The captive question

Uncertainties created by the Solvency II directive are keeping many risk managers awake at night as they worry about the effects of the new rules on their captive companies. But Philippe Vienot, a member of the AMRAE board and the risk manager at BNP Paribas, told Commercial Risk Europe that he is not too worried by this, even though he has four to manage on a daily basis. Not that he is an enthusiastic supporter of Solvency II either. In fact, he says, the arrival of the directive will be a case of taking it on the chin and making sure that the captives are compliant no matter what.hide“I am not too worried, and I am not expecting much either,” Mr Vienot said, referring to the effects that Solvency II could have on his captives. He certainly has a point: as nobody knows what will be the final shape of the directive. To panic now could in the end prove to be a waste. This does not mean that Mr Vienot and his team are twiddling their fingers as they wait for the regulators, supervisors and the market as a whole to reach common ground about the new insurance rules and make some firm and final decision. Just the opposite, in fact. The right approach, in Mr Vienot’s view, is to be prepared for the worst-case scenario, and take any breathing space conceded by regulators as a welcome bonus. BNP Paribas has run the QIS5 tests three times already on its captives and is prepared to run them again once every six months. “We do everything required to remain compliant,” he told CRE. “If regulators give us some flexibility, it will be fine, but we are not betting on it and will make sure we are fully compliant anyway.” Mr Vienot’s experience as a captive owner will be handy because he hosts the main Solvency II-related workshop in Deauville this week, which presided over in 2011. In this year’s session the discussions will move on from the quantitive part of the directive to the less-discussed, but by no means less relevant Pillars II and III which deal with subjects like risk management, governance and reporting. This is a timely discussion, as the market seems to be little prepared to face tougher requirements in such areas when the directive kicks in by January 2014. “Insurance companies are behind schedule with Pillars II and III, and captives even more,” Mr Vienot said. “The effort required to be compliant are mostly undersestimated by the market.” As a captive owner, Mr Vienot says that he has not seen much clarification from the regulators of late. He benefits from the fact that BNP Paribas has its own insurance unit, Cardiff, which has been working on Solvency II for some years already. The AMRAE board member is a relatively new hand at risk management but he is however well used to issues such as the problems that insurance buyers and their providers are likely to encounter in the new prudential regulations. Mr Vienot took over risk management at BNP Paribas, France’s largest bank, in 2009, when the current wave of financial problems were already well under way. He joined the bank after a long career in underwriting and broking. While still a broker at Marsh he took the Associate in Risk Management (ARM) qualification. His said his goal at the time was to better understand his clients and their key challenges. Mr Vienot said that as he studied for the qualification, he was not thinking of moving over to the buyers side. “When I attended the ARM course, I thought I could one day become a risk manager, maybe after I retired. But I received a proposal only a few years later,” he explained. The invitation to join BNP from Chartis presented a new challenge that appealed to his risk management instincts and eagerness to tackle new challenges. “It is a large company, present in 85 countries, with a very interesting variety of risks spread around several business lines,” he said. The insurance background has been very helpful, said Mr Vienot. It has allowed him to understand the positions of the other parties in the negotations when discussing contracts. “I can understand what is feasible and what is not for an insurer, and I can also have an idea of how much the brokers are making or losing in a particular negotiation. I know the economics of the brokerage business and the amount of work they put in, which is something that is not always visible to clients,” he said. “A broker is in the market every day. Clients are there once a year, when we have to renew our programs. They deal with clients of all sizes and characteristics, só they have a good risk culture. This is a kind of knowledge that I would probably not have acquired if I had started directly on the client side,” explained Mr Vienot. He has dealt with some intractable issues such as the purchase of insurance protection for banking executives, a product that has become rare in the market, although he says the worst is now over. “At times rates have more than doubled, but the situation is not so bad anymore. Prices have fallen a little, although they remain high, and we don’t see much scope for large decreases in 2012,” he said. “The market remains somewhat fragile, as these are lines with a long tail. Most potential claims that have been notified in those hectic years are still under instruction today. So insurers are not sure whether they will have to indemnify or not,” continued Mr Vienot. He added that, although there is capacity for all programs that the bank has, it is not enough to meet the prospect of large losses. Fraud, professional indemnity and D&O are key lines for banks. Total capacity in those lines available for a bank like BNP Paribas reaches some €300m, which is not nearly enough to cover a worst case scenario. This is why captives are so important. “We decided that we can live with a quite high amount of retention. It sends a good message to insurers. It also shows that we will deal ourselves with the matter of frequency, as they will only be called when losses reach a certain level. It is the same philosophy for most of our lines,” he said. BNP has four captives, which allows it to issue local policies wherever necessary and enables the company to live with high amounts of retention. Then there are other lines such as property damage, general liability, kidnapping and ransom, terrorism, car fleets and employee benefits. For these lines there is not such a problem of capacity and local units can maximise value by dealing with many of these issues directly. The group has a general property damage program arranged centrally along with the financial lines. In total Mr Vienot has 10 people in his team, including two from Fortis which merged with BNP Paribas. There are also 252 ‘insurance correspondents’ who are responsible for applying the insurance process throughout the group. These individuals are sometimes COOs of a business line. Some are compliance professionals who work full time with the management of risks. As a former broker Mr Vienot appreciates the imporance of having a good relationship with the intermediaries. One of his first decisions after he took over was to organise a tender among the brokers. International programs and the complexity of claims that BNP can face requires an integrated international broker network to deal with them. The bank also needed a conceptual tender for six lines: fraud, PI, D&O (all financial lines), property damage, general liability and a French specific coverage for financial groups which is basically a business interruption coverage for banks. To help rationalise the programs he insisted on service level agreements. Beforehand, the group had up to four brokers handling a single program. Now it uses only one for the program, which makes it much easier to manage. As to challenges for the market, Mr Vienot said that there is still some way to go for the insurers and for risk managers at banks to reach an acceptable common ground. He is worried for example by the fact that insurers have inserted lots of exclusions into wordings for financial firms in recent times because claims against banks are potentially systemic. “Systemic is antagonistic to insurance. When a claim becomes systemic it becomes very difficult for insurers,” he said. “I understand the concerns of the insurance industry. But, for us, it means that we keep purchasing programs for fraud and professional indemnity which are not transferring risks very efficiently.” And he also beleives that the market still has some way to go to improve the global programme offering. “For banks, it is very difficult to find carriers that can be the lead underwriters on international programs. There are maybe three of them only. And even these few players don’t have the policy wordings available in all the countries we would like,” he explained.

The captive question

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