‘The wings wherewith we fly to heaven…’ – comment

Next month sees the publication of the complete Risk Frontiers 2013 report, sponsored by XL Group and Willis, at the Ferma conference in Maastricht. We will also next month publish the final findings of our Global Risk Frontiers project which is still ongoing and has delivered surprisingly similar results to the European survey. Both surveys deliver an in-depth picture of the state of the risk management profession, how it is developing and where it feels it needs to go, what are the big risks that they are currently facing and how risk managers and their partners in the insurance market need to react to the challenges.hideThe whole point of these exercises is to raise the level of knowledge and discussion in this market as it enters a seemingly important juncture in its evolution. As we all know, ignorance really is no excuse in today’s business world. There are inevitably national and regional differences but the overall conclusions are remarkably similar. The following is a top level summary of the key findings of the European survey. I thought it would be useful to share these early thoughts with you and perhaps use them as ammunition for debate at the Ferma event and help deliver the best Forum yet. What are the big three risks that keep you and your CEO awake at night? The response to this question was both highly consistent and diverse at the same time. It was consistent because most risk managers identified big macro, economic, political and social risks on an international basis as the main challenges that keep their CEOs awake at night. But it was diverse at the same time because of the wide range of specific risk types identified by risk managers who work for many very different companies. The bottom line is that it is uncertainty that keeps CEOs awake at night and in a fast changing, volatile and difficult world ‘market’ this means that the job of the risk manager becomes both more interesting and harder at the same time. What are the scariest emerging risks and what needs to be done about them? The major emerging risks are cyber, supply chain and business interruption and political risks. It is interesting to note, however, that many of the risk managers who took part in this year’s survey actually seemed to find it difficult to distinguish between the major risks that keep their CEOs awake right now and the emerging risks. Based on this year’s Risk Frontiers discussions the conclusion has to be that it is increasingly difficult to neatly identify and categorise existing and emerging risks. At the same time it appears to be increasingly difficult to distinguish between ‘insurable’ asset risks and traditionally uninsurable pure business risks. This is again presumably why some risk managers feel increasingly uncomfortable about their role and how they fit into the corporate structure. Others see big opportunities for an extension and expansion of the risk management profession and the chance to emerge from the traditional insurance silo. The bottom line is that, as identified in last year’s survey, there do not appear to be any really brand new ‘emerging’ risks. Rather risk managers in Europe face a set of challenges presented by the intensification and interdependence of risks and speed of change of business in a global economy. Are you happy with recent developments in coverage for key areas such as cyber, supply chain/business interruption and environmental? This question introduced the critical link between the fast-evolving risk scenario faced by most European corporations and their ability to mitigate those risks. The recent Thai floods and impact on business interruption coverage was again used as the prime example of the challenge faced by the market. This event caught the entire global market by surprise—both corporations and their insurers—as the extent of the interdependence and vulnerability it introduces were realised. After much debate and wringing of hands the discussion has finally, and perhaps inevitably, focused upon information needs. The insurers say that they need more information about their customers’ suppliers and their suppliers. Many risk managers are not happy with the increased demands made upon them in a time of tight budgets. Most agree that it is reasonable for the insurers to demand more information for evolving risks that are difficult to identify and measure. But the customers want to make sure that the effort they put into finding this information is rewarded with more accurate and tailored coverage terms. What needs to be done to improve the transfer of knowledge and risk information to improve product development in challenging areas? The answer to this question was obvious and at the same time quite frustrating. All parties—risk managers and the insurer and broker representatives of the project sponsors XL Group and Willis—are of course all agreed that the answer lies in better, more focused and open discussion and exchange of information. But these fine words do not yet appear to be backed up by firm commitments and action. It seems that, on the whole, the basic economic model of the market does not allow for the time and effort required to actually make this happen and ensure that the extra effort expended is adequately rewarded. The insurers know this and it is the reason most serious players have set up dedicated units to deal with complex, multinational, large corporate risks. But inevitably they are playing a game of catch up in a market in which the profits needed to fund the investment in such operations, and particularly global programmes expertise, are not easy to find. Those insurers that find the solutions the fastest will be the winners in this limited but highly competitive market. Are you happy with claims service currently and how could this be improved? This answers to this question revealed again how important it is for the insurers and the brokers to invest in expertise to meet the demands of their biggest and most complicated customers. The good news for the insurers is that, on the whole, European risk managers are happy with the service offered by their insurers in the key area of claims. But once again there is a frustration across Europe with the apparent inability or unwillingness of the leading insurers to fully recognise the significance of this area and provide truly bespoke services. More pre-event planning and discussion to avoid subsequent costly and sometimes job threatening disputes is clearly wanted by all parties. But of course this again demands time and expertise that is short on supply. Is there adequate capacity for your risks in emerging markets? What services provided by insurers and brokers are most important with global programmes? This has been a big topic all year and not surprisingly generated some lively and in-depth discussion. Most risk managers seem reasonably happy with the response of the insurance market to their fast growing needs in emerging markets and the world of global programmes. The insurers and brokers identified early on that their growth would come in regions such as Latin America, Asia and Sub Saharan Africa rather than the mature markets of Europe and the US and so have invested in these regions. The networks and infrastructure needed to properly service such programmes are generally already in place. The response to this question during the roundtables and during our Risk Frontiers events throughout this year have again confirmed, however, that while the basics are in place there is considerable fine-tuning required to really meet customer needs. The Big Conclusion The really big picture conclusion to draw from this year’s survey is that Europe’s risk and insurance managers are feeling both challenged and excited by the fast-evolving risk landscape that faces their corporations. The leading players in the international corporate insurance market have identified changing customer needs and are doing their best to meet them. But it is not easy. The risks themselves appear to evolve faster than the time it takes to properly analyse them and work out lasting solutions. This leads to a delay that is frustrating for risk managers under pressure from bosses and made all the more frustrating because of ever higher information demands made by the insurers. There is no doubt whatsoever that this situation would be vastly improved for all if risk and insurance managers, the brokers and insurers could find some way of communicating more effectively on an industry-wide basis. And it would also be immensely helpful if governments, regulators and tax authorities worldwide stopped reacting to apparent crises with ill-considered short-term solutions that are already out of date by the time they have painfully churned through the political, legislative and regulatory processes (such as Solvency II). In this sense it does seem very difficult indeed to avoid arriving at the very basic conclusion that a political, legal and social structure designed for the 20th century does not actually work very well in the ‘borderless’ 21st century. A fine example of this is the increasingly bizarre game of cat and mouse played by national and regional governments as they attempt to stop truly global corporations from avoiding the payment of tax. This state of constant flux is likely to continue for a generation and will of course be exacerbated by the inexorable shift of economic and political power to the Brics. According to George Soros: “Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” So if he is correct expect this world to become ever more riskier and the role of the risk manager to become ever more critical. So what is the required response from risk managers and their partners in the insurance market? Well, that surely can only be to dramatically improve the level of risk awareness and communication. And who better than that doyen of early modern risk management thinking, William Shakespeare, to sum this up as he wrote in Henry VI, Part II: “Ignorance is the curse of God; knowledge is the wing wherewith we fly to heaven.” I look forward to seeing you in Maastricht!

‘The wings wherewith we fly to heaven…’ – comment

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