Evidence from leading reinsurers during the Monte Carlo Rendez-Vous in September and late last month in Baden Baden strongly suggests that they will not welcome efforts to broaden the coverage with open arms just yet with further analysis and a joined up and more transparent approach.

“We stand at a unique time right now in the risk industry. You can make an argument that we can have as big an impact collectively, and that risk professionals have the opportunity to make as much impact on their companies now, in the next five to ten years, than any other period in the history when you think what has happened in the global market place,” said Greg Case, Chief Executive Officer at Aon, during the panel debate in Monte Carlo that was hosted by CRE editor Adrian Ladbury. “The possibility for impact is monumental,” he continued, “and I think achieving the impact is going to require greater cooperation to drive behaviour.”

According to Lex Baugh, Chief Executive Officer at Chartis Europe, the last 10 years have seen tremendous progress on collaboration, but it is still not as widespread as it should be.

“There is not enough exchange, and probably that exchange has to be at a deeper level. Data is certainly one area where that comes into play to help better understand risk and opportunities from the underwriting standpoint,” he argued during the panel debate at Ferma, that was also hosted by CRE’s Adrian Ladbury.

But Mr Baugh believes the trend towards a joined up approach will continue and that the barriers between players in the risk and risk transfer industries will continue to be dismantled.

Coordination and cooperation delivers the best innovations, agreed Jeff Moghrabi, Country Manager for France at ACE and Regional Manager for central and eastern Europe. But the industry is still not spending enough time on reading scenarios and measuring risk to facilitate development, he added during the Ferma debate.

“We are at a turning point and we as an industry need to be very humble about risk. What you do upstream, the collaboration, is key. Are we really dedicating enough time to measuring that risk? All that hard effort will pay off when the contract is put into question,” he continued.

The conclusion that cooperation and transparency are key to innovation was also drawn at the Monte Carlo meeting. According to the expert panel, insurers and buyers must meet halfway to spark the unfit CBI market.

In order for the insurance industry to supply fit-for- purpose contingent business interruption cover, risk managers must provide more transparency on their supply chains and business models, the panel said.

For their part insurers and reinsurers need to accept that, in order to service this risk, they will have to rely on incomplete data sets and use the available information more wisely, they argued.

There was an acceptance amongst the experts that currently CBI coverage either does not exist in any meaningful form or does not meet buyers’ needs. This is primarily due to the fact that the insurance industry is worried about exposures that it says it cannot quantify.

Torsten Jeworrek, member of Munich Re’s Board of Management and Chairman of the Reinsurance Committee, said that to solve this problem insurers need risk managers to open up and share information on their practices and supply chains.

“We do not know more than you about your supply chain management…We have to really understand the structures within the organisations and in your business models and I think there is a deficiency here that we have to improve upon,” he said during the debate.

Mike McGavick, CEO at XL Group, agreed on this point but he added that insurers are then going to have to transfer those data sets and the information needs to be given more quickly than in the past. “We are not going to get complete data sets on CBI risk,” he said.

The disruption to global supply chains following the 11 March, 2011 earthquake in Japan—which hit the technology and motor sectors hardest—highlighted the accumulation problems presented by CBI risk as pointed out by Munich Re during its Baden Baden press conference.

Concerned with a lack of transparency and the potential for risk accumulation, some insurers have reacted by reducing their contingent business interruption (CBI) limits and the scope of cover for certain perils, regions and numbers of suppliers, Caroline Woolley of Marsh told CRE.

They have also increased their scrutiny of information on suppliers and business continuity plans, she said. “We are seeing more scrutiny and restrictions for traditional CBI and BI property damage cover, but insurers are also responding positively by providing specialist standalone insurance,” said Ms Woolley.

Insurers offer some cover for supply chain disruption through CBI insurance included in traditional property and business interruption cover—mainly through suppliers’ and customers’ extensions.

However, some reinsurers, industrial insurers and Lloyd’s syndicates have launched specialist cover in recent years and months.

Reinsurers of traditional property CBI insurance have though expressed concern with the way CBI insurance is currently offered by insurers.

CBI cover offered as an extension to property insurance policies has broadened over time. But it is rarely priced separately and not properly risk assessed, said Heike Trilovszky, Head of Corporate Underwriting at Munich Re.

The reinsurer is currently reviewing the terms with which it offers CBI cover through property reinsurance and direct insurance (see front page story).

“We cannot continue to provide CBI cover on the basis that it is thrown in with BI cover for free—with little transparency, no understanding of accumulations and without separate pricing. We need much greater transparency, otherwise we will have to reduce our exposure,” she said.

“We are talking to risk managers about alternative solutions, at least for the largest accumulations,” said Ms Trilovszky. “Reinsurers need more transparency to get greater levels of comfort—to know that they are not over exposed to peak scenarios,” she said.

Reinsurers can continue to give CBI cover if transparency is improved—through requiring more information from clients on CBI exposures. Ideally reinsurers would have the same transparency for CBI as they do for traditional property damage BI, said Ms Trilovszky.

Only time will tell if risk managers and the risk transfer industry get their act together on CBI and tell a number of other innovative solutions to a myriad of buyers’ concerns.

The same can be said of the effects of Solvency II, which many fear will only further stifle innovation.

During the closing session of the Ferma Forum insurers and brokers expressed concerns about the possible effects of the Directive on the ability of insurers to provide new and innovative solutions.

According to the panel the higher capital requirements that will be imposed by the regime are likely to hinder the ability of insurance companies to think outside the box.

“We do not need more regulation,” said ACE’s Mr Moghrabi. “Solvency II is already costing a lot of energy to the industry. That energy could be better dedicated to improving risk modelling and risk analysis or innovation,” he added.

Though Karel van Hulle, the architect of Solvency II at the European Commission, did reassure CRE during an interview at the end of October that this was by no means the intention of the Directive and suggested that recent refinements to key areas such as catastrophe weightings could reduce such fears.

Please sign up here to our full-time mailing list to ensure that you receive our weekly newsletter.

• More FERMA News
• More Risk Management News
• More Insurance News
• More Broking News
• More Association News