection of this professional malaise. “Every employee with a management function is responsible for his area and therefore a risk manager himself,” said Ralf Oelssner, former Managing Director of Albatros Versicherungsdienste, in charge of Lufthansa’s captive brokers and insurers.hideMr Oelssner was also for some time Head of the German risk managers’ association, the Deutscher Versicherungs-Schutzverband (DVS). “If you understand risk management as the application of common sense, this means that awareness for duties and responsibilities has been heightened by the crisis,” he added. INCREASED DEMANDS His successor, Reiner Siebert, the present Managing Director of Albatros, agreed with Mr Oelssner. “The relevance of risk managers did not change much because of the crisis,” he said, “But demands on them increased.” According to Mr Siebert, risk managers have responsibilities which already existed before the crisis, but were probably not as transparent as now. The near-failure of AIG and troubles of other insurers have underlined that insurance customers do have a counterparty risk when they buy cover. Thus, today it is far more important to check the financial strength and reliability of an insurer. “We cannot afford to make a mistake here,” said Mr Siebert. “When you put all your eggs in one basket and the insurer becomes insolvent like AIG, then you have a big problem.” It is thus important to divide up risks among several insurers and also to diversify in different layers, he said. As a consequence risk managers have to think more intensely about the threats that their companies face. “The crisis enlarged the number of possible scenarios—scenarios we did not think about before,” Mr Oelssner said. “In the past, many catastrophes happened because we could not imagine the risk.” And, in some respects, the crisis has also placed pressure on risk managers’ influence. In some companies, insurance departments had to tighten their belts, because cost reductions across the board had been prescribed by the headquarters. “Since there is not much room for staff cuts in a company’s insurance division, the spending on premiums had to be reduced,” said Mr Siebert. However, the breadth of cover bought by Lufthansa remained the same, he added. “When there is a big claim which is not covered by insurance policies, the chief financial officer will be at a loss to explain this to the shareholders.” Some companies also saw a trend to fold insurance departments into the general buying department. It was a strange twist that another consequence of the crisis, the introduction of a mandatory deductible for D&O policies, sparked this. Under the new rules, every management board member has to pay up to one and a half his or her annual salary as a deductible if a claim occurs. This retention is insurable—and a hot dispute over the form of this insurance among managers has made corporate clients very uneasy. “I have met every board member in my group over a period of four weeks this year because they needed individual cover,” said one risk manager who did not want to be named and usually only talks to the CFO. This cry for help from the top brass has, at least in large corporations, strengthened the role of risk managers. But doubts remain. In particular some in-house brokers are having a hard time. The European Union’s Intermediaries Directive—or, as it is now called, Insurance Mediation Directive (IMD)—has increased the bureaucratic burden considerably for in-house brokers. “They now have costs that are similar to non-captive brokers,” said Hans-Georg Jenssen, Managing Director of the German broker’s association VDVM. “In some companies the question arises about whether in-house brokers are worth the trouble.” There is also the question about whether captive brokers are in line with current thinking on compliance. Both energy giant RWE and concrete maker Heidelberger Zement have recently closed their captive brokers down. DIVERGING ROLES Meanwhile, in some companies the risk management function is now also formally separated from insurance buying. “In some companies this is united in one function, because the risk management centres on the purchase of insurance, in other companies it is separate,” said Lufthansa’s Reiner Siebert. Some enterprises did not have a centralised risk management division, and each top manager had to take care of the risk management in his department himself. “Which model is used depends on philosophy and size of a company,” he explained. At Lufthansa, each legal entity has its own risk management division, but Albatros and its parent company Delvag, Lufthansa’s captive, are also represented in the company’s centralised risk management division as purchaser and provider of insurance coverage. “In the beginning risk management was not more than a sum of statutory rules. How to appoint adequate employees for example,” explained Mr Oelssner. Later this became a profession. The person in charge had to think about how to minimise risks via measures like fire control or staff training. The second step is to calculate how much of the risk the company can handle itself, only the third is to decide if it is insurance one will need and the forth is which one, he continued. In the meantime, requirements on risk management have been firmly enshrined in the statute book. Each company has to prepare a risk report with its accounts, and failure to run appropriate risk management systems is an offence, said Mr Oelssner. PRICE VS CAPACITY The risk managers’ future work will also depend to no small degree on Solvency II, Europe’s planned new capital adequacy regime for the insurance business. “The risk manager community takes Solvency II really seriously,” said Philipp Andreae, Managing Director of the German risk managers’ association DVS. Mr Siebert of Albatros has mixed feelings about the impact of the new regulations. “There is a fear that insurance companies may use Solvency II as a reason for price increases,” he said. However, currently this is not visible, at least for aviation cover. Last year there had been considerable price increases, but Mr Siebert expects premiums to decline in the current renewals. “This is not because of fewer claims, but because of more capacity in the market,” he said. “I am convinced that Solvency II will regulate the risk managers’ work more intensely,” Mr Oelssner said. His colleague Mr Siebert does not believe that with Solvency II risk managers can feel more secure about the financial strength of insurers. “I doubt that one can foresee a case like AIG with the model,” he said. However, overall, the industry appreciates the Solvency regulations. “We hope it will increase the insurers’ willingness to pay,” said Mr Andreae. Solvency II also applies to captives. “Many captive owners are thinking about shutting down their captives, because they no longer make economic sense,” he said. In particular the heavy reporting duties are a problem, said Mr Siebert. “They are taking a sledgehammer to crack a nut.” Lufthansa, however, feels well prepared and will certainly keep its captives. All the questioning of risk managers and their employees about the way this work should be carried out in future also reflects generation changes. Many current risk managers are still of the old school and spent years or even decades in insurance companies before moving to a large client to become the risk manager. They are therefore part of a community with the industrial insurers. Nowadays, they often come across young chief financial officers who have little understanding for the bond between the insurance professionals, their jargon and the standard answer: ‘We have always done it like that’. It could well be that many of the major changes seen today in corporate Germany could also result in a generation change in the risk management community. But this would not necessarily be such a bad thing, despite the fact that the meetings between insurers, brokers and risk managers might not be as cosy as they often are now.

‘Sinnkrise’ hits German risk managers

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