The sixth biennial Luxembourg Rendez-vous, a combined exhibition and conference event, will take place on 3rd & 4th June, as usual at the Centre Européen, and almost exactly 10 years since the first event in June 1988. Chris Best reports.
The Rendez-vous has survived the notorious volatility of the conference business because it has succeeded - like only a handful of other events - in gaining widespread recognition as the unique European forum for its target market: corporate risk managers and captive insurance company owners, and the insurers, reinsurers, and the other service providers who minister to their needs.
The Luxembourg Rendez-vous, which is a joint venture between Risk & Insurance Research Group Limited and captive manager Sinser, regularly attracts a huge number of participants from all over Europe, and in particular from the Scandinavian countries. The fifth Rendez-vous in 1996 was attended by over 400 participants, and 1998 will be an equal success. The list of exhibitors signed up for 1998 indicates, as well as anything could, the nature of the event and the interests which it addresses: Royal & SunAlliance, Zurich Insurance, Standard & Poor's, Guernsey Financial Services, AGERE (Luxembourg's captive manager association), Starr Excess, Willis Corroon, Chubb Insurance Co of Europe, Heath International, SINSER, XL Europe, Crawford-THG, Gibraltar Finance Centre, Mauritius Offshore Business Authority, Nordic Mutual, States of Jersey, Isle of Man Government Authority, Sampo, A. M. Best & Co, Protection International, International Network of Insurance (INI), Sirius International Insurance Corp., Euroguard Insurance Company, Polysis A/S, and Softronic.
This year the conference programme is preceded by a half day "Introduction to Captive Insurance Companies" seminar for those new to the scene and wanting to brush up on the fundamentals of captive feasibility, establishment, operation and management, before they attend the more wide-ranging and strategic two-day main event on risk financing and risk management.
What regular participants to the Luxembourg Rendez-vous (of whom there are many) value most of all is knowing that the conference debate will be geared to problem-solving rather than confirming the prejudices and selling the products or services of the industry suppliers.
The event exists to help industry and commerce become more effective at risk management and risk financing. To this end, previous Rendez-vous gatherings have been as willing to criticise errant insurance buyer practices as the inadequacies of the insurance industry.
The 1996 Rendez-vous saw a heated panel debate on the controversial question "Should you close down your captive?" Paul Bawcutt, Risk & Insurance Research Group Ltd, upset the complacencies of a number of captive owners and captive managers with the following implied criticisms of the way some captives are run:
* make sure that you have properly assessed the cost of running your captive - that there is sufficient net premium volume to justify a realistic allocation of central management time, and that there is a real benefit for the parent even after the financials are consolidated;
* do not use the captive as a deductible funding vehicle. Retaining the losses in-house does the same job and avoids local premium taxes;
* do not continue running your captive in a domicile which made sense when the captive was formed but no longer does, because of changes in tax law;
* make sure your captive takes full advantage of direct access to the reinsurance market; for short-tail property insurance there is no other justification in using a captive;
* do not use more than one captive - this is a waste of capital, it means an increase in management fees and other costs, and it harms the tax position by reducing risk spread in each captive;
* carefully assess whether it is worth fighting tax authorities. The cost of expert tax advice and management time needs to be measured against the possible gain. Sometimes the figures might suggest "paying up" makes sense, or even that the captive should be closed down;
* make sure your captive is not set up in such a naïve way that it is bound to provoke attack from the tax man. That is, premium income exceeds aggregate exposure; capital is inadequate; premiums are not arm's length, etc;
* make sure your captive has a strategy. This sounds obvious, but in fact many captives do not have a business strategy. It they do not, then it is almost inevitable that they will not be used effectively;
* do not let work on your captive hinder or side-line fundamental risk management work by absorbing too much time of the risk manager and other key personnel;
* make sure that the return on capital which the captive generates is at least as good as the parent could get by using the money elsewhere;
* before committing yourself to the use of a captive weigh the alternatives, which, besides insurance, include not buying insurance for low level exposures, increasing retentions under insurance policies, using rent-a-captive facilities, financial reinsurance, retrospective rating plans, profit commissions, stretched aggregate programmes, etc.
Two years earlier, in 1994, the insurance industry was in the dock when a paper was presented on "How to finance risk in the environment of an inflexible or inadequate insurance industry". At the 1992 Rendez-vous risk managers were under attack in a session "Does risk management still need risk managers?" Coming back up to date, this year a well-known risk manager will be arguing that the insurance market is not keeping up to date with risk management developments. Naturally, the insurance market representatives will vehemently disagree. It promises to be a lively session.
But so will the other sessions, each of which is about real issues that are impinging on risk management and risk financing in industry today: the pros and cons of relocating your captive; the role of audit functions in risk management and risk financing programmes; getting real value from outsourcing; European insurance liberalisation and whether it has achieved significant benefits for buyers; etc.
Besides the panel sessions, each day will be opened by keynote speeches. The first day's keynote by AIG's John Nicholas will deliver the latest ideas on accessing new risk financing capital for catastrophe exposures - i.e. the capital markets, insurance derivatives, risk securitisation, etc. The second day's keynote will be given by the Lloyd's market's new chairman, Max Taylor, who will explain Lloyd's evolving relationship with captives and how the market works with multinational insurance programmes.
The European orientation of the Rendez-vous is guaranteed by its chairman: ERC Frankona's chief executive officer Bernhard Fink, and SCOR's executive director of group facultative operations Michael Hurtevent. The superb translation facilities of the Centre Européen, which is the conference hall used for European Union meetings when they are held in Luxembourg, mean that participants can listen to all presentations either in English, French or German.
Corporate risk managers who are over the age of fifty are old enough to be aware of the paradox that though insurance companies were much smaller in the dim and distant past (a couple of decades ago), nevertheless they were much better at giving customers the products they wanted than today's giant insurers. Now, with the dubious benefit of all the mergers and acquisitions of recent times, corporate risk managers can talk direct with giant insurance companies, without the mediation of a broker, but still not get the cover they want, or used to get.
Most of the encouraging public relations talk by insurance company chief executives at conferences, about the imperative need for insurance companies to stop trying to sell customers off-the-shelf products and instead respond to their real needs and aspirations, is mere window dressing.
The big changes of the past decade in the risk financing sphere - the ones which affect corporate risk managers - are the introduction of finite/financial insurance and reinsurance and, more recently, the notion that the capital markets might be tapped to add capital to insurance markets through risk securitisation. Both of these innovations are the result of conventional insurance markets limiting the cover they are prepared to offer to industrial and commercial businesses. Finite/financial insurance and reinsurance is taken up by companies only as a next best thing to being able to buy insurance.
It would not be worth making these points except that it is necessary to emphasise to corporate risk managers that the future is likely to be more of the same. That is to say, the world's major insurance companies are increasingly interested primarily in benefiting from the problems caused by ageing populations in developed countries and the withering away of social security systems, by making profits from providing life, health and pensions products. Insurance companies are still interested in dealing with big companies and organisations, but only to provide insurance cover at the levels the big companies can handle for themselves, or merely in terms of providing insurance/risk-related services.
In a future in which insurance will play a lesser role than in the past and businesses will have to access a wide variety of economic instruments to satisfy their risk funding needs, it will become increasingly absurd to describe what is evidently normal, commonplace, standard and inevitable practice as "alternative risk transfer". Insurance as we have known it is on the way out. Alternative risk transfer is what the risk manager, and his suppliers, must become increasingly proficient in. The Luxembourg Rendez-vous exists to help them along this path.
Chris Best, Risk & Insurance Research Group Limited.