commercial risk europe

Adrian [email protected]

[AMSTERDAM]—THE MANAGE-ment and transfer of supply chain risk is improving, particularly among risk managers in loss-hit markets such as motor manufacturing and electronics. But far too many companies with international supply chain exposures still fail to carry out adequate risk identifi cation and management because they are driven by the need for cost control and the demands of procurement departments.

CAPACITY UPPartly as a result of improved management of supply chain risk the capacity crunch that was threatened after the Japanese earthquake and tsunami and Thai fl oods of 2011 has been averted.

The insurance market is managing to deliver more capacity with less onerous information demands.

However, companies that carry signifi cant supply chain exposures need to step up efforts to work out where their key exposures really lie, use the latest natural catastrophe modelling tools to help identify

vulnerabilities and take a more holistic risk management approach to this critical threat.

This was the advice provided to risk managers by supply chain risk specialist Tom Teixeira at ACE’s Benelux Risk Forum 2014 held at Nyenrode Business

University in the Netherlands at the end of last month.

Mr Teixeira was recently appointed managing director for the insurance and risk advisory business of Alvarez & Marsal, the global turnaround management

SUPPLY CHAIN

Supply chain risk needs further serious work

SUPPLY: Turn to P22

Tom Teixeira

IN PERSON:Evolution not revolution is Jeff Moghrabi’s theme, he tells CRE, on his promotion to Regional President Continental Europe for ACE in Europe ...............................p12-13

Commercial Risk EuropeEUROPEAN INSURANCE & RISK MANAGEMENT NEWS

www.commercialriskeurope.comVOLUME 5/ ISSUE 03/ APRIL 2014

GLOBAL RISK FRONTIERS:The risk community is developing fast in the GCC region as investors in major companies begin to wake up to the benefi ts of a structured risk transfer programmes and ERM approach ... p9-10

New EC studies hint at future toughening of ELD

ELD

Ben [email protected]

[LONDON]—NEW EUROPEAN Commission (EC) studies have recommended potential revisions to the Environmental Liability Directive (ELD) now under consideration ahead of an offi cial review of the directive later this year. If incorporated into the ELD the revisions would see a sharpening of the polluter pays principal enshrined in the directive and place increased liability on business.

REPORT DUEThe ELD originally states that the EC would submit a report to the European Parliament and Council before 30 April that shall ‘include

any appropriate proposals for amendment’ to the directive.

Although an EC offi cial told Commercial Risk Europe that the April deadline will not be met, due in part to late reporting by member states and internal commission factors, he confi rmed that the ELD’s evaluation report will be delivered this year, potentially before summer.

The three new studies—along with two previously published, and reports from member states—provide background material for the review and therefore give insights into potential changes to the ELD.

“All three studies as well as the two 2012 studies, input from experts and stakeholders and, of course, the member state reports 2013 are being considered for

the Commission report this year,” said the offi cial. “I confi rm that the studies will be one source of information, but of course not the only one, so will have to be assessed, considered and our

conclusions taken,” he added.The recently published

studies were commissioned by the EC last year. Their main recommendations focus on the extent to which strict liability should be applied under the ELD, the interpretation and application of signifi cant biodiversity damage, the categorisation of environmental damage, the signifi cance thresholds for land and water damage and the optional permit and state-of-the-art defences. They also focus on the exclusion of marine and nuclear conventions and other international instruments.

‘POTENTIAL REVISIONS’The bulk of potential ELD revisions can be found in the recently

ELD: Turn to P20

Valerie Fogleman

Julia Graham

CONTRACT LAW

Ferma opposed to changes to EUinsurance contractsBen [email protected]

[ B R U S S E L S ] — F E R M A H A S warned the European Commission (EC) against any radical overhaul of EU insurance contract law claiming changes would jeopardise the market for large risks and likely add unwelcome costs.

Ferma made the comments late last month to the EC in response to a fi nal report by an expert group on whether differences in contract law between EU countries are an obstacle to the cross-border provision of insurance.

AIN’T BROKE?As reported in Commercial Risk Europe last month, the investiga-tions could lead to a harmonisation of rules across the EU, but Ferma believes the current system works well for large risks.

Ferma said any attempts to converge national insurance contract laws would be ‘long and costly’ with unclear benefi ts and potentially unintended con-sequences for its members.

It welcomed the broad con-clusion of the EC’s expert group that insurance products for large risks are already widely distributed on a cross-border basis.

NO OBSTACLESFerma told the Commission: “Risk managers, as corporate insurance buyers, share the view that the provision of large risks insurance products on a cross-border basis is already occurring without any major obstacles arising from local insurance contract law provisions. In our view, the current legal situation is more than satisfactory

FERMA: Turn to P20

Ben [email protected]

[BRUSSELS]—THE EUROPEAN Commission and governments across Europe are failing to adequately address risk management, Richard Anderson, Chairman of the Institute of Risk Management (IRM), has warned. Echoing calls from other organisations, such as the World Economic Forum, he has called for governments to look to industry for best practice risk mitigation and employ high-level heads of risk, or country risk managers.

‘TOUCH WOOD’“The terrible (UK) fl ooding in Somerset and the Thames has brought into sharp focus the ‘fi ngers crossed’ and ‘touching wood’ approach to risk management strategy that is so often adopted by government. It is regrettable that this seems to be the default mechanism to approaching all manner of risks. It is an appalling state of affairs because we understand how to manage risk better now than we ever have in

the past,” said the IRM chairman. “Since the fl ooding we have

seen lots of frenetic activity from government offi cials which is unproductive and the government would be better served by seeking the advice of the increasing cadre of expert risk professionals who are largely being ignored at the moment,” he added.

EUROPEAN-WIDEThe recent UK fl ooding is the latest high profi le event in Europe to bring defi ciencies in government risk management into focus, but Mr Anderson believes the problem is endemic across Europe for a range of risk, with shortcomings equally prevalent at EU level.

“Of course better risk management is not just pertinent to fl ood risk. It is pertinent to a whole raft of risk scenarios that may strike at any time in the future.

Government needs to build its risk management capabilities so that we plan, develop information sources, reduce risk likelihood and build

IRM

Governments falling short on risk management warns IRM chair

IRM: Turn to P22

01_CRE_Y5_03_News.indd 1 1/4/14 20:38:10

02_CRE_Y5_03_FAP.indd 2 1/4/14 16:04:52

NEWS 3Nat cat

Rising nat cat exposures demand timely responseStuart [email protected]

[LONDON]—A STRING OF LARGE natural catastrophes over the past fi ve years has shown that no business is immune from the disruptive power of nature. Earthquakes in Japan and Chile, storms in the US and fl oods in Asia and Europe have all impacted supply chains, distribution networks and the customers of European companies.

Indicators point to a worrying rise in natural hazard exposure for corporates, necessitating a renewed focus on improving resilience to protect supply chains and society as a whole.

Whether or not you believe that climate change is driving an increase in frequency and severity of natural catastrophes, there is consensus that such events are having a greater fi nancial impact.

NEGATIVE TRENDReinsurers have long observed a clear trend of increasing losses, both insured and economic, according to Andreas Schraft, Head of the Cat Perils Team at Swiss Re. Since the reinsurer began tracking natural catastrophe losses in 1970, the number of events has risen steadily from just 33 to 178 in 2011. Total losses as a result have increased from around $9bn in 1970 to a peak of $418bn in 2011.

Macro trends, like population growth, increasing wealth and the concentration of economic activity in areas exposed to natural hazards, are mostly to blame. The steady rise in losses is also a refl ection of society’s increasing vulnerability and the fact that risk is increasingly concentrated and interconnected through cities, technology and specialist commercial hubs, according to Mr Schraft.

When the wind blows in the US or the earth shakes in Asia, more often than not it will now affect businesses in Europe, which increasingly rely on overseas markets for their customers and suppliers,

according to Caroline Woolley, Head of the EMEA Property Risk Team at Marsh.

Historically, large catastrophes were considered events for far off lands, but last year’s fl oods in Europe and the disruption caused to supply chains by the 2011 fl oods in Thailand have shown that few, if any, companies are immune from the risk of natural catastrophes, she said.

Companies are already feeling the force of increasing frequency and severity of natural catastrophes, according to Ms Woolley. “With the complexity of modern supply chains we can no longer look at a single

industry or a company in isolation. They are all part of a value chain, which means that all companies are in some way exposed to natural hazards,” she said.

Today, the greatest economic exposure to natural hazards is found in Japan and the US, which rank fi rst and second in risk consultancy Maplecroft’s Natural Hazards Atlas 2014, followed by Taiwan, China, India, Mexico and the Philippines.

Developed markets are generally well prepared for natural hazards, but exposures are increasing in countries like Japan, the US and Europe. For example, a recent report from the

European Commission predicted that if no mitigation action is taken the average annual cost of fl ooding in Europe could rise to €97.9bn by the 2080s, up from the current €5.5bn fi gure.

Because of their economic size and exposure to major storms and earthquakes, the US and Japan are expected to stay at the top of Maplecroft’s exposure index for the foreseeable future. However, high growth markets—like China, Indonesia, Turkey and the Philippines—are likely to climb the rankings in the long term, said Dr Richard Hewston, Principal Environment Analyst at Maplecroft.

EMERGING MARKET HAZARDSuch markets have high levels of natural hazard exposure, as well as growing populations and signifi cant potential for economic growth, he said.

The increasing concentration of economic activity in emerging markets—many of which face substantial natural hazard risks—is likely to be a big driver of natural catastrophe risk in the future. The share of the global economic output in countries categorised as ‘extreme risk’ by Maplecroft is expected to rise from 44.3% today to 49.9% by 2025.

Another important driver of exposure is society’s resilience—the

WEATHER-RELATED BI RISK SHOULD BE CENTRE OF ATTENTION Rising natural hazard exposures are a particular problem for business interruption and supply

chain risks, experts say.While macro issues—such as growing populations and wealth—are driving corporates’ exposure

to natural hazards, the move to low cost outsourcing and lean supply chains is heightening the threat, according to Nick Wildgoose, Global Supply Chain Product Manager at Zurich Global Corporate.

The increase in outsourced supply chains means that business interruption and contingent business interruption claims are becoming a signifi cant proportion of large commercial property claims for some insurers, he said.

Research from Zurich and the Business Continuity Institute suggest that some 70% of companies have experienced supply chain disruption, with adverse weather being the second largest cause of disruption behind IT failure.

“If the Mapelcroft statistics are correct (see story above) that the share of the global economic output in countries categorised as ‘extreme risk’ could rise from 44.3% today to 49.9% by 2025, then supply chains will be even more exposed to natural catastrophes,” said Mr Wildgoose.

Business interruption losses from natural perils are typically higher than the cost of replacing the damaged property, according to Maarten van der Zwaag, Head of Property Account Engineering at Allianz Risk Consulting. AGCS loss data shows that BI losses are between 50% and 70% of all paid losses resulting from natural catastrophes.

“What’s more, a large amount of those losses occur outside the country where the natural catastrophe has happened. This is the result of supply chain interruption, which is why the Contingent Business Interruption (CBI) element of a business interruption policy is increasingly in focus,” he said.

Property damage is not the only cause of supply chain disruption from natural hazards, according to Mr Wildgoose. Natural catastrophes can take out key infrastructure, like ports, roads, power and communications, which in turn disrupt business. “As an industry we need to think beyond physical damage to property,” he said.

Another factor adding to business interruption exposures is the trend towards specialisation and the geographical clustering of similar industries, said Mr Van Der Zwaag. A local natural catastrophe event could therefore impact multiple suppliers of specifi c components at the same time, he said.

“This could not only knock out a company’s main supplier but also impact the potential alternative suppliers. A good example is the high concentration of electronic producers in the Pearl Delta in China,” said Mr Van Der Zwaag.

The often large gap between economic and insured losses following a catastrophe refl ects the degree to which business interruption and supply chain disruption risks are either under insured, or not insured at

all, said Caroline Woolley, Head of the EMEA Property Risk Team at Marsh. Developing the market for supply chain insurance and extending BI limits for property damage and

non-property damage caused by natural perils will help close the gap, she said.Identifi cation and quantifi cation of the extent of exposures is essential for risk transfer as well as best

practice risk management, said Ms Woolley. “Insurers are already requiring more information on natural catastrophes and supply chain exposures.

Providing this information is important if clients want to get the best value from their insurance—insurers will price for a worst case scenario if information is missing in a high natural catastrophe zone,” she said.

The business interruption and supply chain losses from the 2001 fl oods in Thailand and the earthquake and tsunami in Japan were a wakeup call for businesses and their insurers.

“There’s defi nitely a greater awareness of the risks of geographical clustering since the Thailand fl oods of 2011,” explained Volker Muench, Global Practice Group Leader for AGCS’ Global Property unit.

“Risk managers are responding to this challenge and we’re seeing a more integrated approach on the client side to managing this risk. As insurers, we’re looking for more information from our insureds to calculate accumulation exposures and to manage supply chain risks beyond fi rst tier suppliers,” he said.

A large number of companies do not know the locations of their tier one suppliers, explained Mr Wildgoose. “Some corporates are analysing and investing more in understanding their supply chain exposures, while others are sleepwalking into future problems,” he said.

“Some companies do now map all their tier one suppliers. Not only is this good practice, such information is crucial for insurance. If insurers are to provide supply chain insurance we need a certain level of information on strategic suppliers,” he said.

Data quality is increasingly important for industrial risks, explained Tina Baacke, AGCS’ Global Head of Catastrophe Risk Management. “Without good quality data, the models have to make assumptions which are sometimes far off the reality—with misleading results,” she said.

With the shift of economic activity to emerging markets, unexpected large losses, like the 2011 fl oods in Thailand, could become more common in the future, according to Andreas Schraft, Head of the Cat Perils and Treaty Centre at Swiss Re. “There are many more such powder kegs waiting to explode,” said Mr Schraft.

If left unchecked, the increasing natural catastrophe exposures could become uninsurable, or at least much more expensive, he added. “If the risk is not transparent, or if large events become too frequent, insurers will shy away,” he said.

—Stuart Collins

CONTINUED ON PAGE 4

Hurricane Katrina

03_CRE_Y5_03_News.indd 3 1/4/14 16:12:47

What lessons can be learnt from the situation in Ukraine?Ukraine, which has hitherto been considered low risk for travel security, demonstrates the importance of being adaptive and the need to undertake contingency planning. It also shows how a situation can develop rapidly and unexpectedly, with important implications for business travellers, expatriates and national employees.

What are the main reasons a company might pull its staff out of a country?

The main reason for evacuation is political instability—as seen recently in Ukraine, Venezuela and Thailand. Natural hazards, such as tropical cyclone Haiyan in the Philippines and the earthquake and tsunami in Japan in 2011, are probably the next biggest driver. Even storm Sandy in the US saw some clients with business travellers in New York request assistance.

Are there other reasons?

The availability of adequate medical facilities can be another factor. In Ukraine and Sudan the standard of medical care played a part in our advice. For example the closure of Sudan’s only international standard hospital was a key driver for evacuation. Our data shows that nearly 50% of travellers and expatriates hospitalised in a high-risk country will require medical evacuation. In an extreme risk country, that figure rises to nearly 80%.

Are such crises becoming more common?

That is hard to say, but there are many examples where clients have called on our support. Most recently, Ukraine has kept us busy and we are currently advising over 9,000 business travellers and over 1,700 expatriates in the country from a total of 107 companies. The conflict in South Sudan and protests in Thailand and Venezuela have also resulted in requests for support from clients in recent months, while we still see residual unrest in Egypt and other Arab Spring countries. There was

also a significant spike in interest for North and South Korea when tensions ratcheted up last year.

Are companies growing more concerned with the risks of operating in overseas markets?

We have noticed an increased level of preparedness among companies since the terrorist attacks of September 2001 as well as since more recent crises, such as the Arab Spring, that were seen in Africa and the Middle East in 2011. Our clients want to understand and anticipate what is happening in countries in which they operate. We have also noticed that the scale and impact of our assistance has grown, while we also see organisations take more time preparing travel and evacuation risk management plans.

What might be behind this increased interest—is it just linked to globalisation?

Businesses are increasingly shifting towards emerging and riskier markets. A recent PricewaterhouseCoopers report estimates a 50% growth in overseas mobile workers by 2020. But we also see an increased understanding among clients of the need to prepare for threats.

What are companies doing to prepare? What is best practice?

We do see much more work around prevention, and we see that clients are on the whole much better prepared.

Our experience of crises management projects shows that good practice lies within four elements:

n Understanding how many travellers or other staff you have in a given location, and being able to communicate with them both efficiently and quickly

n Developing contingency plans for crises and reviewing them regularly

n Staying in close contact with your travel service providers, such as local transport companies

n Preparing employees that are heading in to high-risk areas with the possibility that their visit might have to be cut short

What is the potential damage for those not prepared?

The dangers of not preparing are around business interruption and reputation, as well as exposure to subsequent legal liability if appropriate steps to protect employees are not taken. Ultimately employees’ lives are at risk.

Is there much difference in preparedness between companies and sectors?

There are different levels of preparedness among our members, but the fact they have membership shows that they are addressing the problems. Some companies—especially those operating in high-risk areas and sectors—are very active and have a

forward-focused approach, but across the board we see greater engagement among organisations that realise they need to be better prepared to deal with these inherent risks.

Is it a straightforward decision to evacuate?

The most important decision for a travel risk manager is whether to defer non-essential travel and pull out non-essential staff. But it’s not just about getting people out. We help companies focus on managing their exposure and enabling business continuity. For example, some organisations continue to operate in a country after we have advised leaving, as some did in Syria, and we are able to support them in that decision.

There can also be risks of moving employees out too early. For example, after the earthquake in Japan and the Fukushima nuclear crisis a number of our clients were concerned with the perceived reputational problems of leaving when other companies were staying.

Should companies also consider local employees in their plans?

It’s not only about expats. Companies should always consider the safety and wellbeing of their national employees in a crisis, however there are particular constraints on moving local employees.

What are the benefits of using a company like International SOS and Control Risks?

There is an obvious return on prevention and preparation. For example, in a crisis a company will need to use accredited secure providers, but these are hard to find at short notice and in a demanding crisis environment. But in many ways the most important service we provide is information, which is particularly relevant in emerging markets.

We provide an assessment of the inherent risk, keeping clients updated on the situation so they can make judgements based on their own perspective.

Preparation key to protection of staff & reputation in overseas crises

NATCAT: No business is immune to exposureability of a country or company to recover and bounce back from a major disaster.

While the US and Japan have built high levels of resilience to natural hazards, a lack of mitigation in many key growth markets, coupled with an increase in physical assets and supply chains in these countries, increases the risk posed by natural hazards to business, according to Maplecroft.

A substantial proportion of future global economic growth will occur in countries that are highly susceptible to natural hazards and exhibit significant resilience deficits, according to Dr Hewston. The share of global economic output in countries classified as ‘high risk’ in Maplecroft’s Resilience Index is projected to increase from 21.4% to 31.4% by 2025.

Another trend behind increasing exposure is urbanisation.

Swiss Re’s Mind the Risk report found that economic value is increasingly focused in cities. Some 28% of the world’s population lives in the 600 cities covered by the report, generating around half of the world’s GDP. “Economic value is generated in our cities, which is where much of the world’s services and industry is based, and this is where the risk is,” said Swiss Re’s Mr Schraft.

For example, Swiss Re found that 380 million city-

dwellers are exposed to major river floods, while severe earthquakes could impact 280 million.

In particular, cities in Asia are at risk of catastrophic floods, storms, storm surges, earthquakes and tsunamis. According to the reinsurer, a major earthquake could affect 29 million people in the Tokyo-Yokohama region—the world’s most exposed urban area. Manila, the Pearl River Delta in China, Shanghai and Jakarta are also at high risk, as is Los Angeles, the most catastrophe-exposed city outside of Asia.

Superstorm Sandy in 2012 showed just how vulnerable a major city like New York is to natural hazards. Sandy, a relatively small storm in terms of wind force, knocked out travel, power and communications, affecting millions of people for days and weeks after the storm.

VULNERABILITY TO INCREASEUnless cities improve their resilience, society’s vulnerability to natural hazards will only increase, experts say. For example, the total population in cities exposed to cyclones and earthquakes is projected to more than double from 680 million in 2000 to 1.5 billion in 2050, according to Maplecroft.

Many of the world’s growing number of cities are in growth markets with deficiencies in disaster risk management and insufficient infrastructure, according to the consultancy. “The key to moving forward is how

projected economic growth translates into resistance to natural catastrophes,” said Dr Hewston.

Resilience to natural catastrophes is also an important issue for larger multinationals, according to Volker Muench, Global Practice Group Leader for Allianz Global Corporate and Speciality’s Global Property unit.

“Resilience is of particular importance for business interruption insurance buyers, and especially for any larger industrial clients that have their supply chain sources spread around the world, so from this perspective it is important to understand the resilience of the country where the supply is coming from,” he said.

Increasing the uptake of insurance, including business interruption and supply chain coverages, is an important part of building resilience, argued Ms Woolley of Marsh, which supports the UNISDR resilient cities campaign. Insurance helps ensure a quick recovery, but it also encourages continuous improvement in mitigation and loss prevention, she said.

While climate change and the growing impact of natural catastrophes may appear beyond the control of corporates, there is much that companies can do to protect themselves and help shape the macro trends, according to Mr Schraft.

“What can you do with increasing risk? Well, about half of the potential future losses can be mitigated effectively,” he said. “Companies have to take ownership of their risks—know their risks and take effective measures.”

Preparation is crucial for risk managers looking to protect employees caught up in crises like the recent unrest in

Ukraine or major natural catastrophes, says Rob Walker, Head of Information and Analysis at International SOS and Control Risks, the medical and travel security joint

venture that helps organisations understand and manage the risks of operating in complex or hostile environments

CONTINUED FROM PAGE 3

NEWS4 Travel risk Nat cat continued

03_CRE_Y5_03_News.indd 4 1/4/14 16:12:54

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Association News

AGERS revamps for birthdayRodrigo [email protected]

[MADRID]—AGERS, ONE OF SPAIN’S RISK management associations, is celebrating its 30th anniversary this year with a host of activities that aim to strengthen its position as a centre for training and a

platform to support the interests of members.In an interview with Commercial Risk Europe, AGERS’ president,

Juan Carlos López Porcel, said his association will focus on issues related to global insurance programmes and support Ferma’s plans to create a European certification for risk managers.

“AGERS’ priority in 2014 is to provide integral services to its members,” said Mr López, who took over the presidency in February and is also Head of Risks and Insurance for southern Europe at ArcelorMittal.

Over the past few years AGERS has made great efforts to offer new and improved education to members, whilst simultaneously focusing on conferences, research and other activities.

This effort is symbolised by the AGERS 2.0 renewal project and has been complemented by the appointment of an executive manager, Alicia Soler, to focus on the day-to-day management of the association.

AGERS 2.0 is composed of a number of initiatives including the launch of an improved website that allows risk managers to more easily obtain information about the activities of the association, as well as access literature and forums to discuss the most pressing issues facing the Spanish risk management community.

One area of the website allows members to access the AGERS Spanish Risk Managers’ Community space, a new tool to promote interaction among risk professionals.

“This community, which is accessed exclusively by risk managers, has the mission to create a network for mutual collaboration, strengthening the profession and representing the sector before other institutions, with the goal of developing lobbying work to support our interests,” Mr López said. “The main objective of this networking tool is to improve management in the fields of risk and insurance to the benefit of the sector and society as a whole.”

Within the Risk Managers’ Community area members can keep up to date with the activities of AGERS’ working groups, receive the latest news on the Spanish risk management sector, follow the association’s interactions with other bodies and express their views via forums.

Sections of the new website open to non-members offer resources such as videos of events organised by AGERS.

“Our website is now a channel of information and research that also supports the diffusion of ideas between members via its blogs,” Mr López said.

Global insurance programmes have grabbed AGERS’ attention in the past year as they become a priority for Spanish companies expanding overseas.

An AGERS working group was created last year to help tackle the subject following calls from members.

Their worries reflect the new importance that global programmes have acquired for Spanish companies, Mr López said.

“Considering that good risk management is today a competitive factor for companies, the adequate design of a global programme can be an imperative matter for their growth,” he pointed out. “It

NEWS6 COMMENT

R ECENT TRIPS TO THE MIDDLE East to carry out research for the GCC regional leg of this year’s Global

Risk Frontiers survey has firmly underlined the biggest challenge that faces the regional and international risk management profession currently: talent or lack of it.

This issue has been regularly identified by risk and insurance managers in Europe during our European Risk Frontiers surveys.

As has been well documented, the credit crisis and subsequent economic and financial fallout has given the European risk and insurance management community an unparalleled opportunity to move the discipline on to the next level.

Regulators are forcing board members to take risk management seriously. There is a constantly rising volume of primarily corporate governance and standards that demand a risk-based approach, if only from an auditing perspective.

And there is no doubt whatsoever that the current batch of directives emanating from Brussels that cover all manner of business matters, not least data privacy, demand more proactive and sophisticated risk management from corporations and formal reporting.

This is a golden opportunity for the European risk management community to grow up and use national risk management associations and the European federation Ferma to properly define the profession at last.

There are big operational challenges of course. For example, there is still a great deal of uncertainty in Europe about whether risk management should include insurance management or whether the disciplines should be treated separately.

But a body of education and training that is internationally recognised and respected is a fundamental building block towards the creation of a pan-European and indeed global risk management community.

Ferma is forging ahead with its certification project to try and achieve this, but one suspects that attempts to join up the dots with other leading bodies such as RIMS in North America, RMIA in Australia and IRMSA in South Africa will be no easy task.

Perhaps the biggest challenge facing the industry is delivering the young risk management talent needed to support existing professionals who are attempting to take advantage of this window of opportunity and obtain the budget to fund it.

The fact that the majority of senior risk and insurance managers that we have met recently in the Gulf region are European, and a good proportion Scottish graduates of Glasgow Caledonian’s risk management degree course, hugely underlines this challenge.

There is a limited number of existing risk management courses and this produces a limited number of graduates able to plug the skills gap. The fact that this shortage is a global phenomenon makes competition for talent that much more fierce.

The danger is that the European and international risk management community fails to overcome the obvious difficulties in constructing a robust certification system in the short time span available and the function is delegated to the audit profession.

This would prove to be a massive mistake and could put the development of the true risk management profession back years.

The message is surely clear in Europe at least—get behind the certification effort. Make sure it works with existing educational bodies and produces that pipeline of fresh talent and risk awareness needed to raise the standing of risk management once and for all.

This opportunity may not arise again.

ADRIAN LADBURY

Editorial DirectorCOMMERCIAL RISK EUROPE

Now or never on risk education

EDITORIAL DIRECTORAdrian [email protected]

PUBLISHING DIRECTORHugo FosterTel: +44 (0)1580 785 176 [W]

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WEB EDITOR/DEPUTY EDITORBen NorrisTel: +44 (0)7749 496 612 [M][email protected]

Whilst every care has been taken in publishing Commercial Risk Europe, neither the publisher nor any of the contributors accept responsibility for any errors it may contain or for any losses howsoever arising from or in reliance upon its contents. Editeur Responsable: Adrian Ladbury.

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REPORTERS: [email protected]

UK/IRELAND: Garry Booth, Stuart Collins, Tony Dowding, Nicholas Pratt FRANCE/SPAIN: Rodrigo Amaral GERMANY: Anne-Christin Groeger, Friederike Krieger, Herbert Fromme EDITORIAL ENQUIRIES: [email protected]

CONTINUED ON PAGE 8

“T HIS COMMUNITY, which is accessed

exclusively by risk managers, has the mission to create a network for mutual collaboration, strengthening the profession & representing the sector before other institutions, with the goal of developing lobbying work to support our interests ...”

06_CRE_Y5_03_Leader.indd 6 1/4/14 16:14:07

07_CRE_Y5_03_FAP.indd 7 1/4/14 16:06:53

8 BEHIND THE NEWSAssociation News

HCC Global Financial Products, S.L. (UK Branch) is registered in England and Wales with company registration number FC022894 and branch registration number BR005839. HCC Global Financial Products, S.L.- Sole Shareholder Company – ES B-61956629, registered at the Mercantile Registry of Barcelona, volume 31,639, sheet 159, page B-196767, is an exclusive insurance agency of HCC International Insurance Company PLC Spanish Branch, registered with the Spanish General Directorate of Insurance and Pension Funds (Dirección General de Seguros y Fondos de Pensiones or “DGSFP”) in their Register for Insurance Intermediaries, Reinsurance Brokers and their Senior Posts under the code E0191B61956629.

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is no longer a strategic choice and, as a result, we have felt the need to analyse and study the fundamental aspects of these programmes. They are widely accepted and diffused, but can possibly be improved, clarified or harmonised from a regulatory point of view.”

The working group is composed of risk managers from 11 Spanish companies that have met regularly to discuss the subject. It has also held discussions with insurers, brokers, legal experts and DGSFP, the Spanish government agency that oversees the insurance market. The group’s findings will be released in a document in May.

Other AGERS working groups are dealing with issues such as cyber risk, the ISO norms on risk management and environmental risk. AGERS has also created a number of commissions to deal with subjects such as training and education, research and international affairs.

‘LATIN AMERICAN FOCUS’The international focus has centred on Latin America, a key market for Spanish firms where AGERS has nurtured relationships with risk management associations in Brazil, Peru, Colombia and the Dominican Republic, as well as with Alarys, the Latin American risk management federation.

But the organisation is also active in Europe, where it is represented on the board of Ferma. Mr López said that joint initiatives are being planned with other European associations and Ferma.

For instance, Mr López said that AGERS fully supports Ferma’s planned

European certification for risk managers. “This certification is a necessity that has been discussed within the risk management community for years, and previous efforts took place in some countries that did not result in the desired outcomes,” he said. “We have to congratulate ourselves on the Ferma initiative to resume work on this subject…This year will be fundamental for its development.”

Mr López noted that a member of AGERS’ board, Isabel Martínez Torre-Enciso, is working closely with Ferma on the project, adding that certification could be a vital tool to further strengthen risk management.

“We believe that this issue is part of the consolidation of risk management and that it will answer to a regulatory need,” he said.

“It will also be useful to enrich the sector by establishing the minimal requirements for a professional to receive certification.”

The risk management sector in Spain has seen huge changes since the birth of AGERS in 1984 and will continue to evolve as new developments create challenges for the profession, Mr López pointed out.

TECHNOLOGICAL ADVANCES“The evolution of risk management over the past 30 years has moved in parallel to the technological changes that have taken place around us,” he said. “We only have to remember that the mobile phone became a day-to-day working tool at companies around 1996, but has since implied a change in the way that we work and that we manage everything, influencing even our way of life.”

According to Mr López, the Spanish insurance market has proved resilient during this period of great change, highlighted by the way in which it faced the financial crisis over the past five years.

“The crisis has shown that Spain’s insurance market enjoys very good health,” Mr López said. “In the past few years, a necessary consolidation process has taken place in the insurance industry. The regulatory body itself has expressed a view that the sector must carry on its consolidation work, as there are still 270 companies operating in Spain, many of which are small, with less than five employees.”

He added: “Perhaps this is the road to improve services that, in general terms, are of a great quality, but, as in other sectors, are subject to a continuous process of improvement due to the particularities of the economic environment.”


Juan Carlos López Porcel

06_CRE_Y5_03_Leader.indd 8 1/4/14 16:14:14

ENERGY FIRMS IN THE Middle East energy market have an ‘above-average’ approach to risk

management relative to their global peer group, according to research published last month by global broking and risk consulting firm Marsh.

The broker used its bi-annual National Oil Companies (NOC) conference that took place in Dubai to publish its Benchmarking the Middle East Onshore Energy Industry report.

The analysis gauged the comparative risk quality of Middle Eastern oil, gas and petrochemical facilities to more than 500 similar facilities worldwide and found that they are coping well with the fast-changing economic environment and resultant risks.

According to the research, hardware is a key strength in the Middle East because of land availability, substantial capital investment and the development of modern facilities.

Andrew George, Chairman of Marsh’s Global Energy Practice, said: “The Middle East is playing an increasingly critical role in world energy production. Significant investment in the region and expanding facilities necessitate that the industry fully understands and addresses the unique landscape of risks involved.

“The relative performance of the region in its approach to hardware, in particular remote isolation and flare design, demonstrates that companies are persisting in their efforts towards creating safer installations, improving loss prevention and driving operational excellence.”

Marsh noted that low levels of natural catastrophe exposures in the region eliminate the need for additional, and often onerous, design features to combat such threats.

The abundance of available land in the region enables sites to produce inherently safer designs through careful plant siting and layout, stated the report.

“Sites are often located in areas remote from the population with the site layout arranged to minimise the risk of cross-exposure and to prevent the spread of fires. Sites in other parts of the world are often highly congested and located in areas that have become highly populated,” stated the report.

Key areas for improvement in the Middle Eastern energy sector include software and emergency control systems, said Marsh.

In particular, the broker believes that ‘significant improvement’ can be achieved through the management of change—the industrial practice of changing processes and systems without the introduction of new hazards or exacerbating existing hazards.

“Improvement opportunities should focus on software (management systems) and emergency control. Risk engineers and underwriters alike consider the features embedded in the software (management systems) category to be the most important in determining the overall risk quality. Consequently, software is the dominant weighted category and heavily influences the overall risk ranking and benchmarking results,” stated the report.

Marsh pointed out that process plants in the region constantly face a growing ‘suite of challenges’. These include changes in the geopolitical environment, cultural differences, skill shortages, development of new technologies and the availability of capacity to meet the increasing scale of new projects.

Recruitment, training and the retention of a qualified workforce remain a big challenge for Middle Eastern energy companies.

Indeed this area was identified as a key challenge for the regional insurance and risk management community at the Multaqa event in Doha, Qatar two weeks before and during individual and group meetings with risk managers hosted by Commercial Risk

Europe as part of our annual Global Risk Frontiers survey.

Marsh pointed out that the Middle East region faces increasing pressure from regulations that govern workforce ‘localisation and empowerment’. Also, in many cases, emerging oil and gas hubs have limited experience readily available in the local talent pool, it added.

This means that regional companies still have to rely on expatriate

workers, which brings challenges and risks.“Middle Eastern energy operators,

therefore, also continue to face the various challenges associated with managing a diverse expatriate workforce, emanating from various parts of the world with notably different backgrounds. Culture gaps, language barriers and the effects of working away from home are just a few of the factors known to affect the management and overall functioning of an expatriate workforce. Nevertheless, several companies have been very successful in achieving stringent workforce localisation targets, while continuing to devise strategies for maintaining the talent they need over the long term,” stated the report.

Marsh believes that risk managers in the regional sector could gain an ‘easy win’ by focusing on what it terms software.

The broker said that expansion in the region naturally brings increased levels of risk that demands an increased focus on process safety and risk quality.

It added that risk managers need to focus their attention on proactive measures that include those embedded in hardware and software features, to ensure incidents do not occur.

But Marsh pointed out that it is also important to be prepared for what can go wrong, however unlikely, when these measures fail.

In the broker’s view, emergency control is a combination of both hardware and software topics.

“The benchmarking of emergency control features in the Middle East against

those of the rest of the world revealed, perhaps unsurprisingly, that hardware features tend to be of a very good standard, although the management thereof sometimes undermines the significant investments made,” stated Marsh.

Mr George concluded that progress is clearly being made in the management of risk in the Middle Eastern energy market, just as CRE’s own research has found it is in other sectors, particularly in the GCC. The good news for regional risk and insurance managers is that such progress will be reflected in improved terms and conditions from underwriters, said Mr George.

“Despite facing an increasing number

of challenges and a complex risk landscape, Middle Eastern energy firms are embracing several improvement opportunities and significant risk reduction is evident as they intensify their focus on loss prevention and operational excellence. These improvements will be reflected in future benchmarking scores,” he said.

“Improving risk quality has advantages for both clients and underwriters. High-quality risks tend to produce fewer losses and are more attractive to underwriters, generally resulting in better rates and capacity in the insurance market,” concluded Mr George.

—Adrian Ladbury, Dubai

ENERGY FIRMS IN MIDDLE EAST SCORE ‘ABOVE AVERAGE’ IN MARSH RISK REPORT

9

GCC

“The relative performance of the region in its approach to hardware, in particular remote isolation and flare design, demonstrates that companies are persisting in their efforts towards creating safer installations, improving loss prevention and driving operational excellence...”

Energy

INTRODUCTION

GLOBAL RISK FRONTIERS SURVEY 2014THE RISK AND INSURANCE MANAGEMENT COMMUNITY is fast developing in the GCC region as investors in major companies begin to wake up to the benefits of

a structured risk transfer programme and enterprise-wide risk management approach. As a result Commercial Risk Europe is carrying out a dedicated survey of some 40 corporate and financial risk managers in the region sponsored by Qatar Financial Centre Authority to find out how the local risk management community is developing, what it needs to do to move on to the next level, how risk transfer is typically used in the region and how it could

be deployed more effectively. This survey will be published at the end of May and distributed to all Commercial Risk Europe and Commercial Risk Africa readers. The survey forms an integral part of our annual Global Risk Frontiers survey that will be revealed and discussed at the Malta International Risk & Insurance Congress on 12 and 13 June in Valetta. To help prepare for the GCC survey CRE editorial director Adrian Ladbury last month attended the annual Multaqa conference in Doha and Marsh’s National Oil Companies event in Dubai. Following are some of the key stories to emerge from the events.

09_CRE_Y5_02_GRF-GCC.indd 9 1/4/14 20:35:16

GROWTH IN THE MENA INSURANCE market continues to outpace gross domestic product (GDP) on a regional and national basis,

according to latest analysis from the Qatar Financial Centre Authority (QFCA) published last month at the annual Multaqa conference in Doha.

The prospects for the insurance market remain strong as the region has a higher than average GDP growth rate, low insurance penetration rates compared with the global average and massive infrastructure investment, particularly in the GCC states such as Qatar.

The demand for and appreciation of corporate risk management is also rising fast among main boards of leading companies, particularly in the Gulf where a decent proportion of the region’s huge infrastructure investment is focused.

But big challenges remain for the regional and international insurance markets and local risk and insurance management community as they attempt to tap this huge potential, according to the QFCA.

QFCA’s latest MENA Insurance Barometer survey, based on in-depth interviews with 38 MENA insurers and reinsurers, concluded that local insurance companies still retain too little business, that excessive competition and market fragmentation continues and that prices remain stubbornly low.

Some international insurers and reinsurers are actually pulling capacity in the face of fierce competition and some notable losses, found the survey. Political instability remains a constant worry and was identified as the number one threat to the market by those polled.

The mood on stage and among delegates at the Multaqa event, which has become the flagship insurance meeting for the GCC and wider MENA market, was quietly confident if not bullish.

Risk managers interviewed by Commercial Risk Europe during the event for the GCC leg of our annual Global Risk Frontiers survey were also cautiously optimistic about developments in the region.

There is clearly a high emphasis placed on the value of enterprise risk management by boards of leading GCC companies.

There also appears to be a rising appreciation of the value of professionally constructed insurance programmes that maximise the capacity on offer from both local and international markets. This is partly driven by the recent slew of high profile losses in the region.

But it does seem that the region’s risk and insurance managers, particularly in the GCC, are under the same kind of cost pressures as their peers

in Europe and often still find it difficult to persuade their bosses that coverage and service is in many cases more important than price.

A number of risk managers interviewed by CRE at the Multaqa event and two weeks later at the Marsh National Oil Companies event in Dubai conceded that while demand for risk management within leading GCC companies is high, a true understanding of the big difference between active enterprise risk management and risk auditing is low.

Risk managers in the region still have some serious work to carry out in order to convince bosses of the true value of enterprise risk management, they said.

The insurance managers interviewed during the two events also confirmed that bosses of regional companies have much to learn about the true value of risk transfer solutions.

But, despite some of the concerns about pricing and excessive competition, the big picture from the QFCA Insurance Barometer survey is positive. A gradually maturing local market can only help to raise appreciation of risk transfer solutions in the region.

The MENA region’s average real growth rate between 2007 and 2012 was 4.7%, compared with a global average of 3.3%. MENA insurance premiums totalled over $44bn in 2012, compared with around $25m in 2007.

The penetration rate remains very low at only 1.3%, against a global average of 6.5%. And, the premium is extremely concentrated, with four markets (Turkey 25%, Iran 19%, UAE 16% and Saudi Arabia 12%) accounting for 72% of the total.

The insurers that were surveyed by QFCA identified GDP and insurance growth momentum, low natural catastrophe exposure and favourable demographics as the regional market’s biggest strengths. Underpriced business, market fragmentation and a dearth of talent were identified as the main weaknesses.

The scarcity of talent was also identified as a big problem by the risk managers interviewed during the Multaqa event for our Global Risk Frontiers survey.

One leading Qatar-based risk manager said that his recently introduced ERM programme is in danger of faltering because of a lack of experienced and skilled risk professionals available to implement the plans.

Though it has to be pointed out that risk managers made this point across the globe during last year’s Global Risk Frontiers survey, not least in Europe.

Akshay Randeva, Director Strategic Development at the QFCA, recognised that talent is a problem and agreed that risk management is one area that demands investment. But he warned that

this is not an area for quick fixes.“This is a very difficult challenge to tackle in

the short term but small steps taken now can have a big impact in the longer term. We have the Qatar Finance and Business Academy for example and the Institute of Risk Management (IRM) is here again at Multaqa and has a strengthening local group. We are supporting research into risk management in the region and will continue to do so. But it is up to the industry as a whole to clarify what it needs and to invest, not just the QFCA,” said Mr Randeva.

Multaqa delegates and the Barometer identified huge public projects as one of the reasons why risk management is taking off in the GCC because those in charge are waking up to the fact that such high value projects need to be carefully risk managed.

Some insurance and reinsurance market speakers at the event attempted to talk up the market and suggested that the prolonged soft cycle may finally be over, or stabilising at least.

The Barometer found that regional insurers believe rates remain low against the average of the last five years with personal lines in better shape from the insurers’ perspective than commercial.

The Gulf region is not surprisingly the most competitive market in MENA and the growing role of brokers, even in markets where the intermediary culture is alien such as Qatar, is evident.

The risk managers interviewed during the event suggested that the rise of the broker is inevitable for larger corporate risks as they bring skills and experience that is thin on the ground in the region.

The Barometer found that most companies are still able to post relatively low loss ratios and benefit from high reinsurance commissions assisted by recovering investment markets.

The survey described the outlook as ‘cautiously optimistic’. Profitability expectations are flat with more upside than downside predicted.

Over the longer term, insurance penetration rates will rise because of infrastructure projects, new compulsory insurance schemes, such as medical in the UAE, and advances made in distribution.

But Kai-Uwe Schanz, author of the report and Chairman and Partner of Zurich-based Dr Schanz, Alms and Company, pointed out that these rates still have a long way to go to catch up with global figures.

Foreign expansion in the MENA insurance market is expected to slow down, according to those surveyed for the Barometer. The main reasons identified were high recent losses and competitive disadvantages in personal lines business. Many international insurers are expected to look elsewhere, such as south to Africa, for new growth opportunities.

—Adrian Ladbury, Doha

RISK MANAGEMENT & INSURANCE GROWING UP IN MENA BUT BIG CHALLENGES REMAIN

GCC

10

MENA IN FOCUS:

Middle Eastern firms set the risk standard in LNG market: MarshTHE GLOBAL LIQUID NATURAL GAS (LNG) MARKET IS experiencing a period of rapid growth driven by a shift towards natural gas as a cleaner fuel and higher import dependence in regions such as Asia and Europe.

In order to meet rising demand global liquefaction capacity needs to be significantly increased and the GCC is well positioned to take advantage of this boom.

According to Marsh, the total value of natural gas projects currently under development in the GCC region could be as high as $73bn.

This is a high value and high risk industry, but thankfully Marsh notes that the regional LNG industry has been ‘consistently observed’ among the top performers on the basis of risk quality and has even set the standard for others to follow.

“Benchmarking the risk quality of the Middle East against the rest of the world revealed that LNG operators in the region appear to be setting the standard. From the overall benchmarking scores, it can be seen that the performance of LNG operators in the region is very good when compared against their worldwide peers in all three categories,” stated Marsh in its Benchmarking the Middle East Onshore Energy Industry report that the broker published for its National Oil Companies (NOC) conference in Dubai last month.

The broker said that, in many ways, LNG plants in the Middle East region are able to leverage the first-hand experience gained from their international joint venture partners. “Having access to tried and tested procedures and both international and corporate standards, are just some of the various benefits. Furthermore, plants are young compared to other industries in the region and based on proven technologies,” stated Marsh in the report.

“Further benefits are drawn from the clean service, as opposed to the corrosive crudes processed in refineries. While other industries in the region still have some way to go in order to embed management systems, including those related to emergency preparedness, the LNG industry is proving to be well ahead of the pack,” concluded Marsh.

—Adrian Ladbury, Dubai

Akshay Randeva

09_CRE_Y5_02_GRF-GCC.indd 10 1/4/14 20:35:30

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12 IN PERSONJeff Moghrabi, Regional President Continental Europe, ACE

Don’t expect radical change at ACE in Europe following the

promotion of Jeff Moghrabi to Regional President Continental Europe.

Evolution not revolution is the theme, he told Commercial Risk Europe in an interview late last month.

ADRIAN LADBURY reports

THERE ARE TWO VERY GOOD REASONS why Jeff Moghrabi has adopted a cautious theme as he plants his feet firmly under the continental European president’s desk at ACE.

Firstly, his predecessor Joe Clabby did a good job and having moved on to a new role in the group as Division President, Global Accounts, Mr Moghrabi therefore has little to gain by engineering a dramatic U-turn in strategy.

Secondly, and much more importantly, based on the latest numbers and anecdotal evidence gleaned from customers, ACE is doing rather well globally and in Europe.

Mr Moghrabi has been a key part of ACE’s European growth story since he joined the group in 2003 as Country President for Italy after more than 20 years in underwriting and management roles.

In 2007 he was named Country President for France and in 2011 his responsibilities expanded to include ACE’s operations in Poland, Czech Republic and Hungary. Just prior to taking on the continental Europe presidency role, Mr Moghrabi also served as Regional Chief Operating Officer, Continental Europe.

He is part of ACE’s European fabric and it would have been a surprise to find him champing at the bit to turn things upside down. Moreover, one does not hear much demand for change from ACE’s customers. As noted above, the anecdotal evidence gathered from European risk and insurance managers during our surveys in recent times is positive for the group.

The company has, for example, invested heavily in its global programmes capabilities and technology platforms to back that up, which is exactly what CRE readers want to see and hear.

When risk managers are asked which carriers they regard as the leading players in this critical slice of the market ACE is regularly named alongside the traditional leaders AIG and Zurich.

It is perhaps not a surprise that ACE and rivals AGCS, AXA Corporate Solutions and XL Group made investments in this area at a time when AIG was struggling.

Another reason why Mr Moghrabi does not promise radical change or forecast stellar growth under his leadership is that the European economy is still struggling to emerge from the doldrums ushered in by the credit crisis of 2008.

Outside of eastern Europe, Russia and Turkey there are few territories or lines of business that offer opportunities to rapidly build business because of lack of competition or stellar underlying growth rates.

Russia and Turkey may offer far more interesting growth potential than mature eastern European economies but they are both bedeviled by scary political risk as recent events have confirmed.

Against this macro backdrop, the strategy for Mr Moghrabi’s continental Europe portfolio is quite simply to get better at what it already does, do it more efficiently and make sure that it performs better than the competition.

If it can achieve this then it will win and retain the best customers.

It has a solid platform and is in a good position. But Mr Moghrabi warns against complacency, not least because, aside from the continued economic problems and poor investment conditions, there were still some very nasty losses in Europe last year and little sign of the frequency and severity abating.

“2013 was a great year for ACE as we reported a global combined ratio of just over 88%. However, I do think the

European insurance market at large, especially the mature market of western Europe, is a little cocky at the moment. In reality we have reason to be humble because the economic, political and risk profile scenario is so volatile you cannot take anything for granted,” he explained.

ACE does not publish separate numbers for its regional businesses such as Europe.

But Mr Moghrabi said that despite some hefty natural hazard losses in Germany, wider central Europe and even France, which ACE took on the chin as much as other insurers in the market, his firm’s European performance was ‘well within’ the range of the excellent group result.

PEAK PERFORMANCEIndeed, he said that 2013 was the best year in six for the continental European business.

This is no mean feat given that there was a reasonable level of losses, rates are generally stable at best and there is still scant relief provided by the investment markets.

In this environment, corporate insurance companies simply have to run a tight and careful ship and, above all, manage their own risks and the risks of their customers better than the rest. This is exactly what ACE is managing to do and has done for some time, according to Mr Moghrabi.

“The two most important things to consider are that we have to make sure that we have the breadth of product, distribution and mix of business across our 19 countries. Added to that you need underwriting discipline and sales discipline. By that I mean one language for brokers and customers. Neither we, nor they, can afford to waste time on dealing with a disjointed organisation. Brokers and customers need to hear a single and consistent message from

sales, underwriting and claims,” he explained.Consistency of message and superior decision-making

can only be based on quality data.Mr Moghrabi said that this has been a real focus for ACE

over the last couple of years and is paying dividends. “Big data is the buzz word currently but we have made

data discipline a real focus over the last two years and have invested heavily. Sometimes people think that this is all carried out by remote actuaries in ivory towers, but this is not the case. It is live data throughout the organisation that needs to be captured, analysed and used to deliver tools to underpin underwriting discipline. These tools show where you can be more aggressive and where you need to be less aggressive to constantly improve the book of business as a whole,” he said.

Better use of better data will obviously help an insurer improve the management of its risk, but what does it mean for customers?

Mr Moghrabi thinks the investment in data by insurers is good for customers. It should lead to quicker decisions and enable all parties—insurers, brokers and risk managers—to spot potential problems earlier and tackle them well in advance rather than during renewal mayhem.

But effective business and risk management is not just about hard data. It is also about investing in people who are able to listen to customers and seek solutions to problems.

Mr Moghrabi said that this is a critical part of ACE’s strategy moving forward as it attempts to help its customer base rise to the ever expanding array of complex cross-border challenges thrown up by the modern world.

Thus last year the group appointed a continental Europe claims relationship manager whose job is to help explain to customers how their policies actually work under differing scenarios.

EVOLVING TO MEET CUSTOMERS’ NEEDS

Jeff Moghrabi

12_CRE_Y5_03-Hot_Seat.indd 12 1/4/14 16:08:42

13IN PROFILE Jeff Moghrabi, Regional President Continental Europe, ACE

“Customers need to understand scenarios whenever they need to make a claim. We have to help the broker and customer navigate the claim, especially if they do not understand the legislation or regulation in a far flung territory where the claim originates and particularly as the rules are becoming more stringent in many places,” said Mr Moghrabi.

Technical engineering expertise is another important area of investment for ACE. Last year, for example, ACE also appointed a dedicated environmental engineer for Europe.

The move was partly due to the fact that the European environmental impairment liability (EIL) insurance market finally appears to be taking off, driven by the Environmental Liability Directive (ELD). And, as Mr Moghrabi pointed out, because this complex area is not just about simple products, price and capacity. The key is actually service and advice.

“The subsequent environmental directives planned for 2015 are heading towards a more proactive approach. It’s about what you are going to do in the 72 hours after the event, how you react and how you are seen to react,” explained Mr Moghrabi.

“It’s the same with cyber. Everyone is still talking about cyber risk and insurance and the customers are not yet buying en masse. The big question is not just about first and third party coverage but actually what services are attached. This is because the privacy authorities are also asking what companies are going to do in the 72 hours after a breach to prevent private information being lost. It is about how you manage the process after an event as much as prevent it happening in the first place and indemnification,” continued the insurer.

Risk managers who took part in last year’s global and European Risk Frontiers surveys certainly welcomed the addition of crisis management and disaster recovery-style services to cyber and other offerings such as supply chain and environmental.

As Mr Moghrabi said, the regulatory response to the rise in prominence of such risks is to require a more holistic approach from companies sparked by corporate governance requirements that demand threats are better managed and reported.

The insurance market is responding with broader offerings. But are the customers willing and able to pay for the extra services? Maybe not quite yet, but they should in future, said Mr Moghrabi.

The new ACE Continental Europe president is convinced that despite current uncertainties insurers and their customers ‘will get there’.

He pointed out that the push on EIL cover began six years ago when the ELD Directive really started to build up a head of steam, but it took at least two years to start making real sales. ACE has also invested in specialist engineering expertise in the cyber area and now expects this line to ‘move onto the next level’.

So does this mean that ACE is about to launch an all-singing, all-dancing super-broad cyber offering?

Not immediately, but it is in the works, driven by the group’s investment in creating a more flexible and interactive organisation, promised Mr Moghrabi.

“We are not being exceptionally noisy but we do have two areas of real expertise. In Europe we have first party expertise and in the US we have best practice for third party. Until recently they did not talk to each other as much but

in October we created a best practice group and this year we will come up with a solution that includes both capacity and expertise,” he explained.

No interview with an insurance industry leader would be complete without the inevitable question about the outlook for prices, terms and conditions for the market in the months to come.

Mr Moghrabi agrees with his peers that this question really is no longer relevant because the market is now not a single entity prone to volatile market-wide shifts as in the past.

“We have seen mini cycles in corners of the market that may only last six months, not big market-wide shifts,” said Mr Moghrabi. “At the beginning of this year we saw a slight hardening in the German property market because of the catastrophe events [mainly flooding] and a hardening in the financial institutions sector. But if it is not loss driven, such as in these areas, on the whole one has to say the market has been flat,” he said.

The main cause of this remarkable taming of the previously wildly volatile underwriting cycle is the arrival of truly committed capacity rather than a cross-subsidy from personal lines and investment income, according to Mr Moghrabi.

“It is perhaps a paradigm shift. If you looked at continental Europe ten or twenty years ago the commercial market was often subsidised by personal lines and by investment returns. Now investment returns are marginal and volatile and so no one can afford to have combined ratios over 100%. At the same time, motor and homeowners’ lines have gone through big changes and are performing quite poorly because of high competition and the impact of catastrophes. Therefore there is no room for cross-subsidisation regardless of who you are. There is very little room for manoeuvre,” explained Mr Moghrabi.

Mr Moghrabi agreed that this lack of wiggle room for the incumbent corporate insurance companies and national multiline players means that effective risk management of their portfolios is more important than ever.

And, as any risk manager will attest, the best way to ensure that risk is managed well in any organisation is to hire the best people.

PLAYING ‘CATCH UP’In this regard, the insurance sector unfortunately has to play a very fast game of catch up. This is because it does not have a great track record of hiring, training and retaining the best talent.

“Unfortunately our sector has historically dedicated very little energy to managing the talent pool but we are fixing that. Last year at ACE, for example, we created a graduate scheme for the continental Europe multinational business and we are very happy with the results. In fact, we are now escalating that scheme to the wider ACE Overseas General business as a result,” he explained.

The key to hiring in the modern, global and fast-changing economy is to find the right mix of talent that delivers both deep technical expertise and flexibility, said Mr Moghrabi. If anything flexibility is more important than the technical expertise, he believes.

“You need talent from very different specialisations whether that be legal, engineering or even more generalist

areas like the humanities. Above all you need people who are versatile and can jump into any situation. They need at least three languages so that you can parachute them into a country and they adapt,” he explained.

Mr Moghrabi underlined the scale of the task that faces the insurance sector by pointing out that these highly skilled and versatile people are not just needed for managerial roles but for key functions such as underwriting, sales and claims.

Built on the enhanced use of data, the modern insurance company, peopled by a versatile and adaptable talent pool, can then switch tack when required more quickly and effectively than in the past and therefore focus on achieving the optimal risk return ratio at all times, explained Mr Moghrabi.

“We work and live in such a volatile environment we need to be able to adapt and change much more frequently and faster than in the past,” he said.

“For example at ACE we had a plan for 2013 to introduce surety cover in three key countries—Germany, France and Italy—and we were very pleasantly surprised by the success of this initiative. By last autumn, we realised that the Spanish market also had a big need because other sources of surety cover, notably from Spanish banks and especially for the Latin American markets into which Spanish companies were rapidly expanding, were very scarce. We saw this and immediately hired someone to build a surety business in Spain and it has taken off since we launched there in January this year. You need a very talented and flexible pool of people to do this,” he added.

It’s all very well being able to rapidly shift resources around internally to maximise opportunities, but if these highly talented and versatile people are not focused on service then the whole grand plan is destined to fail.

Risk and insurance managers increasingly demand that the modern international insurer uses all this enhanced data, knowledge and skill to deliver a better level of service, especially when they have significant cross-border exposures.

Mr Moghrabi is well aware of this continued, if not heightened, need for softer skills that are fundamentally based on communication, particularly in the field of claims. He is passionate about this vital but too often overlooked area.

“We cannot guarantee that a very complex claim will be paid in x number of days but we can guarantee that, whether on the claims, underwriting or the service side, all the key stakeholders can, and will, be brought around the table to give it their full attention. Customers and brokers will be able to access ACE management at all levels if they feel the need,” he said.

This has been enhanced by the group’s recent investment in its new global accounts division and multinational practice that provides a suite of customised solutions.

A key part of this is the ACE Worldview platform, which enables customers to monitor the status of their entire global programme in real time from their desktop.

This gives customers access to policies, helps them monitor worldwide claims, creates and shares data reports and enables them to receive daily programme updates.

But this is not just technology that enables customers to view the status of their programme or claim. It also provides the basis for real communication to take place. This is vital, according to Mr Moghrabi.

“All customers can access underwriting, claims and engineering information on one platform, and the key decision-makers even in the toughest situations,” he said.

This is important for customers of big corporate insurance companies who generally accept that the very nature of the product means there will always be grey areas. What is very frustrating for many risk managers is when that grey area is surrounded by a wall of legal silence.

“Working with customers throughout the process on big claims allows us to look each other in the eye. We may sometimes even disagree intellectually and legally, but we can still respect each other and show that we have done the right thing and the right processes have been followed internally. We can also make sure that these processes are challenged internally at all the key stages,” said Mr Moghrabi.

This sort of approach helps to retain customers even when big and complex claims occur, he said.

“T HE TWO MOST IMPORTANT THINGS TO CONSIDER ARE THAT WE HAVE to make sure that we have the breadth of product, distribution

and mix of business across our 19 countries. Added to that you need underwriting discipline and sales discipline. By that I mean one language for brokers and customers. Neither we, nor they, can afford to waste time on dealing with a disjointed organisation...”


14 HOT SEATRobert Benmosche, President & CEO, AIG

A JOB WELL DONE

Following the fi nancial crisis of 2008, AIG received a $182bn loan from the US government and taxpayers to save its business, which had been severely damaged by a foray into the credit default swap business and the global economic

meltdown. Four years later, in December 2012, AIG announced that it had repaid its entire debt, plus a positive return of more than $22bn, to the US government. This restructuring and repayment was led by AIG president and

chief executive offi cer, Robert Benmosche. ADRIAN LADBURY asks the questions

ROBERT BENMOSCHE RETIRED AS THE CHAIRMAN and chief executive offi cer of MetLife in 2006 following a successful career in the insurance and

fi nancial services industry. In the summer of 2009, at the request of AIG’s board and company stakeholders, Mr Benmosche came out of retirement from his vineyard in Dubrovnik, Croatia to help breathe life back into the company and return it to profi tability. Commercial Risk Europe met Mr Benmosche, who was diagnosed with cancer in 2010, at the AMRAE conference earlier this year. We asked the former Coca-Cola delivery driver and lieutenant in the US Army, who served a tour of duty in Korea in the Signal Corps, why he took on this huge challenge when he could have been harvesting his beloved grapes.

Adrian Ladbury (AL): You came out of retirement to lead AIG out of crisis, pay back the US taxpayer and get the business back on track. Now that the job has been done, how long do you plan to stay at the helm? You have suffered ill health, would you not like to enjoy your retirement having seemingly achieved your goals?

BOB BENMOSCHE (BB): My plan is to be able to fi nish the job through 2014, and so I could retire in March 2015 after reporting another good full year. If my health holds up then we’ll see what happens in 2015. So far I’ve been able to hold my own and stay pretty active. The illness hasn’t slowed me down at all and I enjoy what I do. Actually love what I do. It’s been a great deal of fun. But I would say we’re probably on the last lap, in the last year.

AL: What was in your mind when you took charge of a company in crisis? What were the main objectives, have you achieved them and how?

BB: When I came to AIG, I looked at the sum of the various parts of the business and decided that those would hopefully become greater than the whole. And that whole, as I defi ned it, would have to be big enough to pay back everybody everything. It should have shareholder value. So what hit me early on was the need to create shareholder value because that means you are solvent. With this basic need in place it would follow that everybody else would start to feel better about the business, improved credit ratings would follow and we would be able to get out from underneath the enormous debt that we had on our books. That was my initial vision.

AL: Did Hank Greenberg play a role in your decision to take on this huge job?

BB: I met with Hank in January 2009, we had lunch and he said he would like me to consider becoming CEO of AIG because he thought I could make a difference. It was quite an honour for me that Mr Greenberg would even think of me for the role. I said I’d give it some thought and get back to him. Being Hank Greenberg he called me three weeks later and asked what I had decided? I said I hadn’t had time to give it that much thought and so, again being typical Greenberg, he said: ‘Well you said you would, why don’t you come in and have lunch again?’ So I went to have lunch with him in February 2009 and I could see in his eyes the desperation of a man that was seeing his life’s work being destroyed and I felt horrible for him.

I felt horrible for all the people of AIG because as a competitor they were annoying! They were very annoying because they were successful and good at what they did. So I felt bad at that lunch and said: ‘Look Hank, I don’t think you’ll get it done, but if it comes to pass I promise you that I will do it for a year or whatever it’s going to take to get it back on track before it’s too late’.

But nothing did happen and I never received a call

from him. However in March 2009 I saw this spectacle of a commercial inquiry going on in Washington against the people of AIG. I felt for them and could see that they really needed an advocate. It was at that time I got this thought that the US taxpayer had given this company $182bn—why wouldn’t the people of our government want to help the people of AIG pay it back? Why wouldn’t they want the people to stay at work and do their jobs so they can pay back the money instead of wanting to see the company implode? That is what almost happened in March 2009 and I thought it was a sad statement of our history in this country.

AL: Thankfully for the people at AIG and the US taxpayer the company was not allowed to implode under a welter of accusations and back-biting, particularly about compensation for AIG staff, and you took over and helped lead the insurer back to recovery. How did this actually come about?

BB: The critical thing that happened back then was that people in our government, however critical I choose to be of them, made decisions. I believe that if Tim Geithner (CEO of the New York Federal Reserve Bank), Hank Paulson (Treasury Secretary) and Ben Bernanke (Chairman of the Federal Reserve) had not all got together and made decisions, the fi nancial system would have collapsed. Had they allowed AIG to collapse because of the credit default swaps we would not know the world we know today. Institutions outside the US, as well as within the country, would have collapsed. We have to accept in America that we have a system called the capitalist system. It is about employment at will for the employer and employment at will for the employee. That’s the way it goes and if you keep poking people in the eye they will eventually do something different. So while I was criticised a lot for

defending the staff I was merely attacking anybody who thought it was OK to criticise our people.

AL: Apart from compensation for AIG staff there was also a lot of pressure on you to break up the group and sell off the various parts to try and recoup some of the investment made by the taxpayers. But on the whole you decided against that fi re-sale strategy. Was that the right thing to do with the benefi t of hindsight?

BB: When I took over at AIG I immediately stopped the fi re-sale that was going on, where businesses and parts of our company were being sold for way less than their true value. I said: ‘You’re not selling anything anymore’. For example, I was under intense pressure to sell our mortgage guaranty insurance business, United Guaranty. Eventually I got my way and we did not sell it and I think that will be proven to be the right decision over time. We also unfortunately sold the iconic building at 70 Pine Street—AIG’s headquarters. But I don’t like to look back on what we could have done, because it’s the past.

AL: But you have just done a deal for the sale of the aircraft leasing business ILFC to Aercap Holdings for $5.4bn. Was that a good deal?

BB: We are very hopeful that we fi nally found the right buyer. The challenge in 2009 was stop the sales, get the morale back up and get the businesses performing correctly. It was about operating the company, not selling the company

AL: How did your strategy affect the people at AIG? I remember at the time I had some pretty intense meetings with your people, brokers and customers about whether you would survive or not. But there was quite a remarkable level of loyalty on the corporate insurance side of the business at least. How did that happen?

BB: Well, fi rst of all it didn’t happen overnight. Hank [Greenberg] left behind a company of very strong, entrepreneurial, innovative and empowered people, there’s no question about that. As I visited our people around the country and then around the world, I began to realise how strong they were. Around that same time, in 2010, I also decided to meet about 200 of our best and biggest clients around the world and about the same number of top brokers. What they told me is that they could always rely on the confi dence and judgement of an AIG person and that our people really make a difference.

My job was to give the staff hope. If you deprive people of hope you may have deprived them of the last and only thing they have left to look forward to. So that was my challenge, and it’s a theme I’ve used for many years in my career. As a leader I have to give my people a vision and I’ve got to make sure that they believe that vision is attainable and is good for them. So when I attacked the government and I called them certain names, which is all documented on the internet, people eventually applauded. They said: ‘Oh my God, he’s actually taken them on. He actually cares about us’. People realised that I really cared about only one thing and that was restoring this company, paying back its obligations and going back to making wine! What also retained the clients in the crisis was the belief that AIG would survive as a regulated entity. The clients understood the difference between AIG the holding company and AIG the insurance company.

AL: You paid the $182bn back with interest quicker than most people thought you would. What do you think is the lasting impression of this affair on your customers?

BB: I would say that every customer I’ve met since we CONTINUED ON PAGE 16


15HOT SEAT Robert Benmosche, President & CEO, AIG

IN CHARGE OF THE COMEBACK KID


16 HOT SEATRobert Benmosche, President & CEO, AIG

paid the money back is elated to see that happened. But it’s not only customers that are happy, also people across the insurance industry—CEOs of other companies and the like. This is because it said that we in the insurance industry are pretty responsible people and we have the capacity to go through some tough times and still be here. I’m amazed at how many people, competitors, said: ‘Thank God you pulled it off, it’s great for all of us’. I think people took a great deal of pride in the sector seeing AIG pull it off. It’s the comeback kid!

AL: Broadly speaking you would have to say that the comparison between the performance of the insurance and banking sectors over the last few years has been great for the insurance sector. You and others such as XL had your problems but pulled through. There were no major casualties and this is surely a huge bonus for your sector?

BB: The banking sector is very different and you have to understand that banks are not dealing with long-term liabilities and that’s a big deal. People bring their money to a banking institution and say: ‘I want you to keep it here until I want it, keep it safe’. Banks have to do business with other banking institutions in other countries and within a globalised system. There are a lot of payments between the institutions and if you stop the music on any given day it could be pretty tough. It’s so integrated and complex today that it’s hard for any one person to really understand if there’s a chink in the armour.

I remember when I was at Chase Manhattan Bank they talked about a huge snow day in New York when parts of the state were completely paralysed. They didn’t know who to call and ask what do we do with loans in this kind of situation when people couldn’t get to work to move the cash around. The state didn’t know how to open and so they called George Champion who was then the chairman of Chase Manhattan and he said: ‘Calm down guys I’ll get on the phone’. He called all of the banks and said: ‘Here’s what we’re doing—I’m going to reconcile this, you do this and he laid it all out.’ He even had to turn on the lights. Today nobody knows whom to call! So the banking system is very intertwined.

I was on the board of directors at Credit Suisse at the time of the credit crisis and nobody could tell at that moment who was still standing, therefore the inclination was to stop. Such paralysis could cause the financial system to collapse. The regulatory reaction to this was to demand more capital so the financial institutions have so much cash, so much liquidity that it would be pretty hard for the system to need anybody else. But the downside of this is that it is strangling growth. That is why people are frustrated about how long it’s taking to get over the recession. People are struggling with why there are not any new jobs. This is because people are sitting on so much cash because the regulators and governments haven’t really figured out how to protect the financial system so it can run reasonably efficiently.

AL: Yes it does seem like there is still a lot of work to do on the regulatory front as it is clearly not just about building bigger capital buffers but rather making sure that risk is properly analysed and priced. What would you like to see happen to improve this?

BB: They really should think about having the right safeguards in place so that if any one institution fails it would not bring down the system. I think regulators don’t understand that it’s actually OK for a company to fail. You can’t have institutions that can never fail. You’re

never too big to fail. We don’t even have governments that can’t fail. There is no question in my mind that any large financial institution in America can withstand any financial crisis of significant magnitude. You have to carry out stress tests.

When we decided to pay a dividend last year and decided to buy back a billion dollars of our stock, people said I guess they’re OK. We did a stress test unofficially because the Federal Reserve has not put us under their regulation yet. We had a budget for a two-year period of time. During that period we ran some pretty significant stress tests, and we asked questions like what would happen if we under-performed our pre-tax profit budget by a significant amount of money. So instead of making money during that period of time, we lost money and we’re under budget. In addition to that the credit rating is cut and unemployment goes to twelve and a half per cent. In addition to that credit spreads widen by over four hundred basis points, housing prices fall and the mortgage backed securities market collapses. And, if that’s not enough, since we are an insurance company, assume that Superstorm Sandy comes back through New York again. Then you ask yourself whether you have the level of capital necessary for your credit rating? Do you have enough liquidity to continue to meet the needs of your business? These are the two big questions that you have to ask yourself and in all cases we had plenty of money.

So the board of directors agreed to give some of it back to the shareholders. If you can handle that kind of a crisis you’re doing pretty well. The point is that we are so well capitalised today that we can’t bring the financial system down. So you can over regulate us so that the shareholders don’t always have the value they should, but I’m not sure it’s a good regulatory system. A good regulatory system ensures that all of our customers are protected and all the promises that we made as an insurance company can be paid. Surely it’s up to the bondholders and stockholders to figure out whether they want to continually leave their money here as an investment. You can’t protect the investors like the policyholders and I think the regulators out there are just afraid and not really thinking about what they are there for.

AL: Is globalisation the biggest threat to all of this because we have a global economy that is still effectively run by national and regional governments not designed for the job? There is a fundamental problem here surely?

BB: I think that the current governmental and regulatory system restrains the global economy. I think we’re at a point where the system will make it more difficult to move money from here to there. Switzerland clearly has said that it cannot afford to have two institutions that are bigger than the country itself. To what extent do you want Credit Suisse and UBS to be allowed to be so big that they can fundamentally impact the position of Switzerland? How do you protect their depositors? More countries are also looking at their own banking institutions to support their own growth. So you have depositors in Germany that need to be protected and they’re not concerned about depositors in France. The question asked is how to protect your country rather than any institutions that are part of a worldwide network. I just think the world is shifting, I’m not sure where it’s going but its people are becoming more parochial again in this day and age.

AL: It seems that the political reaction does not match the economic reality. People increasingly have a global perspective, the economy is increasingly global but national governments are still running national budgets. How do you square that? You run an international company and you are regulated all over the world because you have subsidiaries

all over the world. You are a global business attempting to transfer the global risks of global customers but you face local governments who are telling you that you can’t transfer that risk on a global basis. You have to leave some of the risk in the country even if the local insurance industry does not have the capacity to carry it and you have to pay tax on that. How is that problem going to be solved?

BB: It’s complicated but it’s our core strength that we are continuing to build upon. Like it or not Proctor and Gamble are going to be all over the world. Like it or not Walmart are all around the world. As companies continue to expand around the world they are going to have to comply with what they need to and we will as well. The key is to be skilled at pulling it all together. That is what is important and that is what we do in an effective way. We have achieved enormous geographical risk diversification so that we can offer large property cat coverage for example. If I were looking at exposures here in France it would make it very difficult for me to insure that exposure if we were just focused on the size of our French business. But we don’t think of it that way. We think about France as a location among many. We look at that risk and aggregate it with all the risks of Japan, Thailand, Indonesia, South Africa, Middle East, Israel and the US. It is complex but it’s the management of that complexity that allows AIG to do things for clients that others can’t.

AL: So it goes back to people again. If you can manage that process, if you can manage the people, the relationships with the local governments, the regulators and so on then you have a critical edge over the competition?

BB: Yes and this is why we made a big change at AIG as we entered into 2011. We decided to focus on consumer business around the world and the commercial insurance business. And within the commercial insurance business we decided to focus on our key products. They are property, liability, casualty, energy, shipping and so on. We said don’t think about a US and a non-US business as in the past. We used to be very traditional. If we had people in the US expert in earthquake, hurricane or other cats, they were not allowed nor invited to understand how we could apply some of that to what goes on in Europe or Asia. So we could have been over-exposed or under-exposed, we didn’t know. Now we have one person running it globally so he can sit down and assess our global appetite for risk, the global size of the premium and then decide if we want to take on a billion dollar property in Paris. He may choose to do that because it fits the diversification. So it’s about the law of large numbers and the laws of significant diversification of risk. That was a major shift in our strategy. It’s just starting to take hold and we’re beginning to see very good results from it.

AL: It sounds like you have more or less achieved what you set out to achieve when you took the helm at AIG. Is there anything else you want to do before you go back to your wine?

BB: I think we’re close to achieving it. It’s a matter of sustainability and how much time do you need to know that something is sustainable? I believe that we have made some dramatic changes in the organisation. We’re investing in our technology. We are working hard to become state of the art and improve the way we think about risk. Investment in such systems is very expensive so we’re criticised for spending too much money. But you can’t succeed until you spend some money to reinvest in infrastructure. I think people are finally realising that AIG is actually pretty healthy, alive and just as competitive, if not more, than it was before.



» IAIS UNDER PRESSURE OVER GLOBAL PROGRAMMES

ONE OF THE BIGGEST PROBLEMS FACED by companies, their brokers and insurers when putting together a multinational programme is regulators’ response to non-admitted excess covers in different countries. Now the International Association of Insurance Supervisors (IAIS) is coming under renewed pressure to harmonise regulation, not least from ECIROA (the European Captive Insurance and Reinsurance Owners Association).

Günter Dröse, Chairman of ECIROA, first urged insurers and brokers to back the association’s proposals for the application of excess cover in all countries over a year ago.

ECIROA argues that in non-admitted-countries where foreign insurance cover is not allowed, local policies should be issued up to a working cover level (capacity and wording following market Master standard) and the Difference in Conditions and Difference in Limits (DIC and DIL) protection in excess of the locally placed policies allowed by agreement.

Now that ECIROA has ‘observer’ status at the IAIS, the association has pledged to keep up the pressure for change.

Graeme Condie, Allianz Global Corporate & Specialty’s International Insurance Solutions Coordinator, said that future progress will likely be restricted because the two key bodies involved have different priorities.

He explained that the main remit of the IAIS is to support local insurance markets and to protect local consumers and carriers. ECIROA, on the other hand, was established to represent the interests of insured multinationals, some of whom struggle with complex regulation in the context of their international insurance programmes.

ECIROA is currently lobbying the IAIS for the acceptance of excess global covers in all countries (including those where non-admitted is prohibited), which it argues would make structuring multinational insurance programmes easier. It isn’t a priority for the IAIS, according to Mr Condie, and is unlikely to be for some time.

“Despite ECIROA having laid out clearly the positive aspects of the excess cover proposal (higher limits/capacity in the domestic market, local insurer access to more sophisticated wordings, increased premium volume in the local market), the predominant view within

the IAIS appears to be that such a proposal denudes local control of insurance market activities,” he said.

He explained that Allianz is supportive of any initiative that would improve the streamlining and administration of global programmes.

“That said, we are aware that the IAIS does not see the problems insurers may face with regard to multiple regulatory environments as an overriding priority, which itself tends to undermine ECIROA’s proposal, albeit put from a client as opposed to an insurer perspective,” he added. “We continue to follow the ECIROA/IAIS debate, in the hope that ECIROA’s own observer status at the IAIS will allow the issue of excess cover to be further discussed. However, we feel it may be some time until substantive progress is made.”

Petra Riga, Head Zurich International Programmes Sales and Distribution, Zurich Global Corporate, said that while historically the IAIS has been more focused on pure supervisory measures, their objectives do call for the ‘promotion of effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets’.

“However, in recent years the realities of the financial crisis and the G-20’s activity have forced the IAIS to dedicate the bulk of their resources towards financial stability initiatives. Nonetheless, we do perceive an interest in the market aspects of supervision,” she explained.

She pointed out that Zurich presented its perspective on cross-border and Group Internal Risk Transfer to the IAIS Reinsurance Subcommittee in November 2013. She said the presentation was well received: “[We] demonstrated our tools for building insured specific solutions, identified marketplace challenges to meeting the needs of multinational clients and suggested tactics for the IAIS to leverage its position as a global standard setter to create those ‘fair, safe and stable insurance markets’.”She said these tactics include:n becoming an advocate for regulatory

reforms to streamline the delivery of international programmes (both products and claims);

n engaging in multi-lateral trade negotiations to support international programmes;

n and incorporating the concept of consistent regulation and removal of barriers to international programmes.Ms Riga added: “We are fully supportive

of ECIROA’s concepts. I think it will be incremental and require further education especially in the emerging markets. If such

proposals can gain traction through trade agreements such as TISA we believe that substantial headway would be possible.”

Another problem is that the IAIS has a lot on its plate right now, according to Praveen Sharma, Global Leader of the Insurance Regulatory and Tax Consulting Practice at Marsh.

“The IAIS, whilst sympathetic to the needs of multinational companies with regard to their global programmes, have other major priorities—such as the implementation of the Insurance Core Principles,” he said. “This is a 400-page document providing a globally accepted framework for the supervision of the insurance market, the implementation of which is going to take up a significant amount of time and resource for insurance supervisors.”

Insurers and brokers are supportive of ECIROA’s stance. Stephen Morton, Head of AIG’s Multinational Centre of Excellence, EMEA, said: “The lack of consistency of rules across the world is a major challenge, if not a headache! So anything that brings consistency and contract certainty is, frankly, welcome.”

Tracey Clayton, Team Account Executive at JLT Specialty Limited, said: “We do support any call for regulators to accept non-admitted excess covers. In some countries liability limits will never be breached on primary layers, let alone excess layers and fronting for excess layers can be tricky in developing countries where capacity is very limited. Added to this, the costs of fronting versus premium allocation for developing countries can also be prohibitive.”

However, she added: “As there is so much more focus on compliance now, we do not feel that there will be much headway in the coming year.”

—Tony Dowding

» FRONTING FEES—MORE ART THAN SCIENCE?

A RECENT WHITE PAPER FROM AIG HAS taken a new look at fronting fees and how they are calculated. The paper acknowledges that, in the past, fronting companies have been reluctant to divulge the secret formula behind their fronting fees, resulting in a perception that pricing has been more art than science.

It said that many brokers and clients often regard fronting fees as purely an administrative servicing cost, and they evaluate fees against the perceived workload of a given risk management programme. But according to the author of the paper, Salil Bhalla, Head of Global Fronting across Europe, the Middle East and Africa for AIG’s Global Risk Solutions, there are a number of drivers

that influence the fee, including the:n Number of countriesn Number of policies and certificates to be

issuedn Number of premium transactionsn Anticipated claims volumen Volume of premiumsn Magnitude of policy limits to be issued,

andn Any special servicing and reporting

requirements.But even these drivers do not fully

explain the components that actually make up fronting fees, especially for global programmes, according to AIG. It noted that the main components of fronting fees are: central programme coordination, local service fees, captive cash-flow management and reporting, claims handling, credit and cost of capital, regulatory and operational risk and profit.

The issue of central programme coordination is vital for any controlled master programme and the fronting insurer is responsible for designing and implementing a compliant programme structure that meets the client’s needs.

On the issue of local service fees, the paper points out that in any global fronting programme the local insurer will be issuing an admitted policy and providing local servicing such as issuance of certificates, premium invoicing, premium collection and payment of taxes, as well as possible local compulsory cessions and premium reserves withheld and local requirements governing the exportation of premium and risk.

Another component of the fee is related to the regulatory and operational risk. Insurance is a highly regulated business that is getting even more regulated, said the paper, and the risk that a policy might not comply due to a change in law or regulation can lead to losses for the fronting insurer.

On the profit element of the fee the paper says: “In implementing and managing a captive programme, the fronting insurer should not simply seek to cover its own administrative costs and cost of capital but to deliver an adequate return and profit for its shareholders…In some markets, inexperienced fronting insurers may only wish to charge a nominal fee for captive fronting but this fails to recognise the valuable resources that handling such programmes can consume.”

The paper concludes: “In recent years, fronting insurers have been fine-tuning their pricing models and moving towards a more scientific approach to determining appropriate fronting fees.”

—Tony Dowding

» THE BEST OF IPN

Commercial Risk Europe’s International Programme News (IPN) is a monthly web-based service that delivers news and analysis on risk transfer and financing developments at international level. It examines initiatives from insurers, brokers and captive managers to help risk and insurance managers improve the way they manage and transfer their cross-border risks. Below is a selection of leading stories from this month’s issue.

You can access the full IPN newsletter at http://www.commercialriskeurope.com/ipn-home/ipn and sign up to receive the monthly email alert at http://www.commercialriskeurope.com/ipn-signup.

17INTERNATIONAL PROGRAMME NEWS

Günter Dröse

17_CRE_Y5_03_IPN.indd 17 1/4/14 16:08:00

18 E-NEWSLETTER

» UPDATES TO ISO 31000 COULD INCLUDE CLOSER ALIGNMENT WITH MULTINATIONAL ACTIVITIES

[LONDON]—FORTHCOMING UPDATES TO both ISO 31000 and its accompanying Guide 73 will likely take the form of a simple ‘cut and polish’ but more drastic amendments, such as writing a new document in the language of multinational companies and governments, are on the table, Kevin Knight, Chair of the ISO working group that produced the ISO 31000, told Commercial Risk Europe.

As part of an ISO 31000 review, a working group will meet in London between 14 and 17 April to develop proposals to be put before a meeting of the ISO Risk Management Technical Committee, including its chair Mr Knight, this September.

“That group is looking at doing a bit of an update to 31000 and consequently Guide 73—some editorial and polishing that needs to be done,” said Mr Knight, who is also President of the Federation of Asia Pacific and African Risk Management Organisations (FAPARMO).

“But I also think because we have it open to review some people may want to rewrite the document and seek wholesale changes. This would be regrettable as the strength of ISO Standards is that they are subject to evolutionary change not revolutionary change,” he added.

Mr Knight hopes that any drastic changes, including more closely aligning ISO 31000 with the operations of multinationals, will rather take the form of additional complementary documents.

“So, for example, rather than rewriting 31000 in the language of multinationals, or government, which some have called for, we would write separate documents for the application of 31000 in multinationals or government. You would essentially take the framework section and annex of 31000 and

write that into a high-level corporate risk management document,” he explained.

Changing ISO 31000 itself to fit the language of a specific activity or group would be problematical because it is a generic guideline and written in appropriately phrased language, explained Mr Knight.

“The attraction of writing a separate document focused on large multinationals or some other specific function is that you can easily write it in the language of the function. It is far easier writing it in the language of a specific function rather than when you try to write generically,” he said.

The ISO working group will send proposed changes to national ISO mirror committees for consideration. Final decisions will be taken in the first week of September in Istanbul, Turkey by the ISO 31000 Technical Committee. “Then we should have a clear working plan on where we and ISO 31000 are heading,” said Mr Knight.

—Ben Norris

» GERMAN RISK MANAGEMENT COMMUNITY LOSES KEY PLAYERS TO INSURANCE INDUSTRY

[COLOGNE]—GERMANY’S RISK MANAGEMENT community lost two prominent members to the insurance industry last month with Klaus Greimel of energy giant E.ON and Hanns Martin Schindewolf, who left car manufacturer Daimler at the end of last year, joining insurers HDI-Gerling and AXA respectively.

Mr Greimel, one of Germany’s most prominent risk managers and Head of Insurance at E.ON, will join insurer HDI-Gerling Industrie in July 2014. He has been chosen to replace Lutz Blume as branch office manager in Munich. HDI-Gerling Industrie confirmed the appointment.

Between 2010 and 2013 Mr Greimel was chairman of the German risk managers’ association Deutscher Versicherungs-Schutzverband (DVS). His predecessor at DVS was Siemens risk manager Stefan Sigulla, who also stepped down as chairman

to become a management board member at HDI-Gerling Industrie. Mr Greimel remains a committee member at DVS but will seemingly have to resign from this position in due course.

Mr Greimel, who studied economics, did a stint in the US with broker Johnson & Higgins and then moved to Zurich. In 1993 he joined the Viag group in Munich that merged with Veba to become Eon in 2000. Since then he has been based in Düsseldorf, although his family continues to live in Bavaria.

DVS will lose another committee member in Mr Schindewolf. He will join AXA Germany. The 41-year-old will take over responsibility for the insurer’s retail property, casualty and liability business. He will also be responsible for the insurer’s automotive business, which mainly consists of cooperation agreements with car manufacturers.

Mr Schindewolf stepped down as chief executive and chairman of Daimler Insurance Services in October. At Daimler he improved the sales of insurance policies through car dealerships. AXA also wants to benefit from his expertise in this field, where the insurer is seeking to close the gap to market leaders Allianz and HUK-Coburg.

Before his stint at Daimler, Mr Schindewolf was with consultancy Boston Consulting Group for nine years.

—Herbert Fromme and Patrick Hagen

» NEW HDI-GERLING TOOL HELPS BUYERS TRACK GLOBAL SUPPLY CHAIN AND NAT CAT EXPOSURE

[COLOGNE]—HANNOVER-BASED INDUSTRIAL insurer HDI-Gerling Industrie Versicherung has introduced a new geo-information system that will help the company with risk analysis and loss prevention at any location in the world. HDI-Gerling’s clients can also use the system to analyse their supply chain and plants’ nat cat exposure.

The system is called Argos, which stands for Accumulation Risk Geospatial Online System. The name also refers to the figure in Greek mythology who had 100 eyes and could thus see in all directions.

HDI-Gerling, a Talanx subsidiary, has been conducting trial runs of the system since the end of 2013 and it has now been launched officially. The insurer expects it to support more exact underwriting and give the company a competitive edge over its main rivals. The system bundles information

from a number of data sources while the maps are supplied by special service providers.

When an underwriter enters the address of an existing or potential client, Argos gives an overview of its sites’ nat cat exposures, noting if the company is exposed to flooding, earthquakes or hurricanes. In addition, the system provides information on the distance to the nearest nuclear power station, nature reserve and the population density of the region.

From HDI-Gerling’s point of view, the tool is of particular use for big companies that have a huge number of plants around the world. As well as delivering an overview of sites’ nat cat exposures it can point out potential cumulative risks in certain regions. In addition, it can aid companies planning new plants.

Argos is also capable of analysing a company’s supply chain. Industrial companies can see if a supplier is located in an endangered zone and take relevant precautions.

At the moment Argos can be used by clients for free, however HDI-Gerling may charge for the service in the future.

But, like all such data-based risk assessment systems, Argos is not infallible. It cannot avoid the risk of false or missing information, especially when much of it comes from external sources.

“Human logic and specialist experience are, and will, remain the essence of industrial insurance,” said member of the management board of HDI-Gerling Industrie Versicherung, Joachim Ten Eicken.

Mr Ten Eicken is convinced that Argos will help HDI-Gerling to become much faster and more precise when assessing and processing losses in the wake of flooding and storms. During periods of flooding, underwriters and claims adjusters can identify whether the insured sites have suffered damage.

“The system is a step in the right direction to achieve more transparency about premium calculation and losses,” said a risk manager, who did not want to be named. However, the risk manager does not believe the system is unique in the insurance industry. “HDI has come on the market with a tool other insurers already have,” he said.

It remains to be seen how the system performs in real life, whether there are proper interfaces for data that clients provide and if the information that flows into the system is really up to date and contains enough detail, the risk manager said.

—Herbert Fromme and Patrick Hagen

» THE BEST OF THE WEB

Commercial Risk Europe reports the leading news stories of relevance to Europe’s risk and insurance managers every week in its electronic newsletter. Below is a round-up of the most popular articles published last month. To sign up for the free CRE weekly newsletter please go to: http://www.commercialriskeurope.com/ more-information/newsletter/sign-up-here

Klaus Greimel

Kevin Knight

18_CRE_Y5_03_BOW.indd 18 1/4/14 16:08:24

JUNE 12-13 2014, WESTIN DRAGONARA RESORT, ST. JULIAN’S MALTA

EVER EXPANDING RISK HORIZONSpresenting the results from the

2014 GLOBAL RISK FRONTIERS SURVEY

To view the programme in detail, or to register for the event, please go to:

WWW.COMMERCIALRISKEUROPE.COM/MALTACONGRESS2014Email our Event Manager Annabel White—[email protected]

JUNE 12-13 2014, WESTIN DRAGONARA RESORT, ST. JULIAN’S MALTAJUNE 12-13 2014, WESTIN DRAGONARA RESORT, ST. JULIAN’S MALTA

DAY 1—THURSDAY 12 JUNE12.00—12.30: Registration 12.30—14.00: Welcome buffet lunch and networking14.00—14.10:Opening remarks & Welcome address—Finance Minister, MaltaSESSION 1—GLOBAL PROGRAMMES: THE ENDLESS SEARCH FOR NIRVANA—CONSISTENCY, CONTINUITY, COMPLIANCE AND CAPACITYThe fi rst session of this year’s congress will identify how risk and insurance managers with European and international corporations can most effectively manage and transfer their international exposures.14.10—14.30: CRE Editorial Director Adrian Ladbury will report the fi ndings of research carried out by Commercial Risk Europe, Commercial Risk Africa and International Programme News among leading European and international risk managers on the subject of global programmes during the fi rst half of the year. 14.30—15.00: KEYNOTE SPEECH—Insurer—speaker TBC15.00—15.30: PANEL DEBATE—The fi ndings of the survey will then be discussed with a panel of leading experts from a law fi rm, a broker, and advisory fi rm and two corporate risk managers15.30—16.00: Coffee and networking break16.00—17.45: Structuring a global programme

Master classIncreased scrutiny from regulatory and tax authorities in recent times has changed the ground rules for the structure of global programmes.

This Master class will address the above issues and identify the practical process that risk managers should consider when they structure their global programmes.

The panel, chaired by Praveen Sharma of Marsh, will include two experts from leading international insurance companies and a representative from a law fi rm and advisory fi rm.

The Master class will discuss two hypothetical case studies for Public/Product Liability and Director’s & Offi cer’s classes and consider the major issues that risk managers should consider such as implementation of local policies, premium allocation and recharge and premium taxes.16.00—16.50: CASE STUDY 1: Public/Product Liability16.50—17.40: CASE STUDY 2: Director’s & Offi cer’s 17.40—18.00: Summary of afternoon’s discussions. 18.00—20.00: Cocktails

DAY 2—FRIDAY 13 JUNEDay two will focus on two core matters: what are the key existing and emerging regulatory parameters that risk and insurance managers have to work within and how well equipped is the insurance industry to cope with the risk transfer demands of modern global corporations. SESSION 1—CAPTIVES AND THE EFFECTIVE MANAGEMENT OF GLOBAL RISK09.00—09.30: A leading captive manager will address among other key issues: ■ Why are captives still the most effective way of

managing corporate risk?■ How can captives help risk managers maximise their

insurance spend and improve coverage?■ Where should a European company set up their captive

and why?■ What are the latest captive tools and methodologies

such as Insurance Linked Securities available for risk managers?

09.30—10.00: Angele Grech, MFSA Regulatory Development Unit, will tackle the following questions:■ What does Malta have to offer as a captive centre, why

set up a captive in Malta?■ What are the current captive options available to risk

managers and what are the latest developments?■ Why did Malta introduce its new reinsurance SPV rules? ■ What are the latest developments in captive cell

structures in Malta and what do they offer?■ What is the potential for Malta to become the home of

a new ILS centre in Europe?10.00—11.00: Malta panel debate—Adrian Ladbury, Editorial Director, Commercial Risk Europe, will host a discussion with a group of local captive managers, investment managers and risk managers who have captives in Malta.

SESSION 2—GLOBAL RISK MANAGEMENT AND TRANSFER11.30—11.45: What the buyer wantsCRE Editorial Director Adrian Ladbury will reveal the fi ndings of this year’s Global Risk Frontiers survey and initial fi ndings of the European Risk Frontiers survey and explain what risk and insurance managers really need from their insurers and brokers in the year ahead.The survey’s specifi c questions include:■ What could insurers and brokers do to ensure that the

value of insurance is more easily explained to the board?

■ How could insurers and brokers better manage claims?■ What single initiative would improve the process of

innovation and development of new covers for emerging risks in the international marketplace?

11.45—12.45THE GLOBAL RISK FRONTIERS INDUSTRY DEBATEA panel of leading senior executives from the European and international insurance industry will explain how they plan to respond to changing customer demands. This discussion will also cover the potential offered by capital markets to introduce innovative new capacity to cover diffi cult risks through vehicles such as Insurance Linked Securities.12.45—14.00: LUNCHSESSION 3—RISK REGULATIONThis session will focus on risk regulation, the ever-changing landscape and what it means for risk managers and the wider risk and insurance industry focused on solvency and the regulation of global programmes.14.00—14.30: How does risk regulation make the world a safer place in which to do business? Keynote address—Karel Van Hulle, Professor at Leuven University and former head of pensions and insurance at the European Commission responsible for the creation of Solvency II 14.30—15.00: Regulation of cross border insuranceA senior representative of the International Association of Insurance Supervisors (IAIS) will be invited to explain its thinking and strategy on the supervision of cross border insurance business and programmes. 15.00—15.30: Panel Debate—Adrian Ladbury and CRE Deputy Editor Ben Norris will host a debate with Mr Van Hulle and the representative of the IAIS. They will be joined by Marisa Attard, Director of the Malta Financial Services Authority and two risk managers with signifi cant captivesSESSION 4—THE RISE OF THE CRO & RISK EDUCATION16.00—16.15: CRE Editorial Director Adrian Ladbury will reveal the specifi c risk education fi ndings of its annual Global Risk Frontiers survey of 120 international CROs and risk managers. 16.15—16.45: Delivering true ERMA CRO with a leading international corporation identify what they believe is needed to really make ERM work in a modern global corporation and how education and training can help achieve this goal.16.45—17.15: Risk Manager Panel DebateThe fi ndings of the Global Risk Frontiers survey will be discussed with a panel of leading international risk managers

GOLD SPONSOR

19_CRE_Y5_03_FAP.indd 19 1/4/14 17:21:51

submitted Study On ELD Effectiveness: Scope And Exceptions by BIO Intelligence Service and Stephen and Bolton LLP’s Valerie Fogleman.

It concludes that the EC may wish to consider as an ‘option for priority’ in a possible future revision of the ELD extending strict liability to non-Annex III activities, either only for biodiversity damage or for all environmental damage.

Alternatively, the Commission may wish to consider extending the list of activities in Annex III to include additional activities such as the pipeline transport of dangerous substances, mining and invasive alien species, adds the report.

It warns against reducing the scope of Annex III. “Doing so would not further the polluter pays principle,” it says.

Currently under the ELD strict liability is imposed upon operators of dangerous activities listed in Annex III of the directive for environmental damage caused to land, water and, at the option of member states, biodiversity. Fault-based liability is imposed on non-Annex III operators for biodiversity damage.

“The extension of strict liability (to non-Annex III activities) for biodiversity damage would further a basic objective of the ELD: reducing the loss of biodiversity in the EU,” says the study.

“Extending strict liability to non-Annex III activities that cause land and water damage could make the ELD more effective, and would promote the polluter pays principle because it would make it more likely that polluters would pay the cost of remediating environmental damage caused by their activities,” it adds.

A second report entitled Experienced Gained In the Application of ELD Biodiversity Damage by Milieu Law and Policy Consulting, says there is ‘no justifi cation under the polluter pays principle to maintain the difference between strict liability and fault-based liability for different types of occupational activities causing damage to protected biodiversity’.

“Furthermore, the diffi culties of implementing the ELD linked to the procedures to prove the causal link are exacerbated in the cases of fault-based liability. All occupational activities causing damage to protected biodiversity should be subject to strict liability. In this sense the Commission may want to consider amending Article 3(1)b) in order to ensure that the ELD would apply strict liability to all damages to biodiversity derived from occupational activities,” it adds.

The Study On ELD Effectiveness: Scope and Exceptions also suggests that the Commission may wish to consider, as a priority, revising the ELD’s categorisation of environmental damage in order to make it more streamlined and effective. Current categorisation has led to a complex liability system, it warns.

The Commission may also wish to include air damage, which is currently excluded, in the ELD, says the study.

The ELD currently only divides environmental damage into three categories: land, water and biodiversity damage.

The directive contains ‘signifi cance thresholds’ of environmental damage for each of these categories and only imposes liability if these are exceeded.

The effectiveness study concludes that current thresholds for an imminent threat of, and actual, environmental damage are ‘problematic’ due to the often lengthy assessment needed to establish whether they have been exceeded, particularly for water and biodiversity damage.

Furthermore, the ELD defi nes an ‘imminent threat’ narrowly, which potentially causes operators to not notify competent authorities when their activities threaten damage because it is impossible to know if damage is subject to the ELD, says the study.

It therefore suggests the commission may wish to consider lowering the threshold for an imminent threat of environmental damage under the ELD.

It also says the Commission may wish to consider defi ning land damage under the ELD to include ground and other water damage, as well as clarify or revise its defi nition of water damage.

The study also analysed the application of the permit and the state-of-the-art defences potentially allowed to operators under the ELD. It recommends that the Commission may wish to consider deleting these optional defences in a future revision of the directive.

Fourteen member states adopted the permit defence and fi fteen adopted the state-of-the-art defence. Some member states adopted variants of the defences, whilst others adopted neither. The permit defence has been used only once according to the Article 18(1) member

state reports; no member state has used the state-of-the-art defence.

The study states that whilst a revision of the ELD could make the defences mandatory to help create a level playing fi eld across the EU, this would lower the high level of environmental protection in countries that have not adopted the defences or adopted variants. It therefore argues against such a revision.

“Another way of helping to create a level playing fi eld would be to delete the defences from the ELD,” it says. Adding, this approach would promote the polluter pays principle.

The study found many other reasons why the defences should not be made mandatory or be revised as either mitigating factors or exemptions. A particular criticism against retaining the defences is that both, in particular the permit defence, favour large companies and, thus, disfavour SMEs.

The third EC-commissioned Study On Analysis Of Integrating The ELD Into 11 National Legal Frameworks by Steven and Bolton’s Ms Fogleman, updates and revises the legal analysis reported in 2012’s Implementation Challenges And Obstacles Of The Environmental Liability Directive report by BIO Intelligence Service.

It confi rms initial fi ndings that the transposition of the ELD into the national

law of member states has not resulted in a level playing fi eld across Europe. “Instead, it has resulted in a patchwork of liability systems for preventing and remedying environmental damage across the EU,” it says.

The 2012 BIO study, which will also inform the Commission’s forthcoming review of the ELD, concluded that the directive is struggling to make polluters pay. Prosecutions under the directive are rare or non-existent in many member states and the ELD is failing to encourage operators to take out insurance or other fi nancial security to cover environmental damage, it says.

It found that ‘the lack of knowledge of the ELD among many operators, the public and even competent authorities and environmental non-governmental organisations; a failure by operators to recognise differences between the ELD’s implementation in different member states; and a failure by them to have insurance or other fi nancial security to cover ELD Liabilities—or to recognise the need for it—[is] leading to the

potential for the cost of further ELD incidents to fall on the public purse in member states that have not adopted mandatory fi nancial security’.

The study goes on to ask: “Should the introduction of mandatory fi nancial security be maintained as an optional provision, or are there grounds to introduce mandatory fi nancial security at EU level for some type of operations? Should harmonisation between member states be encouraged on this aspect?”

This will of course pique the interest of risk managers at those companies who would fall under any such mandatory security scheme.

The study concludes that to date there are still only a ‘few cases’ of environmental damage for which the ELD regime has been applied, but added that cases in which it was applied led to remediation measures.

Echoing sentiments in the latest EC-commissioned studies, it states that the major reason for a lack of ELD cases is an inability to demonstrate that damage exceeded the severity threshold fi xed by the regime, particularly for water and biodiversity damage.

Another reason for a lack of cases is that specifi c activities causing the damage have not been included in Annex III of the Directive, it adds.

CONTINUED FROM PAGE ONE

ELD: Revisions to Directive may extend strict liability

NEWS20 Continued from Page One

for cross-border operating organisations when it comes to negotiating contractual terms for specifi c coverage and this gives EU companies a much needed legal certainty and competitive advantage.”

‘TAILOR-MADE PRODUCTS’Ferma president Julia Graham commented: “Industry needs tailor-made insurance products

to support and secure its development. Insurance coverage must fi t the diversity of operators, their multiple locations and their different exposure to risks. Differences in insurance contract laws that could be obstacles to such tailor-made insurance products are overcome thanks to the large degree of contractual freedom and free choice of law that currently exist.”

The Commission will now follow up on the report with

stakeholders, which could lead to a formal consultation (Green Paper).

The EC’s expert group report said that the existing array of national insurance contract law may create barriers and unnecessary costs for so-called mass risks, such as life and motor, but that large corporates tend to be less affected mainly because the legal jurisdiction is agreed at the start of the contract.

This could mean that any future

attempt to harmonise European insurance contract law will see an exemption for large risks.

FREEDOM OF CHOICEThe report states: “With regard to large risks, the cross-border provision of insurance cover is already now a common occurrence; it rarely encounters obstacles arising from differences in insurance contract law since the parties are free to choose the applicable law.”

It added: “In the market for large risks the supply of, and demand for, cross-border insurance is not impeded by contract law. Here, choice-of-law clauses tend to be negotiated allowing the insurer to have risks located in various states being governed by one and the same law. The level of demand for mass and large risks differs as mass risks are typically consumer-related and large risks are typically industry-related.”

FERMA: Contractual freedom helps tailor-made solutionsCONTINUED FROM PAGE ONE

has resulted in a patchwork of liability systems for preventing and remedying environmental damage across the EU,” it says.

which will also inform the Commission’s forthcoming review of the ELD, concluded that the directive is struggling to make polluters pay. Prosecutions under the directive are rare or non-existent in many member states and the ELD is failing to encourage operators to take out insurance or other fi nancial security to cover environmental damage, it says.

knowledge of the ELD among many operators, the public and even competent authorities and environmental non-governmental organisations; a failure by operators to recognise differences between the ELD’s implementation in different member states; and a failure by them to have insurance or other fi nancial security to cover ELD Liabilities—or to recognise the

01_CRE_Y5_03_News.indd 20 1/4/14 20:38:20

To view the programme in detail, or to register for the event, please go to:

WWW.COMMERCIALRISKEUROPE.COM/EVENTS/CALENDAR/Email our Event Manager Annabel White—[email protected]

LATIN AMERICA: The evolving risk landscapeand cost-effective transfer of cross-border risks

LATIN AMERICA: LATIN AMERICA:

Risk FrontiersLONDON

Grange Tower Bridge Hotel London29 May 2014

21_CRE_Y5_03_FAP.indd 21 1/4/14 16:03:00

NEWS22 Continued from Page One

resilience in economically and socially viable ways,” he said.

He believes that a lot of risk thinking at government level is ‘painting by numbers’ with committees simply considering whether a risk rates as red, amber or green.

Worse still he fears that most risks are considered in isolation. “That is not what happens in real life: in real life as one thing hits, another does straight after, and another and another. The interdependence of multiple impact risks needs to be managed far more professionally,” he said.

Put simply, Mr Anderson believes that risk management is not treated as a discipline by governments and until it is will not be taken seriously.

He has therefore called for governments to employ a head of risk to take a strategic oversight

on risk management.“We see heads of professions for

a number of other professions within the UK government, for example, and I think risk management is suffi ciently important and relevant now for governments to be taking it on board. I suspect you could argue there is political risk, which is really for politicians to deal with, but then governmental risk, which needs to be strengthened more with the appointment of a head of profession,” he told Commercial Risk Europe.

‘STRATEGIC FOCUS’This person needs to be very senior and sit either in the cabinet offi ce or even in an independent organisation, said the IRM chairman.

“I see this person as having a strategic focus because I feel risk management suffers when it delves directly down into operations without having a strategic overview. So I am

talking about a senior position within government with an overview of risk management and who can bring it all together. I am not suggesting there are not some very bright and talented people carrying out risk management in government but I just don’t think it is pulled together at a senior enough level,” he explained.

The head of risk would effectively manage enterprise risk in government.

“There has to be a cross-cutting theme to risk management rather than keeping it silo-based. Although I have no doubt that many of the silos within government are exceptionally good at managing risk there is a clear risk that the silos might not be working effectively together. So we really are talking about someone bringing everything together, as a CRO would in a big company,” said Mr Anderson.

He believes governments need to

play catch up with industry in this regard and move on from managing risk at a superfi cial level.

Mr Anderson suggests the development of risk management in government requires a more collaborative approach that demands the risk community better gets its message across.

DIVISION BELL“I think we as a profession need to drive much greater awareness of risk management within governments…One problem that we are facing is that risk associations are divided in many countries. In the UK, for example, it is divided between differing camps in that we have the IRM, Alarm and other bodies. The voice of the profession actually needs to be much louder and most importantly coordinated,” he said.

Speaking specifi cally on the UK, Mr Anderson listed a number

of initiatives that alongside the appointment of a head of risk would help ensure society is better prepared to tackle future risk. These recommendations are equally pertinent to governments across Europe.

He believes every government department should have a senior civil servant responsible for risk management.

Risk management should be a core competency for all civil servants with training and certifi cation to an appropriate level for their principal roles.

He also urged governments to appoint a panel of experts to ensure that modern risk management thinking is effectively embedded.

Furthermore, governments need to review scenario plans to ensure that the interdependence of risks is properly considered, rather than each risk being taken in isolation, he said.

IRM: Government risk thinking: ‘Painting by numbers’CONTINUED FROM PAGE ONE

SUPPLY: International exposure still carries sizeable risksCONTINUED FROM PAGE ONE

and corporate restructuring consultancy fi rm.

He said that both risk management and transfer of supply chain exposure has improved signifi cantly since the Japanese earthquake and Thai fl oods provided such a rude shock to businesses of all types, as well as insurers and reinsurers the world over.

But Mr Teixeira warned risk managers that there is no room for complacency, adding that the cost-cutting mentality that led to the concentration of risks in the fi rst place is still far too common.

Companies around the world are therefore still leaving themselves far too exposed to serious and very real supply chain risks that can hammer shareholder value and even lead to bankruptcy for the sake of short-term cost savings, he told Dutch and Belgian risk managers.

Commercial Risk Europe’s own annual Risk Frontiers surveys and wider industry research has found that infrastructure and supply chain risk has shot up the corporate agenda in recent times.

ACE’s 2013 Emerging Risk Barometer found that risk managers believe that this risk poses the biggest threat of all to their balance sheets.

The survey pointed out that sophisticated global supply chains have driven down costs, but businesses are paying the price for a lack of visibility on exposures. The reliance of many companies on ‘creaking’ civil infrastructures, the security of international energy and power supplies and a potentially small group of specialist or emerging market suppliers compound this problem, said ACE. “This exposes them to severe fi nancial risk in the event of business interrup-

tion,” concluded the insurer. Asked why it appears to be

taking so many companies so long to wake up to the need for more effective risk management of this critical risk, Mr Teixeira said: “One of the biggest barriers is the procurement function which is focused on costs, process compliance and the quality of the product rather than the risks.

“Suppliers may well be compliant, which they need to be of course, but too often it is not considered whether that supplier is based, for example, in a natural catastrophe zone. It is all about cost control, the quality of the product and the fi nancial strength of the suppliers. Other types of exposure are all too often overlooked,” he added.

Mr Teixeira noted that companies need to properly assess, manage and seek to transfer elements of supply chain risk because the underlying threat will not go away.

He said that the key causes of supply chain risk are: increased regulation; the challenging economic environment, for European and emerging econ-omy companies in particular; the continued heavy reliance on a small number of suppliers as companies seek to simplify supply chains; effi ciency drives; global sourcing strategies; adoption of just in time strategies for manufacturing and supplier interdependency.

Mr Teixeira said that risk managers really need to think more carefully about supplier risks, and not just those related to property damage.

Such risks are very real and, if not properly identifi ed, managed or covered, can cause huge problems.

Mr Teixeira said risks include fi nancial fragility and insolvency at supplier parent company level and the direct supplier subsidiary company, regulatory site shutdown, unplanned

IT and telecommunications shutdown, product recall, political risk—especially in emerging nations, failure of critical sub-contractors, labour disputes and transportation disruption caused by adverse weather.

Transportation risk is one that is commonly overlooked but can cause big problems.

Mr Teixeira pointed out that software-based models are available today that can help companies identify their potential weak spots, both in terms of the location of the supplier fi rms themselves and the ports, roads and railways used to transport goods.

Dual sourcing of a supplier to a safe spot is sensible. But if that supplier is reliant on a catastrophe-exposed transport hub then the benefi t can easily be wiped out, he said.

The supply chain expert said that the solution is to carry out a ‘logical and cost-effective approach to supply chain risk management and sustainability’.

This needs to focus on key products and suppliers and not necessarily on those companies that deliver the highest volume of supplies, he said.

Mr Teixeira said that the fi rst step is to ‘geo-locate’ the actual manufacturing facilities of these suppliers and identify both the property and non-property damage-related risks.

Next the risk manager, in combination with the procurement function, needs to carry out a thorough business interruption assessment and additional cost of working analy-sis of operations, throughputs and interdependencies for these key products and business units.

Then the risk manager needs to evaluate potential solutions to minimise the supply chain risk based on dual sourcing, buffer stock strategies, supplier buy-out and, of course, risk transfer.

Mr Teixeira said that he fully understands the frustration expressed by many risk managers in recent times about the amount of information on suppliers demanded by insurers and reinsurers.

He said that latest research actually proves that while it is useful to have as much information about suppliers, even down to fi fth and sixth level, the greatest risk by far is posed by tier one (direct suppliers) and tier two suppliers.

Mr Teixeira believes the insurance market has worked this out and is now being more pragmatic in its information demands.

The biggest problem for insurance managers has been to secure adequate levels of Contingent Business Interruption (CBI) cover against Property Damage Business Interruption (PDBI) policies, said Mr Teixeira.

But the former Willis consultant said that opportu-nities do exist to provide additional cover for damage and non-damage-related perils through the combination of stand-alone policies with existing CBI limits.

One recent development has been the use of captives as a partial solution to supply chain exposure. Mr Teixeira told risk managers that captives offer a number of benefi ts including:

■ Better access to supply chain exposure data that supports a better analysis of the risk

■ The development of more effective supply chain strategies through better understanding of exposures

■ The ability to use underwriting profi ts generated through other lines of cover to support supply chain protection

■ The use of the captive to ‘plug’ gaps in existing cover and protection against supply chain credit and disruption risk.“Captives can be used to

provide a formalised vehicle for the more effective management of a deductible programme, provide excess layer capacity and as a bona fi de insurance entity to access reinsurance markets that may offer enhanced fl exibility, additional capacity and keener rating. Captives represent an invaluable and innovative option as part of a modern supply chain risk programme,” said Mr Teixeira.

He also pointed out that the insurance market is working on solutions to provide indemnity cover for loss of sales volume or profi ts following negative publicity, which is another useful option for risk managers.

In conclusion Mr Teixeira said that it is vital for risk managers to know the precise location of suppliers’ actual production and manufacturing locations to enable them to accurately measure and quantify the vulnerability and resilience of their supply chain.

Mr Teixeira stressed that it is not just suppliers that need to be assessed. Risk managers also need to assess logistical ‘pinch points’.

And fi nally, procurement, design and risk management departments must collaborate with each other, brokers and underwriters to ensure that an ‘adequate level of resilience is created within a fi rm’s supply chain’, he said.

international supply chain exposures still fail to carry out adequate risk identifi cation

01_CRE_Y5_03_News.indd 22 1/4/14 20:38:32

cre_full_page.indd 1 29/01/2014 10:34:0923_CRE_Y5_03_FAP.indd 23 1/4/14 16:05:11

Size A3 + 3mm bleed - set up as 4 color - fi le: ARM-13-03110-P1-CS_Generic_Comml-Risk-Europe-1-28

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