Global Reinsurance spoke to European risk managers on a number of topical issues ahead of the forum of the Federation of European Risk Management Associations. Sue Copeman reports the results.
Global Reinsurance's survey of European risk managers shows that most, regardless of national boundaries, are focusing on similar areas. This reflects the pan-European, if not global, nature of many of those companies that have risk management divisions.
These are the questions we posed:
How much, if at all, are you involved in corporate governance and if you do you have this kind of responsibility, what does it involve?
What type of financial provision, if any, does your organisation make for liabilities that might occur from non-performance by management of its responsibilities in relation to shareholders? (Such as D&O insurance).
Does your work involve protecting any aspects of intangible assets, such as corporate or brand reputation and if so, what are they?
What risks connected with intangible assets, such as intellectual property, do you insure?
What new risks do you think are likely to be important to your organisation over the next five years?
Are there risks you would like to insure but cannot? If so, what are they?
How would you like to see the role of risk manager developing over the next five years?
The spread of corporate governance in Europe has heightened companies' awareness of the need to manage and monitor all their risks. While some European risk managers do not believe that corporate governance has increased companies' responsibilities per se, all say that it has heightened their management's awareness of the risk manager's role and its importance within the organisation.
Some countries have gone further than others in regulating corporate governance. In the United Kingdom, the Turnbull report is the latest in a series of corporate governance initiatives, while new legislation on risk control will be one of the main topics of debate at the next meeting of the German risk managers association, Bfv, in November.
Jéróme Brizard, president of the Swiss risk managers association SIRM, believes that the strengthening of corporate governance may be attributable in part to the year 2000 issue. “It is a growing trend to consider the wider risks implied by corporate governance although this is not yet the situation in all Swiss corporations. External auditors and financial analysts require more information. For instance, in respect of year 2000,Most corporations have had to make some statements in their annual reports to satisfy shareholders that they were taking care of this exposure.”European risk managers generally do not see directors and officers liability (D&O) cover as offering protection for failure to meet corporate governance responsibilities. As one German risk manager says: “D&O is not the remedy for someone who is afraid of the new responsibilities or what, at any rate, they regard as new responsibilities.”
Mark Butterworth, chairman of UK risk managers' association AIRMIC comments: “Companies make reserves and other financing arrangements for contingencies of which they are particularly aware. If companies know that they have management problems, they should do something about them straightaway rather than seeking to transfer the risk.” He adds that corporate governance is improving boardroom awareness of the techniques behind risk management. “Directors are becoming aware of risk managers' skills and expertise and are giving greater support to their work.”
D&O protection increasingly essential
Aside from the corporate governance issue, appreciation of the need to protect executives against claims relating to their actions is spreading. Around 10 years ago, companies in many European countries regarded D&O cover as non-essential risk. Today most large European companies manage their D&O exposures. The degree to which they transfer them varies, usually according to where they do business.
One Dutch risk manager cites “large uninsured retentions” as his method of dealing with both this risk and those risks relating to intangible assets, such as corporate and brand protection. However, in some countries, even companies with apparently little exposure are buying insurance.
• In Belgium, most of the biggest companies have D&O cover. according to Marie Gemma Dequae, president of the Belgian risk managers association BELRIM.
• Significant number of German companies insure their D&O risk, despite the fact that there have been few cases of shareholders claiming against directors. One German risk manager rather cynically attributes this to the “me too” approach.
• According to Mr Brizard, primarily Swiss corporations as well as multinationals now insure their D&O risks. Interest in cover may also increase in Switzerland as a result of the recent case of SGS Société Générale de Surveillance. Shareholders at the company's annual general meeting refused to grant a release to the former chairwoman for legal responsibilities in respect of her management of the company in 1998, during which it lost two key government contracts.• In France, most major companies protect their D&O risk, although Michel Cournier of Alcatel Alstham believes that this is because they are multinationals rather than indicating a domestic need. It may also reflect the higher exposure inherent with today's substantial mergers and acquisitions activity.
Managing intangible assets risks
Risk managers are increasingly aware of the importance of intangible assets. Some, such as intellectual property, are insured - for example, in France, risk managers sometimes buy “brevets et marques” cover. Mr Cournier says that Alcatel is currently looking at providing broad protection in respect of intellectual property infringement. Ms Dequae's own company, Bekaert, is monitoring the risk associated with intellectual property – “looking at what is needed and what is available”.
In Germany too, there is increasing appreciation of the importance of intellectual property. Says one German risk manager: “While few German companies would consider insuring this now, it could well be a product of the future as people become more aware of the possible risks.”
European risk managers are also aware of the risk of loss of reputation. The degree of importance they place on this reflects whether they think their own organisation is vulnerable.
For example, one UK risk manager of what he describes as “a brand company”, says that issues of reputation are key considerations. “We have introduced a risk assessment approach involving all our businesses taking a consistent approach to assessing all types of risk. We consolidate this to produce a ‘risk footprint' for each of the businesses within the group and then bring this together to produce a group risk footprint. This process includesintangible risks such as brand reputation.”
Risk managers of other companies, particularly those that are not involved in finished products, do not consider loss of reputation to be a major issue. Mr Cournier believes that brand name protection and similar issues are more appropriate for those companies that sell products to a large number of consumers. This is also the view of Ms Dequae.
Jann Winther Christensen, president of the Danish risk managers association DARIM, says that most members currently focus on what he describes as “pure risks” – fire, liability, transport damage and similar contingencies. They also consider D&O cover, but it is only recently that insuring intangible assets, such as corporate or brand reputation, has become an issue. “These are areas which more and more Danish companies will consider insuring. Most realise that they have to look at the broad picture and consider anything that could have an influence on their bottom line”.
Those risk managers who are concerned to manage their reputation risks are aware of the problems. As one comments: “It is not just the difficulty of quantifying potential loss. It is also the question of what triggers the loss – and that is hard to identify in some cases.”
Some anticipate that insurers may provide a solution. Mr Christensen is optimistic about future availability of insurance. “It is just a question of risk and price. We have to look at the risk first and then ask for cover. The special difficulty is quantifying loss which is why this has not been widely done before. We can expect to have to answer perhaps several hundred questions from the insurer in order to get cover.”
Others, like Mr Butterworth, make the point that, when looking at risks relating to areas such as intangible assets the response is not necessarily insurance. “This may be our last response. It is a matter of understanding, managing and categorising before financing from a range of possible options of which insurance is only one.” Mr Brizard says that the larger Swiss corporations have been finding risk financing solutions for some of the risks relatingto their intangible assets with captive arrangements or alternative risk transfer (ART) solutions.
A German risk manager also queries the feasibility of a reputation insurance product. “Sometimes you have people who act deliberately against the interests of their own company by bribing other people or similar actions. This could damage their company's reputation. As far as I know, insurance products always exclude intentional wrongful acts. On the other hand, the act is certainly unintentional as far as the company itself isconcerned.”
He believes that companies might also be deterred from insuring this type of risk because it implies doubt about management's abilities.
In Italy, there appears to be less interest in protecting intangible assets. One Italian risk manager says his focus is more on claims potentially arising from selection of trading partners and their ability to pay.
While some risk managers may not be directly involved in protecting reputation, it is often a consideration in loss prevention strategies. Mr Brizard gives the example of environmental exposures. “We are conscious that the issue is often not to avoid damages - which may not be potentiallygreat - but more to protect reputation. Our loss prevention strategies reflect this and in this way we are handling the risk to reputation.”
Crisis management is an intrinsic part of minimising damage from loss of reputation. According to Jean-Paul Louisot, risk management programme director of AMRAE/CNPP in France, the responsibility for crisis management varies throughout different French companies. In some, the marketing and public relations departments handle this area in direct contact with the chief executive. In others, risk managers feature as part of the crisis team and sometimes orchestrate its activities “exported”.
Increasingly important risks
There is a consensus that environmental issues will increase in importance, particularly because of the potential loss of reputation that can result from environmental damage. Ms Dequae describes environmental liability as a priority, although she comments that insurance for this is at an evolving stage.Another area that risk managers see as increasingly important in terms of potential exposure is e-commerce, particularly in view of the growing regulatory environment.
Some risk managers are also focusing on reducing the impact on profitability of volatility in markets. For example, Mr Butterworth says that the Asian crisis has shown how vulnerable economies can be in certain trading areas.
Mr Cournier highlights the problems of selling in advance, with the dangers of inability to complete or fulfil the promised result in time. He also specifies the dangers of dealing with the non-payment risk. “Increasingly, we are dealing with new companies and it is not always possible to check their solvency using traditional methods. But if you do not sell to them, then you do not sell to anyone. It is a major and increasing risk.”
These are areas that affect many large European companies. Other risks cited as increasingly important are more industry/organisation specific. They include: retention of key people, outsourcing risks, supplier dependency risks, risks resulting from major change and rapid growth, weather related risks and US employment related risks and shareholder related risks.
Most European risk managers consider that they can insure all the risks they wish to transfer by this route, particularly in view of the soft market. Indeed, most are confident of their ability to insure almost anything, provided they are prepared to carry a substantial deductible or pay a high enough price.In Mr Cournier's words: “Anything you want to insure, you can right now. At the end of the day, it is a matter of the price you are prepared to pay for transfer.”However, some German risk managers are critical of the cover available in some areas, particularly environmental liability. One comments: “The costs of risk transfer are very high, while our legal and fiscal environment does not encourage self insurance. We cannot build up tax-free reserves and itis also difficult to support an affiliated or subsidiary company by transferring money from the parent organisation.”
Some of those risk managers who see loss of reputation as a key area would also like the opportunity to transfer some potential costs.
One suggests: “We feel we should have more cover for brand damage, for example in respect of the need for sufficient capital to rebuild a particular brand if it is very badly damaged. These costs can be significant. It is not just a matter of rebuilding image. Even temporary loss of reputation can give your competitors an opportunity to get into your market.”
Several risk managers make the point that, although they are now looking at a broader range of risks, they do not necessarily seek to transfer these to insurers. Derek Maddison, group risk and insurance manager, The General Electric Company plc, believes that insurance is rarely the appropriate response to non-conventional risks unless there is an external driver requiring the elimination of uncertainty, such as suppressed share price ordifficulty in completing a transaction.
Mr Butterworth also emphasises that insurance may not be the chosen route in some cases. “There are certain risks where insurance solutions or limits are unsatisfactory or inadequate for the perceived exposure. If insurance is not available for a particular risk, companies will finance it in different ways.”
Future role of risk managers
Looking at the future risk manager's role, Mr Christensen says that it is likely that Danish risk managers will expect to assume greater responsibility in view of the widening number of risks. “However, it is difficult to be a specialist in so many different areas and it is likely that specialist risk managers will evolve, for example dealing with particular aspects such as financial risk and pure risk.”
Ms Dequae sees risk management as a major management topic. “You cannot do business without it.” She also stresses the growing trend for a team approach, involving internal auditors and fiscal experts. The head of the team may be the overall chief financial officer with a seat on the board – or could perhaps be an overall risk manager.
The diversification of many companies as a result of intrinsic growth or mergers and acquisitions means that the risk manager's task has broadened. According to Mario Bassenelli, risk and insurance manager of ENEL S.p.a, Italy, this emphasises the need for a “link” position – a liaison officer who is able to collect the requirements of different companies in the group and put in place the best arrangement in terms of protection and cost.
Other risk managers also see the need to take an overall view of risk and deal with it as a totality rather than by different lines of insurance or transfer. “I can foresee all types of risk being poured into a single basket,” says Mr Cournier. “Part of it will be internally financed and part transferred through insurance or ART.” In the UK, Mr Butterworth, says that, while some AIRMIC members are very much involved in looking at financing mechanisms for the broad range of risks throughout their organisation, many are not. “It depends on the approach of the risk manager in question as well as the corporate structure. Quite clearly, in the future, the risk manager must have a good appreciation of the broad range of mechanisms available to finance risk, not just insurance.”
Few German companies have risk management departments, although some large groups have captive broking companies operated by professionally qualified insurance personnel. Says one manager: “We do not have the notion of risk manager in our corporate culture. If someone tries to call himself a riskmanager in his company and to implement recognition of this role with German thoroughness, his colleagues will stand up as one man against it.“The company lawyer will tell him that the legal department does risk management, protecting the company against bad contract obligations; the fiscal and environmental managers will also claim risk management roles, as will the controller's department and the internal auditors from the point of view of corporate governance. The current risk manager handles only the small segment involving transferable risk rather than dealing with all the risks of the company and taking the lead in co-ordinating these. This may change in the future.”
Corporate governance and growing appreciation of the need for protection against new and developing risks have focused attention on the role of the risk manager. For example, BELRIM has established a working group to look at the function of the risk manager in the future. It is a topic that is,understandably, close to the hearts of all those surveyed.
Sue Copeman is a freelance writer and researcher and a director of Insurance Research & Publishing Ltd. She is the author of a forthcoming management report on the impact of insurers' consolidation, mergers and acquisitions worldwide on market share. Tel: +44 (0) 208 502 3541; fax: +44 (0) 208 502 5201; e-mail: email@example.com.