FK: What impact will Solvency II have upon terms and conditions for industrial insurance coverage and what impact will it have upon your captive strategy?

GK: Solvency II will definitely have an impact on the industrial insurance market, provided it keeps its current design. Even EIOPA itself has expressed concern that the standard model may be too complicated and too complex. And please don’t forget that Solvency II is about customer protection. In principle, we support this. But with respect to captives, I think single-parent captives should not have to fulfil the same provisions as captives that have third party risks on their books.

Bayer’s captive is such a single-parent captive. We think asking us to deliver all these reports in order to be allowed to operate the captive is overdoing things. So there should be some relief for this kind of captive. But the signals we receive from EIOPA are not encouraging. No special solution for captives is in sight. We think this is unfortunate, given that we have been communicating our concerns to them for years.

FK: What are the main risks facing your company currently—what keeps your board members awake at night?

GK: The single most important issue we currently face has nothing to do with insurance-related things—it’s the euro crisis. This poses a serious threat for companies in Europe and even worldwide. Currently, Germany holds an exceptionally comfortable position, but it will not be able to keep it forever, if there is no real solution forthcoming. The financial pressures caused by the crisis are squeezing national health systems. Countries like Greece, for instance, are having major difficulties in finding the money for pharmaceutical products and there have been severe cuts in national health budgets. The most frustrating thing is that companies can do very little about it.

FK: How will you cope with a long-term recession—what could and should a risk manager do to help their company cope with such a challenge?

GK: Risk managers can make a difference by the way they transfer a company’s risks. For instance, we buy the same cover as in previous years and extend or adjust it if necessary. Cuts in coverage or budgets are not a suitable reaction to a recession—if a loss happens and hits a company that has lowered its cover, it suffers a second time. Bayer regards insurance as an integrated finance tool. In the event of exceptional events hitting the company and causing damage, our approach is to make sure that there is sufficient cover available. Naturally, risk management cannot stop a recession itself or compensate for cancelled orders. What it can do is prevent damage from adding to the recession’s costs more than absolutely necessary.

FK: Have there been any major changes to rules that affect your cross-border risks and if so where and how? Are you more comfortable with the compliance of your global programmes today than last year and what further needs to be done to improve the way they are organised?

GK: Compliance is a fascinating issue and is discussed whenever you look at international programmes. However, it’s not new to us. We have been working for decades with international insurance programmes. What is new is that regulators have become stricter, but since we’ve been adhering to local rules for much longer this does not affect us. We think it’s very important to respect local regulations. They are mirrored in our international programmes. That’s why we feel that we are very well prepared.

FK: Do you have any specific activity in Africa and the Middle East and if so what are the main risk considerations here? How do you arrange cover for risks in these regions?

GK: We have been working in South Africa for decades, so that is a mature market for us. Like other companies, we don’t produce within Africa that much. Our major activity is to sell there and therefore we have corresponding risks. In principle, there is no fundamental difference to other countries in the way we deal with these risks. At first, we look into what the local law says. Then, we establish local protection that has to be in line with the local regulations and with the international insurance programmes we have in place.

The Middle East is a special case because of the recent embargoes against certain countries, which we had to implement into our policies. To make it very clear, if there is an embargo we do follow this and our insurance policies will pay respect to this. And if we cannot grant coverage into such countries through our international programmes, then we have to obtain cover locally on site. In some cases, in this context, our local exposures are not significant. For this reason, we are not affected so much, if we don’t get the normal standard cover.

FK: What are the scariest risks currently? Are you confident that you have identified, measured and adequately managed your cyber risk for example?

GK: From our point of view, the risk of explosion and fire is quite serious for a company like Bayer. It does not always get the attention it deserves. It’s a considerable threat not only to the chemical and pharmaceutical industries but also to other industrial sectors. For example, power plants can explode too.

Cyber risks are a serious threat in our view. We have invested considerable amounts in order to be able not only to monitor the risk but also to fight it directly. As far as insurance is concerned, the problem is to obtain proper limits. Today, when 100 units could be at risk, you may get cover for only 10, so 90 per cent is without cover. Why should I insure 10 when I have to bear the risk of the other 90 myself?

At present, insurers are either not able to provide cover with proper limits or they don’t want to. It’s like a cover for a private car worth €40,000 but the insurer covers only €4,000, while the customer has to pay for the other €36,000 himself. And, for the €4,000 coverage, you have to pay €400 in premium. Would you as a private person buy such a policy? I wouldn’t do this.

On the other hand, if companies believe that cheap cover will drop from heaven it’s time to tell them otherwise. Some don’t seem to have a realistic notion of adequate pricing for a comprehensive cyber insurance policy or other innovative products. This is also valid for high limit policies with considerable volatility, so you will not get cover for a cheap price. The price has to be reasonable and risk-adequate.

FK: Has the insurance market done anything over the last 12 months to help you meet new challenges such as supply chain and cyber risk? What needs to be done now to foster more innovation and avoid capacity shortages?

GK: With regard to insurance for cyber risks, yes there are some improvements. As already mentioned, available limits are not sufficient, but insurers have come up with new constructions. And I am quite optimistic that the limits will be increased to a proper level in future.

When it comes to supply chains, I am a bit surprised about insurers’ reaction. They have insured this for years, and now everything is to be changed only because there were big losses in 2011. I think that’s the wrong approach. I feel the insurance industry has failed to discuss the issue with the companies. Now they want to know everything, but that needs some time. Bayer had no difficulties as a result of the flooding in Thailand or because of Fukushima, which shows that we are in good shape at that level. Still, capacity shortage is an issue. And again, cover without sufficient volume is of little help only.

FK: What are the main challenges presented by rapid expansion to new markets—are you on top of your supply chain risk?

GK: Supply chain, for us, is a global issue. For this reason it makes no difference to us which new markets we access. In addition, we are not necessarily moving production to a new market immediately, but restricting ourselves to really understanding how it works so that our engagement is sustainable in the long run. However, we’re well prepared globally to analyse, monitor and transfer supply chain risks into insurance solutions and routinely do so.

The challenges Bayer faces in that respect are pretty much the same with any country we access for the first time. Of course, there are clear differences between Brazil and India, as well as between India and China. But overall, there are certain patterns and we have come up with methods to cope with them. The key to our risk management is that we communicate closely with our subsidiaries and thereby know precisely where every single company’s exposure lies.

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

• More Germany News
• More Risk Management News