New legislation and changing attitudes are driving German risk management out of its fire prevention ghetto and into the wider world of corporate protection. John Sanders reports.
“Not everyone in Germany knows what risk management actually is. In the United States, they are quite a way ahead of us in this field,” comments Jac Tenniglo, AON Jauch & Huebener's manager engineering. However, with pressure mounting for better returns on insurance spending and boosted by the new law on corporate transparency and control which came into force last year, German risk managers are catching up fast.
The new law, Gesetz zur Kontrolle und Transparenz im Unternehmen- sbereich (KonTraG), was prompted by a spate of corporate catastrophes in Germany and elsewhere. It aims to bring greater transparency to business and obliges company directors to prepare contingency plans for everything from environmental disasters to financial mismanagement and product recalls.
Directors who fail to take the precautions demanded by KonTraG can now be held personally accountable, a fact which has concentrated minds and raised the profile of risk managers. Klaus Braukmann, a risk manager at tyre and auto components maker Conti International, says the impact of this legislation cannot be under-estimated. “This law has created tremendous interest over the past year and a half.”
This is not to say that Germany is starting from scratch when it comes to halting hazards. Mr Tenniglo points out that the country has a firm base from which to develop risk management, as strict safety regulations already exist in many areas of industry, commerce and construction. Implementing a risk management programme is, therefore, partly a question of co-ordinating existing procedures and seeking advice and expertise on best practice.
Multi-national and American owned companies tend to lead the way, largely because the concept of risk management is more advanced in the US. Jochen Kosche, who is in charge of safety, security and fire prevention at 3M Deutschland, agrees that risk management is becoming more sophisticated in Germany, but believes insurers could do more. His main concerns are loss control and compliance, as they affect people and the environment as well as physical assets. Among other things, Mr Kosche would like more loss data from insurers “to help me identify hazards and support our bench-marking activities.”
Risk management is also developing in terms of its scope. The traditional image of buying insurance and protecting against risks such, as fire, has become far too narrow. “We are not just looking at fire prevention. We are looking at currency fluctuations, at losing people with special know-how. It is balance sheet protection we need rather than looking at a single peril like a fire or an explosion,” explains Mr Braukmann, adding: “We need to look at what can happen to the share price.”Carsten Henschel at Hoechst, itself no stranger to corporate challenges and currently the subject of a major restructuring, believes German industry has made great strides in environmental risk management this decade and now needs to turn its attention to the more intangible risks. “A lot of the issues are related to shareholders, investments, hostile takeovers, financial risks, tax risks and also product liability. It is not exactly new, but we have not found the same systems as exist for environmental safety issues,” he says.
Brokers, insurers and reinsurers all have a role to play in the transfor- mation of risk management, as the focus switches from simply quantifying risk to preventing it. The subject is moving up the corporate agenda, with younger risk managers in particular taking the lead. However, it is some way from becoming an integral part of strategic planning, which Helene Prigge, who is responsible for the development of risk management tools at Bavarian Re's AssTech subsidiary, describes as “the perfect situation.”
Bavarian Re set up AssTech 10 years ago and has seen the unit grow from a staff of two to 17 as demand for its risk management services has mushroomed. In that time, Dr Prigge explains, a new philosophy has begun to emerge towards the management of risk: “We prefer to approach risks from the loss prevention side, rather than learning from loss experience.”
This new approach has many consequences, as Hans-Jörg Schill, managing director of Airport Assekuranz Vermittlungs GmbH, the in-house broker for Frankfurt Airport, explains. The airport last year installed video cameras on its cargo handling operations, took a DM 1 million deductible on its cover and slashed the incidence of theft. Mr Schill hopes to extend this type of solution in preference to what he describes as the “... money exchange business. We want to have real deductibles and only buy insurance for catastrophic cases,” he says.
This does not necessarily mean a fall in business for insurers and brokers. Both AON's Mr Tenniglo and Peter Hofer, senior executive, global client services at Gradmann & Holler Marsh & McLennan GmbH, agree that the expansion of risk management is creating additional opportunities for those brokers willing to break out of the traditional intermediary mould. “I see the broker changing from being the classical intermediary to becoming more of a consultant,” said Mr Hofer, whose company has already noticed the impact of KonTraG.
He attributes the recent decision of some major north German companies to transform their approach to risk management overnight to the awareness of board level responsibilities brought in by the new law. In general, more clients are asking for advice on plant inspections, financial risks, employee safety, pensions, internal security and controls on goods leaving a plant. Arranging traditional insurance is in some cases now only a small part of the work done for a client, he says.
Dr Prigge agrees that concentrating on risk prevention rather than risk transfer will not harm business volumes, although the business focus could alter. She sees new risk management tools and techniques making more risks insurable: “We think in the future it will be more important to focus risk analysis and assessment on human factors and on financial risk management.”
Evidence that this is already happening comes in the form of a sales drive by brokers on directors' & officers' cover, another development which can be traced back to management fears sparked by KonTraG. “We bought D&O cover last year for the first time. We are one of the first airports in Germany to buy it,” says Mr Schill, who, in his role as a broker, is recommending other airports to do likewise.
Dr Prigge expects demand to grow in technical fields such as genetic engineering, endocrines, pharmaceuticals, the internet, IT and communications. New challenges for insurers will include a greater diversity of products and, therefore, risk combined with ever decreasing product life-cycles. The latter presents a particular challenge in areas such as pharmaceuticals, she believes.
As well as bringing new dangers, technology lies at the centre of the risk management revolution. For example, AssTech has developed software tools enabling more people to share expert knowledge and carry out risk analysis.
Also tapping into the growth market for risk management consulting services is newcomer, debis, a part of the DaimlerChrysler group, which set up its international insurance consulting division at the beginning of this year.
The debis unit is developing an international research service – the market research forum project – for natural hazards both in Germany and elsewhere.One example of new technology in action is Frankfurt airport's teaming up with AON, giving Germany's biggest airport operator immediate online access to its account. “Every day we can look at these files and see our losses, our deductibles and see if annual aggregates are fulfilled or not. I think this is a new kind of quality,” says Mr Schill. The airport also relies heavily on the innovative risk management techniques of another US company, Factory Mutual, which co-insures its property risks with Allianz.
Rival Marsh broker, Gradmann & Holler, operates a similar service and is introducing a German version for multi-national German-based clients next year. Mr Hofer points out the company already offers clients online products to calculate self-insured retentions and keep abreast of latest contract developments around the world.
Although not yet at the forefront of international risk management, more and more German companies have identified the potential it offers for improving the performance of their operations and the possibilities for exporting innovative risk management expertise.
Spurred on by KonTraG and the opportunities which risk management brings to conduct business more efficiently and cost effectively, most agree with Mr Hofer that Germany's insurance industry is in for a lot more change yet: “The market for risk managers, for insurers and for brokers is changing dramatically compared with two or three years ago and there is a lot more to follow.”
Frankfurt Airport's Mr Schill is more specific: “My philosophy is that the buying of insurance is only a last resort. Much more important are the risk management measures that you take first.” His view may be ahead of the consensus within the industry at the moment, but the pace of change is such that it could well be mainstream before long.
John Sanders is a freelance insurance writer.