Scarcely a week passes without some reference in the financial press of yet another alternative risk transfer (ART) deal being concluded. Perhaps another insurance group securitises part of its catastrophe portfolio or a major multinational corporation finalises a blended deal, covering its traditional insurance risks and “newer” financial needs. The diversity of tools available grows as our skills, risk appetite and imagination lead us into new areas of business.
Quite apart from the technical abilities required to facilitate these deals, we believe the one theme which really unites them all is the move away from a product driven to a solution driven market.
Traditionally, insurance was seen as a means of transferring risk in exchange for a premium from industrial (or insurance) companies to (re)insurance companies. At the dawn of the new millennium, this connection is fundamentally changing. International corporations as well as (re)insurance companies are turning their focus to shareholder value and the optimisation of their company's value based primarily on return on capital and the stability and growth of future earnings. This development radically changes the (re)insurance market by redefining the traditional view of (re)insurance as well as the characteristics of the insurance business as a whole.
In the past, risks were considered to be either insurable or uninsurable. Insurable risks could be turned into standardised products which allowed industrial companies to hedge part of their risk exposure and gave insurance companies the possibility to spread these risks over time or across a portfolio. The deregulation of insurance markets and the globalisation of trading markets have led to a substantial expansion of the product range. A truly global company is seldom interested in buying cover purely for selected risks. A corporation will try to find holistic risk solutions which cover various aspects of its operational and financial risks and support its overall strategic goals. It is worth noting that research suggests traditional products address only 20% of all business risks.
The most effective insurance programme is no longer a series of standardised products but rather an individual solution tailored to a client's specific needs. Consequently, the skills needed by both - those seeking protection and those assuming risk - are becoming ever more diverse and complex. Besides the traditional disciplines of risk management, underwriting, actuarial and claims, innovative solution providers now require accounting, tax and legal expertise to assist their clients. Any solution has to comply with all the relevant insurance accounting and regulatory rules in the territories it provides cover for. Tests must be applied to ensure that adequate risk transfer is present or certain transactions may be deemed invalid. Since almost all large corporations operate in a totally global arena, a good knowledge and understanding of special local laws and regulations or industry specifics are important. Therefore, a crucial success factor for (re)insurance companies seeking to provide complex solutions is to have quick and easy access to in-house or external expertise. Last but not least, the importance of shareholder value orientation and the increasing demand for financial risk coverage require (re)insurance experts to provide banking expertise and an in depth knowledge of financial instruments. This factor will become even more important as (re)insurance companies turn to capital markets to find additional capacity for catastrophic risks.
These new developments are mirrored in the moves by a number of international (re)insurance companies to set up new operating units which bundle expertise from all these areas. Besides structuring effective insurance solutions, the main tasks for such a unit are twofold.
On the one hand, it has to help identify the risks faced by its client organisation. This is a time-consuming process requiring close co-operation between the insurer and the insured. Insurers need to offer consulting expertise to their client's risk management team in order to identify operational as well as financial exposures that have been neglected in the past. The insurer begins to function more as a company doctor, coming up with a sophisticated tool kit which aims to ensure the financial well being of the client. Just like a good co-operative patient, the client, due to its own experience, will in turn assist insurers to understand and evaluate these risks.
On the other hand, insurers have to understand a client's motivation for seeking a solution. Efficient insurance programmes might differ significantly depending on whether they are primarily driven by operational rather than financial reasons. In order to fully understand the risk and to develop a successful solution including operational and financial elements, the following points might be considered:
To make the co-operative team-approach between the insurer and the client work effectively, both parties have to have a clear understanding of each other's goals. From the insurer's perspective, this may involve disclosing its own attitude to risk and even its views on risk based capital. Both parties must feel comfortable that the expected outcome of the alternative solution programme adds value to their organisation's strategy. The relation between these two parties therefore changes from simple mono-line service providing to a co-operative team-approach. Effectively, the two entities become genuine partners - a phrase often heard in the context of insurance transactions but seldom really seen. There is then a move away from the traditional, at times almost adversarial, approach to the renewal negotiations towards a permanent dialogue where changes in risk patterns or exposure needs can be blended into programmes rather than “bolted on” as an after thought.
We believe that for risk solution providers of the future to be successful when dealing with major corporation clients, they must be willing to break with their tried and trusted products that have stood the test of time. Elements of these old tools will still find their place in the modern risk taker's armoury. However, the emergence of new risks, the growing expectations of various stakeholders and the quickening pace of change in all spheres of the business world mean that the quality of solutions provided will increasingly encompass areas of knowledge which were deemed to be outside the insurer's domain. Uberrima fides, or utmost good faith, has been a cornerstone of insurance practice for centuries. This will become even more important as we progress from the requirement to disclose facts deemed to be relevant just to the insurance risk to a platform where a deep and intimate knowledge of a corporation's entire risk spectrum becomes the norm.