The speed of changes in the telecommunications and technology industries is old news. And it is no secret that change opens up an extraordinary amount of entrepreneurial opportunity. Often, however, such entrepreneurial opportunity brings with it increased risks of an unforeseen nature. These new risks provide the greatest challenge for the risk management world - to develop solutions that meet client needs and provide true business benefits in this increasingly dynamic environment.

Many forces shape the dynamics of the telecommunications and technology industries - all point to the conclusion that these are high growth, high investment, high risk industries.

For example:

  • Regulatory environment: As national barriers fall and the pace of deregulation increases, competition becomes increasingly dynamic and threatening. New, low cost competitors squeeze margins out of traditionally profitable businesses. Strong anti-trust laws and diverse legal environments with respect to cyberspace (United States vs United Kingdom vs Europe) are changing the dynamics of the telecom and technology world.

  • Privatization of national telecommunications monopolies forces the organizations to undergo radical change. A new focus on shareholder value has developed, a world of risk borne by shareholders and not ratepayers, with an unwelcome takeover attempt as the ultimate sanction by the marketplace.

  • Technological change: As technology moves to IP from circuit switching technologies, as transmission capacity and bandwidth explode, and as telecommunications and computer technologies converge, the past becomes less relevant and new business models must guide investments.

  • Shifts in telecommunications usage: As consumers shift from using telecommunications networks as a voice medium to a data medium, and as they use mobile devices rather than fixed lines, patterns of investment, risk and rewards are correspondingly changing. These shifts all create big opportunities but also require massive investment and financing. The level of investment needed (in addition to the huge licence costs, as in Germany and the UK) forces the companies to consider new sources of capital. Consequently, telecommunications companies are no longer the safe stocks for widows and orphans they once were.

  • Mission-critical nature of telecommunications: With the development of the internet and e-business, an increasing numbers of firms are hostage to the efficiency and effectiveness of their telecommunications solutions.

  • Globalization: Customers are increasingly demanding standardized service around the world. This means that telecommunications and technology firms need to be able to provide uniform service across the globe and their ability to provide service in emerging markets is a critical competitive differentiator. Globalization carries its own operational, political and business risks, not least the need for building alliances and partnerships which may or may not survive in the long term.

    Thus an enormously challenging risk landscape is emerging. Telecommunications and technology companies can no longer be concerned only with the traditional risk landscape of property/casualty exposures. Companies operating in this new environment face new strategic and investment risks, new economy “cyberspace” risks, new types of business interruption risks, complex financial risks and the multiple risks resulting from complex interactions between many different activities.

    Recognizing the changing nature of the industry and hence its changing needs with respect to risk management and risk financing, Swiss Re New Markets has built an industry practice focusing on the telecommunications and high tech industries. This is a dedicated team of individuals representing the various functional disciplines, including finance and credit specialists, marketers, underwriters, actuaries and lawyers. The idea behind such a setup is to create a critical mass of industry expertise which, combined with the resident risk management and risk financing know-how, can be used to create customized solutions for clients in the telecommunications sector.

    The experienced team at Swiss Re New Markets, based in Zurich and New York, is currently focused on developing solutions for major exposures in the industry. An exhaustive description is beyond the scope of this article. Instead, we have chosen to highlight three areas: credit reinsurance and vendor financing; non-physical business interruption; and “cyberspace” risk.

    1. Credit reinsurance and vendor financing

    Telecommunications and IT equipment vendors are increasingly involved in financing their customers and find themselves with increasing amounts of credit risk on their books. While large portions of their portfolios can be securitized in the conventional capital markets, this is not the case for obligors which have ratings below investment grade or no ratings at all. Swiss Re New Markets is developing innovative ways to manage these exposures and to help clients optimize their balance sheets within the framework of applicable tax and accounting laws and regulations.

    2. Non-physical business interruption

    Telecommunications businesses have serious business interruption exposures. A lack of service for any length of time and for any reason can lead to a significant loss of customers and market share. Traditional business interruption insurance coverage is tailored to traditional industries and is not geared to seeing business interruption as a loss of service. Most business interruption events in telecommunications are not the result of a physical event such as a fire or supply chain issue (on the contrary, telecommunications networks are well set up to handle physical interruptions through redundancy or routing design) but are the result of a software problem, such as a misspecified algorithm, a virus or a network fault of some kind. Furthermore, most of the damage to a telecommunications operator which experiences a business interruption (regardless of the triggering event) stems not from the immediate revenue loss but from the dynamic, long-term impact on its revenue, reputation, market share and customer churn.

    With cash flow or earnings protection against the consequences of a non-physical business interruption, whether as insurance or reinsurance, or as a contingent capital arrangement, Swiss Re New Markets gives its customers the flexibility to respond and to serve their customers better.

    3. “Cyberspace” risk

    The internet, e-business, and the increasingly mission-critical nature of information technology are exposing the telecommunications industry to a host of new risks. Many of these risks are well known in other industries - such as errors and omissions, invasion of privacy, criminal liability and defamation risks - but are of a more complicated global nature for the telecommunications and high technology companies. The legal environment is only now beginning to address many of these issues in practice, with a body of case law only in its infancy and developing in different directions in different jurisdictions. Companies need to be able to manage and transfer these risks in an explicit fashion and in an integrated way, in contrast with the “silent” treatment of such exposures in traditional property/casualty policies.

    Nathan Wajsman is industry practice leader, telecommunications & technology, Swiss Re New Markets, and Marie-Pascale Bosse is marketing sector leader.