The time is now-Spain

Adrian Ladbury (AL): How has the recent economic and financial crisis impacted Spanish companies, what are the main risks created and how can risk managers help their companies cope with them? Daniel San Millan (DSM): Risk management has a high profile in Spain currently. Everyone is talking about the crisis in Spain and how a future crisis can be averted. Enterprise risk management (ERM) is clearly the future but not as a control area, rather as a management function and tool that helps to identify and manage risk before it becomes critical. This is why we, as risk managers, need to take advantage of this situation and make sure that we play a central role in this debate. Insurance remains one of the main tools used to manage and transfer risk but companies now need to look for something more. The time is now for risk management. Juan José Gil Sánchez (JJS): The profile of ERM in Spain is clearly enhanced currently for two reasons. First because of the crisis and secondly the need for more effective management of companies. ERM provides a structure to analyse new, special and emerging risks faced by companies. For multinational companies it is more important than ever to analyse and manage such risks. It is also more important than ever to transfer such risks via insurance. hideTiago Mora (TM): I also think this is relevant for smaller companies where risk management is perhaps not so developed. During this phase in the economy the development of the risk management function is more important because it helps better management of funds. In smaller companies, where there is intense pressure on costs all over the company, risk management is a very useful tool. Cristina Martínez García (CMG): There are signs of an economic improvement but there is still big pressure on costs and of course rapid regulatory change. Risk managers as well as other professionals have to develop new skills and react accordingly but the need for cost reductions across all companies does not help this as the right skills are needed. Risk managers have to learn how to be absolutely pragmatic and make things as simple as possible. Key performance indicators are really important but we have to be careful not to introduce too much bureaucracy and try to avoid an overly sophisticated risk management function. Also, we need to cope with cultural risk and help our organisation to learn how to react to new risks and scenarios so that we can react more quickly and efficiently. Risk ownership, accountability and responsibility have to be spread to all levels of the organisation. In other words, it depends upon the level of maturity of ERM in the organisation and whether, at the end of the day, risk is understood and managed at all levels. DSM: A more mature profession will promote the new position of Chief Risk Officer in Europe. It is not so common here in Europe yet. And it is critical that the person who fills this role cares about insurance as well as ERM because they need to be equally matched. The future of ERM is linked to the future of the role of CRO and will not be owned and driven by other areas of the company, financial or audit, because they are a tool for management not a structure. TM: This is a natural evolution. A company has a lot of structures to deal with risk and the first big step is to align them. This evolution will take more or less time depending upon the company but it will arrive and it does make sense. Internal audit is about control and this function does not actually deal with and manage the risk in an ongoing manner. AL: So it appears the environment is set for ERM to make big strides forward in Spain. What happens next? What is the next big step for the profession to ensure that the opportunity is taken? JJS: Companies need to ensure that responsibility for risks and the management of those risks is allocated to specific areas. Whether the need is to control, monitor, manage or execute action, this has to be done. At the same time, a recognition is needed among different areas of management that there are different tools for the management of risk though advice and the provision of risk solutions to the risk owners. One important tool is clearly the decision-making process about the level of risk retention and transfer. In this sense the insurance actuary has an important role to play because the business of insurance needs improved analysis and management of risk itself and this is an opportunity. This risk analysis needs to be understood at the top of companies but also deeper within companies, in local operations too. TM: The rating agencies are now looking at the risk management process much more closely within corporations and this is another important source of pressure on companies to improve the way they manage risks. This is because it provides a disciplined way to seek evidence of risk management practices. DSM: This is another reason why the risk manager needs to be proactive in the company and particularly at this point in time because we will be listened to. We have a priority to develop ERM in Ferrovial and staff will listen to us because of this. The problem is that when the good times come nobody listens because management is then focused upon investment and growth. So now is the time. AL: What new skills do risk and insurance managers need to learn in order to exploit this opportunity and deliver maximum value for their employers? DSM: There is a confusion about the skills and the abilities of the risk manager. The risk manager does not need to manage all the risks, it is all about the implementation and monitoring of risks. All managers carry out risk management in practice with systems and processes from the highest to the lowest levels. The key is to ensure that the risk management processes are being followed at all levels in a consistent manner. For this reason the key skills that risk managers need to learn are broader management skills. CMG: Although the financial crisis has significantly raised the standing of the risk management profession, compliance, legal requirements and catastrophic events remain the main triggers of risk management. Still today the focus lies on operational risks. Having said that, the only way to be absolutely proactive is to combine efforts within the insurance industry. For example, it is clear that insurers and brokers are investing a lot of money in tracking new regulatory conditions. I do believe that 80% of the information they gather could be shared, and there is a potential for cost reduction in that exercise. If we were able to explain in our own organisations how the rapid regulatory changes are affecting our businesses, we could gain some extra credibility. No matter what you call your main risk official, I believe risk ownership and responsibility must be shared by all levels of an organisation and this is the challenge we have in our companies. Alberto Argarate Ortiz (AAO): Now with the crisis we can show to boards that risk management and insurance are good tools for the business. When things go well, not many people are concerned with risk and insurance. But when they worsen, people become worried about specific risks. For example, right now financial entities are questioning more often the risks related to property markets. And we are explaining to our managers that they are well covered by insurance for all those risks. But, if a loss occurs, it is important that the insurers respond well, as we have to show that all this talk about risk management is not just theory. Many times you are trying to convince managers to buy high limits in D&O and general liability, but if insurance doesn’t work well, it is the worst thing that can happen to us. CMG: In the 2010 Ferma survey, we found a strong feeling that boards are taking risk management more seriously than before. At least 45% of respondents said they report to the board or the executive committee. However, 65% of the companies surveyed do not systematically perform risk analysis before taking major corporate decisions. Doesn’t it seem strange that while risk managers report more often to the board, they are still left out of key corporate decisions made by a company? We are either not using risk mapping properly, or we are not listening to what the risk mapping tells us. AL: And why do you think this happens? CMG: In my view, it is a matter of making things simple. Some of the tools we use are really sophisticated. Risk indicators are often not very user-friendly, and as a result the credibility of results is not that high. AL: Are you happy with the way the insurers responded to the crisis? TM: There was not a big difference between before and after the crisis. With the exception of credit insurance, where we found lower limits and higher premiums, insurance has responded to the challenges. Even the premiums are not at the same level as they were before. We are still in a soft market. JJS: In my opinion, international insurance companies have done very well during the crisis. There were no specific problems about the service provided. There were some problems related to capacity in the market in general. Levels remain more or less the same as before the crisis, or even a little lower. But I think this is good news for the insurance market in general. The new challenge is to offer additional cover for emerging risks, like reputation issues and supply chain risks. Some companies are making progress in this area, and the recovery of the insurance market has been positive, especially if compared with other financial services. AL: Emerging risks is a very important topic currently. How can you tackle this challenge? CMG: I think insurers and brokers need to share more information with us. For example, about claims. It would be great for me to have access to relevant information on specific types of claims that I could use to capitalise the relationship with my insurer. What I want for my own portfolio of risks, is access to the knowledge accumulated by insurance companies and brokers thanks to the enormous amount of information they gather. This could happen through a risk assessment analysis, an internal benchmark or some other procedure. Luis San Juan (LSJ): We had a tool for this purpose some years ago, but at the time clients did not show much interest in accessing claims data. With the development of ERM interest in this type of information has increased and we provide our clients with insights into claims information. CMG: But isn’t it ironic that brokers are now commercialising this kind of tool? They are offering a sort of benchmarking tool. You can have a worldwide analysis, or a line of business analysis and they are really keen on commercialising these products. DDM: There is something else I would like to mention about the issue of information. How can we know that our insurers are solvent? I don’t have the answer. It has become quite clear that rating agencies are not efficient enough: AIG went bankrupt with a rating of ‘AAA’. The key issue for us, as risk managers, is to demonstrate that we have things under control. If insurers become insolvent and it was not predicted, we cannot say that. How can this be improved? The solution is not easy, but this is something we have to think about. AL: Does this not present another opportunity for brokers? DSM: They should be able to do it, but they don’t. CMG: Solvency II might provide a unique opportunity to have more discussions on this issue. Unfortunately, it is more focused on pricing than on overall capacity concerns or other aspects more than minimum capital requirements. I am not ready to pay more for an insurer to be solvent; I presume that it is solvent. But I need some kind of information to make sure that my insurer is prepared to handle a claim efficiently and to pay it in the long term. I’m presuming that my key players are well capitalised. But I agree that brokers should be highly involved in this accreditation process. AL: It is about legal fears, isn’t it? Brokers are scared that, if they advise you on who can handle your coverages based on solvency, they may be sued. CMG: This is rather similar to the role of brokers when it comes to other processes. In Spain, they often come out with these statements on how they cannot be part of the damage assessment process and that we will need to hire a forensic accountant specialist or someone else, because regulations don’t allow them to do this. It would be good to have some clarification on the roles of the players in the industry, because maybe we are duplicating the roles, or we are paying the brokers or insurers for something that they say they are doing, but they are not. AL: And what do you do to check out the solvency of your insurers? What are you looking for? JJS: It has been suggested that a coverage for the solvency of the insurance market might be needed. That could be a solution. I can understand the position of the brokers on this issue. If an insurance company has the levels of solvency required by the rating agencies, it is quite difficult for a broker to say that such a company could be about to become insolvent. Perhaps the best solution is to work with the financial department of our own companies, so that they can analyse not only the ratings, but also the rationale of insurers. It sounds complicated but it is probably not really. We at Telefonica started to do that two years ago. AL: And the metrics are not too complex are they? You look at how they invest their capital, what they charge for their business and what is the liability profile for their long-term business, stick it all together and assess their strength? JJS: With Solvency II, there will be a good approach for this information about the groups, not just for the local units in every country. TM: Insurance companies perform this kind of check on reinsurers. They have their own analysis, not based on rating agency information alone. AL: Solvency II has changed quite a lot lately as the proposals are being fine tuned. Do you feel more comfortable or more concerned about it now? JJS: The move from Solvency I to Solvency II is positive in general because it proposes a different approach to the solvency of insurance companies. The problem is how can we match Solvency I with Solvency II to avoid an increased burden on the companies and their reporting workload. These kind of things, in the end, mean higher prices for clients. It is a difficult task, but I believe the more brilliant minds in Europe are working on that. I suppose it is possible to find a good balance between competitiveness and solvency requirements. DSM: All the companies that run captives should be worried, that’s for sure. There is nothing defined right now, but it looks certain that captives will be treated in a special way, and the equivalent principle will be applied to them. A solution will be found. It is common sense that a captive cannot be treated, from a regulatory point of view, in the same way as a commercial insurer. But, as long as I cannot see the final version of the norm, I won’t be completely relaxed about it. My feeling is that Italian, Spanish and other European regulators are not really worried about captives. Only Luxembourg, Ireland and the other captive domiciles have some interest in this issue. AL: And are you worried about the impact of Solvency II on capacity? CMG: Most of the market players agree that there is continuing pressure on prices. However, from the buyers’ standpoint we don’t expect price increases in the immediate future because there is plenty of capacity out there. Of course capacity largely depends on the line of commercial business. But, in the end, the adequacy of limits depends on your own risk exposure and your own business model. It is not a matter of capacity. It is more focused on pricing in general. JJS: The trend we are seeing now in the evolution of Solvency II is that reinsurance will be a very important tool for most medium-sized companies. In the future the price of capacity will depend on the diversification of portfolios. Diversification is an important element of Solvency II, and as a result, I believe there will be some lines with higher prices and others with lower prices for the same capacity. AL: Cristina, you mentioned earlier that it would be a great help if more information on regulatory issues was shared with buyers. I suppose you were referring to global programmes. Insurers spend fortunes gathering their databases of information. Why should they give it away for free? CMG: It could enormously reduce the administration costs of an international programme. It could enhance the networks of insurers and brokers, which could provide services to the levels that were promised at the time the contract was signed. Also, contract certainty could be impacted as well. We need transparency on tax issues. In my view there is a lack of commitment to come up with a working group comprising experts from the buyers, the brokers and the insurers to have an open discussion on what worries us in our daily routines. Contract certainty is not only about issuing documentation, but also about getting it right. We often don’t take into account how much it costs us to have documents sent back to insurers because there are errors or mistakes. And that is not necessarily because the insurer makes mistakes, but because information is lacking. I will give you a concrete example. I’m going through the budgeting process for next year right now. I wish I had in advance a clear picture of how much tax will impact my international programmes. I am estimating figures that will heavily impact on my budget, but I don’t know whether they are right. I am sure insurers could provide me with that information. The information exists, as those guys have invested a lot of money tracking it. But we don’t have a full understanding on how tax affects our international programmes. It is a serious matter. Spanish regulators have not started doing deeper analyses on it yet, but other countries like Belgium and Germany are already looking at it. LSJ: We constantly carry out research and make a great effort to understand licenses and tax implications to help our clients be compliant. The implementation of an international programme requires a lot of time and investment, and it is necessary to see the results for more than one year. It is often very difficult to show in only one year that the solution a client is using is the proper one. Therefore it is important for us to build long-term relationships with clients to achieve the best possible global programme solution. AAO: In recent years, international programmes have developed a lot. Nowadays, you can put in place an international programme that is as broad as you want. If you are based in 30 countries, you can issue policies in all of them. It all depends on the costs you want to assume. Our experience is that you are always going to have problems. But if you spend time with your insurer, you can solve the problems. AL: What’s the most important question in the market for the next year? JJS: In my view, it is the evolution of Solvency II regarding the state of the market in two years’ time. That means capacity, pricing and competitiveness. For policyholders, the eventual disappearance of mid-size insurers could be a problem. AAO: Our biggest issue is the D&O market. Capacity in the market depends on the sector in which you are working. For the financial sector, for instance, there is no extra capacity for higher levels. Capacity is very expensive and you have to write thicker limits and spend a lot of money. Risk premiums increased in the past two years for all entities, and at the moment we are paying higher premiums than two years ago. CMG: Reputational risks. I would like to secure new solutions and ideas for these kind of risks. DSM: My concern is also about regulation and Solvency II. We have to be ready for the changes. TM: Environmental risk is also a big issue for the market right now. The Participants Commercial Risk Europe would like to thank the following individuals for taking part in this year’s Risk Frontiers Iberian roundtable in Madrid. Daniel san Millan, Presidet IGREA and Corporate Risk Officer at Ferrovial Cristina Martinez Garcia, corporate risk manager at Campofrío Food Group and IGREA’s board member at FERMA Juan José Gil Sánchez, Director of Risk Finance and Insurance at Telefonica and board member of IGREA. Tiago Mora, Director Industrial Risks & Captive Management, MDS Alberto Argarate Ortiz, Technical Director, Bbva Broker Luis San Juan, Head of Sales and Client Relationship Management, XL Spain

The time is now-Spain

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