Time to step up to the plate-comment

The Malta International Risk and Insurance Congress in Valetta at the end of this month, November 25 and 26, will see an impressive gathering of leading European risk managers and insurance industry leaders congregate to discuss the big issues that are shaping the future of the profession at this critical time in the economic recovery. The timing of the event is apt as it is rapidly becoming clear that the European risk and insurance management profession finds itself at a crossroads from which it could either march onto a higher level and finally gain the recognition and influence it deserves or wander off into the wilderness. With top risk management executives present at the event from FERMA and the national associations, this event offers a great opportunity for the profession to help determine which way it will go and how the insurance industry can help it navigate the path. hideSo why is the industry at such a crossroads and what needs to be done to make sure it takes the right path? Well, it has reached the crossroads because the world seems to have suddenly become an incredibly difficult place for European risk and insurance managers to work in but at the same time it is a strangely exciting place in which to work. The economy is moving so fast and nobody is really sure in which direction. For the risk manager it is very difficult to predict where the markets in which corporations operate will head, and the risk profile of the average company seems to change on a daily basis. Macro economic, political and regulatory responses to the recent crisis mean that companies are trying to organise their strategic response to the recovery in a state of constant flux. This is scary stuff but it is also an exciting and invigorating scenario because, out of adversity, always comes opportunity. The opportunity for risk managers possibly lies within the apparent contradiction that all corporations appear to face currently. That is: How do you deliver the kind of returns that investors traditionally expect just as their key competitors struggle to do the same and are weaker than ever before? Unfortunately, the reason why the competition is so weak is the same reason for your own weakness: credit is tight, demand is faltering and the need to deliver consistent returns to investors means that costs must be managed more tightly than ever before. It is time to box cleverly, to identify and exploit opportunities presented by the weakness of the competition without piling on loads of extra cost and risk that simply cannot be paid for because the credit—whether in the form of debt or equity—is not affordable. This is why risk management has suddenly become so important because it is a discipline that enables managers of anything to accurately identify, measure and judge the risk- reward balance in any corporate decision of any import and come up with the correct answer. It could and should be a dynamic and positive approach to decision-making that can really help companies box cleverly out of this situation and deliver what investors demand without cranking up the cost base. This has been worked out by the C-Suite. The days when poor analysis of the true risk-reward balance can be masked by ever-rising revenues are over and the board knows that. The time is also now right for proper risk analysis and real risk transfer and the timing is great because the industrial insurance market remains stubbornly soft just as other forms of risk finance is so hard to obtain at competitive rates. Normally when insurance managers are suddenly beckoned from their ivory towers and asked for help, it is difficult to provide because the insurance market is struggling to keep its own head above water and reacts by whacking up prices and tightening coverage. This is what happened in 2002. But this time around the insurance market does not need to do this and has not done so. It has weathered the financial storm remarkably well and remains as competitive as any insurance manager would want it to be. AIG and a limited number of other insurers who forgot what risk transfer is really about did mess up and lost a lot of money by playing in the international banking market’s own version of the legendary LMX spiral. But thankfully none of them went into run off and the US Treasury Department just announced that it now expects to make a profit on its investment in AIG next year. But this benign situation will not last forever, it is a window of opportunity and insurance managers need to seize the moment. Claims are on the rise and, along with rising inflation and unnaturally low interest rates, this means there is a real prospect of reserving additions on the horizon because the pot is now effectively dry for most insurers. Solvency II will also raise the cost of capital and make your risk transfer partners re-examine the sense of offering you cover for the highest risk lines, or at least use it as an excuse to raise rates. But it will take time for this to work its way through the system. Current indicators from both the primary insurance and reinsurance markets suggest a gradual rather than dramatic hardening over the next two years and Solvency II does not kick in till January 2013. Experience and the evidence would suggest that, mega cats aside, the long awaited hardening will begin to pick up pace in the second half of next year. So make hay while the sun shines. Shove yourself onto the agenda for that next strategic board meeting, tell your board how business risk should really be properly identified, measured and managed and take advantage of the still soft insurance market to offload as much of that insurable risk as you can without raising your spend. Lock into a three or even five year deal while you are at it and demand more innovative and bespoke solutions for your specific risks while the industrial insurance market remains highly competitive and willing to listen to you. A positive stance such as this could give you the time and space to provide your board with some sensible advice about how to identify, measure and manage that business risk. If you can, at the same time, shift that operational risk into the willing and cost effective arms of the insurance industry you have a good chance of being the hero. And when everything returns to ‘normal’, which it is very likely not to, there will be no need for a chief risk officer after all because you will be carrying out the role already.

Time to step up to the plate-comment

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