TRANSFER THE RISK

WHAT IS THE BEST ?

October 1st, 2013

1

Introduction

One of the most relevant particularity of a risk manager’s activity is

its responsibility to imagine and set up the transfer of risk.

The transfer of risk may assume several aspects or possibilities.

The transfer of risk must start with an internal evaluation and

preparation by the company which intends to do so.

The transfer of risk obviously affects the organization which accept

to receive it as well as, potentially, the organization to whom the risk

could be retransferred

The transfer of risk implies that all the parties involved must be

aware about what they are doing and what are the consequences

for themselves and for their correspondents

We will study the link between insured, insurer and reinsurer and the

importance of risk management to succeed on it.

2

Introduction of the speakers

Gilbert CANAMERAS

Group Risk & Insurance Chief Officer, VP Finance

Chairman AMRAE

Gaëtan LEFEVRE

Group Risk & Insurance Manager

Group CMI

Chairman BELRIM

Michel JOSSET

Insurance, Prevention and Real Estate Manager

Goup FAURECIA

Emmanuel FIERENS

Chief Underwriting Officer, Head of Business Solution

3

Information People Property Finance Liability

RISKS

Property loss Business

interruption

Accidents, Illness

Theft, fraud

Product & Environnement

claims

Currency, Credit & other

risks

What could go wrong ? Risks, incidents and accidents

External world

Internal world

External world

Suppliers Business profile Customers

Investors, competitors, ...

Legal, ...

Society

Weather,...

LIABILITY LIABILITY

People

Property

Results

Information

Transfer the risk – where is it ?

6

Example of a loss due to a supplier

1st experience, the 1st day as Faurecia risk manager :

A staff of the external security company in charge of the watch service

in Audincourt bumpers plant considered that his skills were insufficiently

rewarded and wanted to be noticed by his hierarchy

He ignited a fire on plastic parts in a large bumpers warehouse, failed to

extinguish the fire … but fully achieved his goal to be noticed by his

bosses

As a result :

Warehouse + 6000 bumpers destroyed : loss of 2.2 M€

Propane bottle storage affected. Luckily, no injury.

Insurance status & Legal procedure

Faurecia property insurer indemnified the loss above the property damage

deductible (400k€)

The responsible was found legally incapable and had no resources

Faurecia & its property insurer started a recourse against the security

company (small company with limited liability insurance) and collected

1.1M€ from the security company liability insurer

The recourse was shared between Faurecia and its property insurer

This event emphasizes the importance of the exposure due to

suppliers and the importance of contractual prevention

Liability : The (re)insurer experience

«The scene »

The liability insurance market is segmented by domain : (Comprehensive) General liability, Professional Indemnity (E&O),

Stand- alone Products liability, Motor liability, Marine liability, Aviation

liability, Pollution liability, Directors & Officers liability, ect..

Depending upon its activities, to protect against its liabilities,

each Insured is required to purchase several of those insurance policies

The “responses” of those insurance policies depend upon their nature

12

Without full knowledge of the contracts signed by the Insureds,

to provide the appropriate insurance solutions for both parties,

the (re) Insurer must solve an equation at five factors :

3 factors iro Insured’s exposures

( U + A + E )

2 factors iro Insured’s contractual approach

( C M + C P )

13

The (re)Insurer must well assess

the Insured’s exposures

14

Products vs Services, Underlying risks &

potential perils

Markets of Insured’s clients

Geographical scope,

activity scope

Impact on exposure level

Growth rational: Organic, acquisition, diversification,..

Prevention & mitigation capabilities

Business model: own operations ; use of

Partners/ contractors –

Joint Venturers, …

Development

plan

Strategic objectives

Understand the Insured’ activities Assess the risks inherent to the scope

Evaluate the reduction of

risks by the Risk Management policy

Products vs Services, Underlying risks &

potential perils

Geographical scope,

activity scope

Markets of Insured’ Clients

Growth rationale: organic,

acquisition, diversification, …

Prevention & mitigation capabilities

Business model: own operations ; use of

Partners/ contractors – Joint Venturers, …

Development plan – strategic objectives

Impact on exposure level

U +

A + E

The (re)insurer must well understand

the Insured’s exposures

15

The (re)insurer must well understand

the Insured’s contractual approaches

16

Parties to the deal: definition of the

Insured(s)

Jurisdiction

Contractual

culture, contractual discipline,

legal support

Position towards performance guarantees, financial loss bearing

Retention vs Transfer of liability

Position towards:

hold harmless /

waiver of subrogation

Contract Management Contractual Policy / Practices

Stability of contractual

relationship with Insured’ business Partners (“repeat risks” vs

“transactional risks”)

Parties to the deal: definition of the Insured(s)

Contractual culture, contractual discipline,

legal support

Jurisdiction Position towards performance guarantees, financial loss bearing

Retention vs Transfer of liability

Position towards: hold harmless /

waiver of subrogation

The (re)insurer must well understand

the Insured’s contractual approaches

Stability of contractual relationship with

Insured’ business Partners

(“repeat risks” vs “transactional risks”)

C M + +

CP

17

Illustration : Main current technical issues by Occupancy

Electro Magnetic Fields (EMF) : Telecom

Nanotech : Manufacturing

REACH – Registration, Evaluation, Authorization and restrictions of Chemicals : Chemicals

Occupational Diseases : Mining, Manufacturing

Genetically Modified Organisms (GMO) : Food, Agro

Mould, Chinese drywall : Homebuilding

Pollution – Environment Impairment : Oil& Gas, Manufacturing

Silicosis : Mining

Workers Compensation, Employers Liability : Manufacturing

18

Risk analysis

Faurecia depends more and more upon suppliers (supply of

products, service,... including presence on Faurecia sites)

Faurecia is seriously exposed in case of damage due to

suppliers if the latter is insufficiently insured or if a limit of

liability of the supplier exists in the contract.

Faurecia would get its indemnification from its Property or

liability Insurer but would lose its deductible and may suffer

increase of premium due to loss record if the Insurer can not

file recourse against the supplier.

Training set for purchasers

established with our broker

How to review & negotiate the liability & insurance provisions

in a supplier contract :

Avoid a waiver of recourse or a too low limit of liability

from Faurecia side

Obtain a sufficient level of liability coverage from the

supplier’s side

How to review the insurance certificates provided by the

suppliers

Level of liability insurance for the

supplier

Guidelines given to the purchasers. The level of insurance will

depend on :

The type of supply : on site service, products (safety

subcomponents or not)

The type of liability : professional liability, products liability

The size of the supplier (local or worldwide)

The country of origin of the supplier depending on the

maturity of the local liability insurance market

Faurecia minimum required covers versus

Local Insurance market offer by country

Pure servicing (cleaning, security, …) Equipments (transfer, conformity, IT, maintenance)

Products (sorting, retouche, interim work)

Faurecia Minimal required covers

General Liability including Professional Liability : 15 M EUR from which Pure Financial Loss/ Professional Liability : 5 M EUR

CHINA General Liability including Professional Liability 1,5 M EUR

From which Pure Financial Loss/Professional Liability 1 M EUR

Idem Idem

MEXICO General Liability 15M EUR OK from which Pure Financial

Loss/Professional Liability : 5 M EUR: OK

Idem Restrictions for

security equipment

Idem

- - - - -

LESSONS LEARNT

In a large corporation where thousands of contracts are signed

yearly with suppliers, the insurance department can not review

each and every contract :

Training of the purchasers is the key

Absence of waiver of recourse is the main point to be

achieved

Level of insurance of the suppliers : the expertise of the

brokers is needed to give realistic objectives to purchasers

All should be well-received by the Insurer

The underwriting

by the liability (re)Insurer :

From the review of the parameters of the “Insured’s specific risk equation:

( U + A + E ) X ( C M + C P )

When the (re)insurer is satisfied with its risk mapping

When the (re)insurer has established loss scenarios of different scales

When the (re)insurer has identified what he does not know !

The (re)Insurer can come up with the Appropriate Solution,

negociated with the Insured and its Broker

24

Accumulation between policies

Reinstatement: Around The Clock or side by side

Full Prior Acts, Retro Date at Inception, Continuity Date

Aggregation: Batch or Serial Clause

Extending Reporting Period

Underlying Erosion and Drop-down

Additional Insured, Joint-Venture

Aggravating items in a liability insurance policy

from an underwriter ‘viewpoint : Each and Every versus Annual Aggregate

Single year versus multi-years policies; Duplication of Limits versus anti Stacking

Defence costs outside limits of indemnity

25

From our claim experience in liability classes ,

the risk transfer from the Insured’ viewpoint ….

Success Factors

• Adequate procurement policy • Regular re-assessment of business

partners • Alignment between contractual policy

and self financing capabilities + liability insurance market capacity

• Regular gap analysis and remedies embedded in the Risk Management policy

• Knowledge of capacity levels available in the concerned liability insurance segments (class/country)

• Opening to Alternative Claim Resolution before litigation

• Existence of monetary caps in contracts

• Recognition of which size matters to access adequate insurance solutions

Failure Factors

• Inadequacy between risks conditions faced and contracts wording

• Insureds accept contract conditions

that he does not master • Lack of knowledge of legal

environment where Insureds have operations or sales of products/services

• Insufficient awareness of

globalisation impact

26

Risk Management Standard Process

C O M M U N I C A T I O N

P I L O T A G E /

M O N I T O R

Define Strategic, Organisation and Risk Management Context

Identify

Analyse

Evaluate

Treat

How to manage the identified risks ?

Prevention Reduction

Transfer

the risk

Keep

the risk

•Workmen compensation

•Vehicles

•Property

•Liability

•Insurance

•Contractual aspects

•Subcontractor

•Outsourcing

G

O

A

L

SPECIFIC ACTION PLANS

•Prevention / Protection programs Incident Management

•Self insurance

•Deductible

•Waiver of recourse

Risk Assessement committee

Risk Management Standard Process

Define Strategic, Organisation and Risk Management Context

Identify

Analyse

Evaluate

Treat Transfer Protection/

Prévention

Q & A

THANK YOU

FOR YOUR ATTENTION

30

31

Appendices

PI: Written on claims-made basis GL: Written on occurrence basis

PI: Financial loss claims GL: Bodily injury and property damage with consequential financial loss

PI: Costs included within limit of indemnity GL: Costs in addition to limits

Illustration : key features of

Professional Indemnity (PI) vs General Liability (GL) PI: Damages arising from professional services breach GL: Damages arising from operations

PI: Allow additional Insured clearly determined GL: Can provide additional Insured on blanket form basis

32

Illustration : main items of vigilance today for tomorrow

anticipated manifestation (Sourcce Marsh Mac Lennan doc)

33