Time to roll up your sleeves-Netherlands

Adrian Ladbury: What are the key risks presented to risk and insurance managers by the economic crisis and downturn? What is top of the agenda currently?

Ellen Rekker: Revenues and profits are down in most companies and we are seeing some problems with the supply chain for instance as suppliers become bankrupt. This year the economic situation will be about the same as last year, but it will be a very hard year, because the recovery is slow. From an insurance perspective I do not see any major problems arising. The market is still soft and there is a lot of capacity. The terror problem remains, ICT is still a big issue and so is the reputation risk. On the insurance side there is Solvency II but we will have to see what happens with the financial markets after QIS5. We need competition and so it is important that it is not reduced by the effects of Solvency II.

Tjerk van Dijk: In this economic climate customers are quick to file claims and find ways to transfer problems to us. This is a challenge and also this environment brings new risks that we are not aware of and will require different skills in the team to manage them.

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Hans De Bruyne: There has been a fundamental shift. China has become the factory of the world. Planes and ships are full of goods that come to Europe and then go back empty. This creates big problems in emerging markets. China, India and Brazil present huge risks. And we are obliged to insure the risks locally but capital in those countries is very limited. For example in India the marine liability insurance market has a maximum capacity limit of US$250,000 per claim. But the value of the goods in a truck can easily reach €10-15m and it is similar in China. The problem is that there is little experience in the local insurance market to deal with such shipments and no knowledge and capital there.

Peter Den Dekker: Can’t you insure this on an excess basis?

Hans De Bruyne: Yes. But this raises compliance issues as it can only be done on a non-admitted basis as we can, legally, not allocate any premium to those countries and we cannot pay claims under a global programme into those countries.

Tsjerk-Friso Roelfzema: You see different markets recover at different paces and different markets may be recovering on the demand or supply side at different times. Then it becomes more difficult because legislation, insurance problems and the like can give more traditional markets less of a role.

AL: Would an international effort on global programmes and compliance to provide a more consistent basis for cross-border insurance buyers not help?

Peter Den Dekker: FERMA talks a lot to regulators and the International Association of Insurance Supervisors (IAIS) because of Solvency II and equivalence. This is a unique opportunity to discuss issues on global regulations and maybe we can invite countries like China, India and Brazil to at last address these issues. We can work with RIMS and raise these issues with the regulators.

Hans De Bruyne: You have to go for practical solutions. You have to be sure you are compliant. This is not a correct situation.

Otto Bekouw: Where this becomes a real problem is in business contracts where the practical issues related to, for example, international liabilities are not addressed in conjunction with the Insurance regulations in countries around the world. The insurance market is not that international. Compliance is a big issue and there is also a big issue with the insurance market not working together to find a mutual solution. Everyone is working on their own.

Peter Den Dekker: There is no guarantee and this is a huge problem because there is no single solution. Everyone thinks they are not going to the edge of compliance. You need competition but not the cost.

Hans De Bruyne: As an example, we have contractually agreed with an international customer that we will arrange insurance for $2m to cover domestic Indian transportation risks. But then you are faced with the fact that the insurance capacity for such risks in India is limited to $250,000 and we are obliged to insure it in India. Therefore our contract with the customer is no more than a gentlemen’s agreement as it is legally not enforceable. This is not a perfect situation. Also, if you then want to cover the excess under an international programme you cannot charge any premium to India for this risk.

Erik Hartkoren, XL: Yes, as an industry we need to help develop regulation and fine-tune how we establish international programmes. We are always looking at the legal and tax issues to be as compliant and competitive as possible. But no single industry can guarantee to be watertight. Therefore you can buy products like financial interest cover. Maybe this also needs to be discussed at FERMA level, perhaps also with RIMS.

Peter Den Dekker: The European Commission is talking about equivalence and other regulations. Interests can never be fully aligned and equivalent and the discussion is blurred. The EC is expecting the major economies to be equivalent which is a first stage and first step towards addressing these issues [Japan, Bermuda and Switzerland have been announced as the first to be considered for equivalence]. We can work with the IAIS and CEA [Comite Europeen Des Assurances] on issues like the opening of the market in India. It is very limited but you can play a role to educate the regulators locally.

Otto Bekouw: You can’t change the laws in India or China but you can approach the way you deal with it in a more uniform way. However, I don’t think it should be made a competitive advantage. It should be more of an industry effort, not using a different approach for the same problem.

Peter Den Dekker: Brokers and insurers have a lot of information and you have to ask yourself whether they are keeping it to themselves for competitive advantage. They should share it. We are in a process with the brokers talking about how we can share this information. This needs to be industry-wide.

Erik Hartkoren: Sharing information could make sense. But we do need to be realistic about the cost as systems need to be updated on a regular basis.

AL: What about emerging risks. Should there also be more of an industry-wide effort in this area to tackle complex new risks?

Hans De Bruyne: There are ever-increasing liabilities imposed upon us both by customers and authorities. For instance, customers no longer accept the limits of liability included in the CMR Convention on Road Carriage or the Warsaw Convention on Air Carriage. They ask us for unlimited or increased liabilities. If we have a customer who is shipping a Boeing 747 load of iPods you can understand that they are not happy with a liability limit of $20 per kilo. Also the authorities impose ever-increasing liabilities on us. For example, you have the European legislation on trademarks. If you import goods from Turkey and they turn out to be counterfeit and you have cleared them in the EU they can impose a fine on us even though we have no control over the shipper or the origin of those goods. The authorities tell us that we have to pay the fines first and then we have to recover this from the shipper in Turkey. I feel the insurance market has to be more flexible and adjust to the new realities of ever-increasing liabilities and support us here.

Peter Den Dekker: I experienced this today. I took three calls from our legal counsel about how to deal with exceptions to the general rule and when exceptions come you need board approval. Under certain conditions they may accept that. But it is getting more difficult with partners you have dealt with for years.

AL: What is the insurance market response to this? Is it coming up with answers to problems like this to help you out?

Peter Den Dekker: We don’t like to accept liabilities but in some cases we need to just do business. In some cases it is just so competitive you just have to do something. In these cases you need experience, knowledge and contract management expertise which is not great within the insurers currently.

Otto Bekouw: I agree. The insurers often lack the knowledge of insurance solutions needed by the business and this is difficult to deal with. But in such cases it is our job to educate and explain. One of the biggest problems is that the insurers are slow to react to opportunities because they have to do a lot of analysis and actuarial work before they even consider offering a new product. Recently some supply chain products have been launched which offer cover for some non physical business interruption triggers. But because of the long underwriting process, selection and the high price, it becomes a missed opportunity for the insurers and practically it does not cater for the need of the potential buyer.

Tsjerk-Friso Roelfzema: The insurers are tackling these risks one by one and so not really contributing their full knowledge or capacity. On the supply chain side insurers are individually introducing new products, but when discussing capacity and price we learned capacity is very limited and prices are sky high. Insurers need to partner in order to develop solutions that fit the needs of their potential clients at acceptable price levels and with enough capacity.

Erik Hartkoren: But is there sufficient dialogue? We do our best to investigate and review our clients’ projects. Insureds could also improve their information transfer to help find solutions.

Otto Bekouw: We participated in a pilot project recently where it took just under six months for the insurers to quote because each line of business had to come up with an answer. Such lead times make it impossible to seriously consider buying such coverage.

Hans De Bruyne: Would it be fair to say that Solvency II will make it even harder for insurers and the insured to work together and there is a risk that the insurance industry is in danger of becoming insignificant as they will no longer be able to provide cover for the risks that really matter ?

Peter Den Dekker: Yes and the result of this will be that the real economy suffers because you have to accept all sorts of liabilities because the insurance industry cannot come up with the capacity. We are not talking about price here but simply availability of capacity.

Tjerk van Dijk: Often the risks are highly unlikely and not really that difficult. Look at the Environmental Liability Directive. The first information about this came about a long time ago and there were endless discussions and presentations. Then, when we asked for a quote it was so simple. Why did the discussion last five years? At the end of the day we were either buying a solution or putting the money in the bank. But the insurance market was very reluctant to start the process perhaps because of a lack of clarity in the Directive itself.

Peter Den Dekker: How many of these products have actually been bought? It is very limited and there are ongoing cases. This has probably not been helped by a lack of knowledge among insurance managers about how to identify environmental risks.

Tjerk van Dijk: I think this is actually a compliance risk. The trigger is the compliance not the risk itself. Why buy insurance when you can’t insure everything? Look at what happened to BP. That was highly unlikely and will the insurance solve the problem?

Erik Hartkoren: Not that many environmental policies have been agreed upon quickly. You see such a long lead time because everyone involved has to absorb the information and analyse it, so that it can be useful. It is still a challenge.

Peter Den Dekker: It is actually not that hard. In July 2008 we bought coverage and after that we have not had to go through all the hoops, go to the factories and ask the environmental managers to complete the forms. But it did take a year to get 70% of the information at the start.

Otto Bekouw: This is typical with a new product as it becomes simpler over time. Such things can be difficult to explain internally. Some of our environmental experts think some of the questions we were asked are ridiculous.

Peter Den Dekker: The best thing would be if the insurers could come up with positive responses rather than an ever-increasing list of exclusions to cover their behinds. The insurers need to be clear and transparent and listen to what the customer wants and have a discussion about the risks.

AL: Are there any exclusions that currently are a real problem and that need to be sorted out?

Peter Den Dekker: The exclusion for Dutch flood is a perfect example. We have the best protection systems in the world but it is still excluded.

Hans De Bruyne: Yes the risk is a myth. Over the last ten years we have seen floods all over the place but not in Holland and yet it is still excluded.

Erik Hartkoren: In the Netherlands it is a purely political decision. Even the Dutch insurance association proposed a solution whereby a €1bn cover could be assembled with support of the reinsurers – but it was declined by government departments and political agreement could not be found. An €1bn limit is not enough but at least a first step. I think reinsurers would put capacity into it but the government would not support the association.

Otto Bekouw: Other problem areas are natural resources that are hoarded by some governments which can cause serious disruption problems for manufacturers in the future. Confiscation or nationalisation of natural resources can be insured in the political risks market, but insurers should be open to the offer cover as part of global property or marine programmes.

Hans De Bruyne: And you have to look out for political risk in emerging markets such as the threat of the loss of a license to trade.

Peter Den Dekker: And these risks are changing. In China today the government demands that production facilities are built in China if you are going to sell the products to Chinese customers.

AL: These are big and complex issues for risk managers to tackle. How can you raise the bar of the profession as you have discussed during this NARIM conference to ensure that you and your colleagues are up to the challenge?

Otto Bekouw: It is important for the profession to raise the bar because we are not often in the middle of the decision making process. This is because we are often perceived to be insurance buyers and that is it. But we deal with all types of operational risks and claims and we need to share this knowledge. It is important that we add value and show it. If we were purely buying insurance then we would be obsolete because it would be commoditising the role.

Tsjerk-Friso Roelfzema: The traditional insurance manager deals with tangible risks. From a risk management perspective the intangible (strategic) risks play a very important role in decision making at board level and we need to position ourselves as strategic sparring partners for the board.

Peter Den Dekker: Whatever the reporting lines, the CFO needs to know how much of a role we play in the whole game. Therefore we have to raise the bar and get into the heads of the CFO. Decisions are made behind closed doors that we are not party to because we have not traditionally operated at board level. So we need to ensure that our role is identified as higher profile.

The CFO needs to understand the position and role of the insurance risk manager and how we can really contribute a lot if we are at the beginning of the discussion rather than finding out about an acquisition through a press release.

Ellen Rekker: Insurance always has had a strong line to the CFO and now even stronger and there is a lot of interest in managing risks in the wider sense. Other board members are also interested now in how we control risks as well as the CFO (no more surprises) and so particularly this year we can make a big step in further embedding risk management into the organisation because of this economic climate. Profits are under pressure and so board members are asking what else can be done to protect and enhance the bottom line.

Niels Diepeveen: If you look at emerging risks you can say that the risk function is emerging as well. New risks have to be managed and this requires a lot of learning and we have to improve professionalism.

AL: Is there adequate training to enable risk managers to step up to the mark?

Tsjerk-Friso Roelfzema: There is a new great postgraduate two year course in Enterprise Risk Management at the University of Amsterdam (MSc). It offers a multidisciplinary educational approach from both a theoretical as well as a business perspective. I qualified first class on an MSc basis in 2009 and before that did various training at lower levels. So it is improving.

Otto Bekouw: There is far more on offer in Holland than there used to be but at the corporate and international level it is difficult to find something suitable.

AL: How is the insurance market and how do you expect terms and conditions to develop over the coming renewals?

Hans de Bruyne: It has been soft for two years but I am not sure it will remain so.

Tsjerk-Friso Roelfzema: Over the past five years we renegotiated our complete insurance portfolio [terms & conditions and pricing]. We have been through the biggest economic crisis and we haven’t seen any hardening of the market yet as there seems to be enough capacity to cover our tangible risks.

Hans de Bruyne: The exception is the aviation market because of the Air France loss. It is such a small market that one loss may have a significant impact. It is not really a stable market.

Erik Hartkoren: I can only agree that there seems to be still a lot of capacity available in the market.

AL: And are you worried about the impact of Solvency II on your captives?

Ellen Rekker: The main worry is the large amount of work. We all have small teams and this is a big job. And after the capital calculations are done, then afterwards we have more reporting and compliance demands to fulfil. Again, it is a lot of work and extra costs.

Otto Bekouw: It is a pity that it does not appear to be geared to the special needs of captives currently. But I still hope that we will see some success coming from the lobby by ECIROA and FERMA to adjust Solvency II for captives. We are not retail insurers!

Peter Den Dekker: One of the interesting things is that Guernsey (which is not a member of the European Union and therefore will not be covered by Solvency II) does not appear to want to apply for equivalent status whereas Bermuda does.

Ellen Rekker: I think maybe a lot of captive managers are waiting for Solvency II and a change of legislation for captives. But you cannot wait too long. It is better to start an analysis now to see what is there already and where you have to be in 2012 and which steps you have to take to implement all Solvency II requirements. I do expect the Dutch supervisor DNB will start asking these questions soon.

The Participants

As ever our thanks goes to the following group of hardy individuals who willingly gave up their time after a tough two days conferencing at Narim to take part in the discussion:

• Ellen Rekker, Risk Manager NS, the Dutch railway company, and President of NARIM
• Peter den Dekker, President of FERMA and Corporate Insurance Manager Stork BV
• Niels Diepeveen, Business Analyst Insurance, Group Insurance, Heineken International NV
• Tsjerk-Friso Roelfzema, Global Risk Manager, TomTom
• Otto Bekouw, Insurance Manager, Royal Philips Electronics
• Tjerk van Dijk, Risk and Insurance Manager / Operational Auditor at Draka Holding
• Hans De Bruyne, Risk Manager, TNT
• Erik Hartkoren, Regional Manager Benelux, of the Risk Frontiers survey sponsor XL Insurance Company Limited