Evelyn Lämmli: I think the risks are pretty much the same. But legal requirements are increasing. For example growing markets like India and China adapt their legal systems and they is sometimes not yet in line with the local risk awareness.

Roberto D’Ambruso: Management awareness of risk is increasing so there is perhaps a perception that there are more risks but it is actually more or less the same. As Dieter said in the power industry we do have to deal with a re-shaped landscape and to an extent have to reinvent ourselves so in this sense maybe there is increased risk.

DB: The risks are more political because political parties and interest groups tend to use them as instruments to meet their ends and promote their causes. So it is definitely more risky.

CT: Welcome to the chemical industry!

Heinz Risi: We have to focus on all the risks faced and generally this is divided into strategic, financial and operational. I don’t see any real big changes in operational risks but there are big changes on the strategic and financial side. As insurance managers we can’t really influence strategic and financial risks but just have to deal with the consequences.

Daniel Zimmerman: We are talking here about entrepreneurial risk which is rising because we are sliding now in an economic downturn. To look back five years is rather a short period of time but a lot has occurred during this period, not least the recent events in Japan, and most of it has been of an entrepreneurial nature.

HR: If I look at Japan I see nothing really new. We had an earthquake, tsunami and damage to a nuclear plant. These are not new risks. What is new is the combination of all three together. I ask the question whether this was not an example of bad risk management to build a nuclear power plant on a coast prone to earthquakes and tsunamis. What we can learn from the consequences out of the Japan event is the impact on the supply chain. We have seen effects on the supply chain which perhaps were not expected but inevitable because of the changing nature of supply chains in recent times. A good risk analysis would have shown up possible scenarios.

CT: We have known of the issues surrounding supply chains for some time though. We as a company, and most companies, have worked very hard to have closed supply chains to manage cash and costs. If one proposes that the supply chain should be broadened to manage the risk better then this will be contrary to management’s aim to manage cost and profits by having a closed supply chain. The risks are known, evaluated and taken on by the company.

DH: Or the risks have been managed. If they have been identified and assessed you have to assume that controls have been introduced to make it a more acceptable level of risk in most cases. We accept the level and manage it.

CT: Agreed and there are conflicts everywhere. That is the point.

DH: I think it is largely about how you present the information to the board. If you have worked through your supply chain risk, identified it to be X, Y or Z and then suggest to the board it is unacceptable, they can either say no, or agree that the risk is unacceptable and approve your recommendations.

Claude Breutel: I have become somewhat fatalistic about this to a certain degree. You can manage the supply chain risk but we now all are part of an integrated global economy and network and even for the biggest of global players I challenge whether they can really manage the consequences of these very large catastrophic events.

DZ: We as a company optimise lean/just in time management, supply chain management, supplier strategies and the like but actually the suppliers are consolidating anyway whether we like it or not. So we don’t often have a choice.

AL: So if the risks are not necessarily changing but actually evolving quite quickly how can you model, measure and more effectively manage them?

CT: Modelling is destined to confuse the matter because the moment you start modelling exercises, people start arguing about the model rather than the risk itself. I say identifying the risk is key and then everything else should follow because the risk is talked about. You do need methodologies to help present risks in a coherent way to the board and other stakeholders, but actually a good technique is fear—by the use of large but reliable figures.

DZ: I agree that what we need is good methodology as it provides a good transparent view of risks and potential aggregations which is important. It is not about quant models and the like but rather about presenting the information clearly and working out the priorities. You need priorities to be clear about the effort placed on the result.

DB: It is also important that each risk has an owner. If an individual is responsible for risk and this has been clearly stated then he or she will take steps to manage that risk.

HR: What risks are really new and can we identify them anyway? If they really are emerging and new then they are by definition unknown. And if they are unknown you cannot see the consequences and so they are not insurable. In the R&D departments innovation happens and new products are developed. They have to perform their own risk assessments during the development phase of a product because they understand what they do. You cannot really expect support from outside to manage this kind of risk, can you? Some of the big insurers, particularly reinsurance companies, do dedicate resources and have large research departments which deal with emerging risks and cat risks.

CB: Yes, of course you have to build awareness and importantly you need a common understanding within the company about how to communicate risks to help build a dialogue with insurers and other risk takers. For me, natural catastrophes are a major focus when talking about emerging risks. We need to focus less on standard property damage and business interruption and more on large catastrophe risks and the consequences. It is true that the focus of attention is shifting from the narrow engineering-type view to the wider picture which is good.

Bruno Länzlinger: I would say that for insurers this is a relatively difficult area. Rates are still soft and have been for a long while now. Insurers have huge exposures on natural catastrophes but still offer quite cheap coverage.

DZ: One of the problems with this whole emerging risk area is that when things do occur the insurance industry tends to move rapidly from underestimating the risk to overestimating it. This happened with terrorism in the early part of the last decade. This also happens within companies after each event. The risks produced by that event are the focus and become the main topic rather than looking at the risk on a regular and consistent basis (news agenda).

CT: In the insurance industry we tend to concentrate on the easy stuff, for example property damage and business interruption, because it is easy to measure. The Japanese incident was not a property damage event really but actually about supply chain and the loss of key raw materials and the impact on the overall business margin which is uninsurable. What is interesting is that when insurers do produce specialist products they find them hard to sell. One problem is that when we look at the risks to a project we should ask, what is the potential loss if the contract is lost over a three-year or more time horizon? This loss to the business is out of all proportion to the amount of any insurance coverage that could be bought. It is small fry really.

AL: So what should and could the insurance industry—insurers and brokers—do to make themselves more relevant?

CT: What is the insurance implication of any financial event? Why do we want insurance? Normally to rebuild a building, pay for loss of profits or pay a liability claim. The insurer does not have to manage the risk—that is our job. So is it a source of funding? We have a property loss, we want it settled as soon as possible when six months is considered quick. Is it unreasonable to expect cash immediately? So I am not entirely certain of the role of an insurance company.

Philippe Guerry: From your insurer, you expect primarily cash in the case of an event. Part of the whole issue is to define the trigger which is the point at which and determines whether the cash is released or not. Some areas can take a long time to agree the trigger (an entire insurance policy in most of the cases) and you need more discussion to find new products. Look at weather derivatives that pay out when a certain temperature is reached. This seems ‘too easy’ and does not look like insurance. It is more like playing a casino or placing a bet and this makes it more difficult to explain internally the insurance purpose of such a product. Sometimes buying more standard insurance can be like this too as it can be hard to sell internally to the operative managers.

CB: I think the problem with innovation starts with the standard insurance policies. We are using wordings that date back to the 1980s and 1990s while our value proposition and the way we structure our products for customers has transformed. We have continuous changes to liability law and contract law has evolved quite significantly but we continue to operate on wordings that probably no longer fit with what we are doing. This leads to gaps because the risk landscape has shifted.

DZ: In my opinion if you look at the total business risk, over 90% of it is not insurable and I think this has risen.

EL: Probably, but anyway you do have to ask yourself if it would be reasonable if all risks were insurable. The existence of insurance coverage can produce moral hazards. Therefore you have to ask yourself: ‘What would I like to insure, what do I need to insure and what can I manage myself?’

DZ: The market offers financing solutions such as ART that tries to help us with financing non-insurable risks. Unfortunately traditional insurance is not known to be very innovative. We are offered more or less the same products that we have been for 25 years now.

HR: In a good risk management system, insurance should always be the last solution. The first step is to identify and assess risks and, secondly, to carry out loss prevention actions. Coming back to your question of what the insurance industry can contribute I say: support the customer with risk engineering services and business continuity planning to prevent losses and if a loss has occurred, support for a quick business recovery. Finally, the loss has to be paid in due time.

RDA: It depends upon your expectations. If your goal is a risk-free environment that is one thing but from an entrepreneurial perspective, risk will always occur. This is why business continuity management is such an important issue and more important than insurance really, particularly for the power industry. The biggest risk that faces the power industry is a blackout. It was recently calculated that a total blackout would cost the Swiss economy CHF3m per minute, which is CHF180m per hour in economic loss terms. This is enormous and I cannot imagine any insurance company that would be happy to insure losses of up to CHF180m per hour. It just cannot be modelled because there are so many unknown factors. So we are focusing on business continuity management really and the management of expectations. Insurance is really a minor part of this.

CB: But the awareness of risk and risk components do surface in different ways. When asked whether a risk is insurable and you respond ‘well, it depends’, one is not necessarily perceived as a credible business partner. If we cannot come up with more positive answers then we risk being marginalised. If up to 95% of events are uninsurable then you have to ask the industry whether it can do better and bring more to the table that adds value. Non-physical damage business interruption is a good example: there is much higher risk awareness now. Insurers need to invest in this to keep pace with developments. I say to the insurance industry come up with something new otherwise large companies will work out their own solution and you are no longer a credible option.

HR: This was in fact the reason why XL was formed 25 years ago and ACE at the same time. The US liability insurance industry failed to deliver the needed capacity and cost-effective coverage and so XL and ACE were formed.

BL: I would say that developing the right solutions needs dialogue and better talks that allow the full picture of the problem to emerge. For example, banks have a real headache when their IT systems are interrupted. We entered into discussions with them about how this could be solved. It got off to a good start but we soon came across the problem of secrecy which can be a real barrier to product development.

CT: Yes secrecy is a problem in this respect. Remember that big insurers still have a lot of claims information that can be pooled and analysed. Why is the insurance industry not using all its data more effectively to start such a discussion? All the discussion is that we, as the customer, should be giving insurers more information and ideas, but why can’t it happen the other way around?

DH: We are much more forward-looking than the insurers which tend to look backwards. They always seem to struggle when they start to look forward at what may happen. When insurers look at a rapidly changing environment they see uncertainty, not opportunity. The industry has lots of unused data, claims history, trends and so on, that should be shared. But it must be said that we are a private organisation and we cannot share much information. For this reason alone when it comes to complex new risks the solutions need to be bespoke, not a standard, off the shelf solution. It may fundamentally be the same solution but we could have individual triggers for individual policyholders.

AL: What percentage of your risk is insured and do you believe that the level of uninsurable risk is rising?

CT: I think about 10%, maybe even less. If insurers manage to increase this market by 1% to 11% this is important for them and they should be very happy. But for us this would be no big deal. This is perhaps why enterprise risk management is more important than transfer.

PG: At the end of the day we need to talk to each other to make it work. You can buy a cheap suit off the shelf or a more expensive one that is tailor-made. For the tailor-made suit you have to go to a tailor’s shop and either use standard fabrics or more specialist ones and the tailor has to cut them to fit your shape. The same is true in the insurance business—this is why it is so important to build partnerships. For this reason one problem we have is that people in insurance companies seem to move on every one or two years to a different role. It takes a long time to build an understanding and risk managers tend to stay in one role for a much longer time. So this is a problem as you have to explain your business and your needs all over again each time to the new person.

AL: What about global programmes? This has been a hot topic for a number of years now and becomes more important as European companies continue to expand to emerging markets in particular. There seems to be some frustration that this is dragging on for so long. What are the solutions to really offer you consistency, certainty and compliance?

CT: The level of certainty over your programme really depends upon the country. Certain countries appear to have different attitudes to the compliance needs of global programmes. Some insurers tell you they would like their clients to be compliant but if the company is not addressing compliance then the insurers do not seem to worry too much about it. So there remains inconsistency in approach. For me one is either compliant or one is not.

DH: Let’s look at this from the opposite perspective. If we manufacture something, the end product has to be fit for purpose and meet the rules. Why are insurance products any different? If I buy a suit I expect it to last longer than six months and if I buy a car the steering wheel should be on the correct side.

CB: This discussion about the responsibility of the insurer is superfluous. My company must be fully compliant and I cannot delegate the responsibility for the compliance of my global programme to someone else. It is the duty of the risk manager to set it up so that the programme is 100% compliant and to pick a partner that helps ensure that it is compliant. So there is a big incentive for an insurer to invest in this and ensure that they know what they are doing.

HR: For me the discussion is finished. Zurich Insurance has shown the way to go and a number of other insurers have come up with similar solutions to structure global programmes. Finally the decision lies with us. Overall I would say that we are better served than five years ago. The fact is that today global companies are aware of how to deal with this, i.e. what they need to be compliant as a customer but also as an insurer.

BL: I would disagree. We still see too many non-admitted solutions and this is just not correct.

HR: Yes but the solution is on the table. Whether you follow it or not is your problem. What astounds me is that the brokers did not bring this up in the first place. Surely it is up to the broker to provide a programme that is compliant?

CT: I do not believe that insurance is special. In developing it there are other problems. Examples are health and safety, capital requirements and employment issues. These are difficult countries to do business in anyway. The insurance bit should not be additionally difficult.

DB: But what astounds me is that this is not just a global problem. Look at buildings insurance in Switzerland. There are 28 solutions and in many different cantons it is mandatory. I think that sometimes there is not enough pressure applied from our side, by risk and insurance managers. In this case why don’t industrial companies demand some kind of centralised solution for companies that are active in every canton. Nobody seems to complain, but just live with it.

CB: Compliance is complex and it could be simpler and easier. You can think you are compliant and then find that you are not. The challenges are often changing and unconsolidated legal systems, especially in countries where there is major growth. But it is not just the popular emerging markets like Brazil and China. We also have very challenging environments in Eastern European countries and parts of the former Soviet Union.

PG: In my ideal world global programmes would be easy. We would have one insurance policy that would cover the entire world in your own language. But this is not how it works unfortunately. You need local policies in local languages. If it is in Chinese then it may miss the point of the local law. We all want to be compliant but the question is how much time to invest. Should you just let every local company buy their own policy? This would mean the end of international programmes, so the answer is rather no. But you do need local policies and you have to find the right balance. Also there is the question of tax too as all countries want to maximise their tax revenue and not see the business disappear to a tax haven. Once again, it’s a matter of balance.

DZ: I think it is quite easy. We all have to follow a code of conduct including being compliant. Remember Zurich was told that its whole international department would have to be compliant otherwise their shop would be closed. The same would happen to us, if we would not be compliant in our business approach. However, Zurich turned their internal problem into a marketing event and marketed their approach as the only way to be truly compliant.

HR: They saw that their customers need support and they found a way, the Zurich way. It started an industry discussion and each insurance company in this market now has their own model to offer compliance. It is better than it was.

EL: But the financial interest clause simply switches a part of the problem to the customer. For example if you have a claim in India it is still not easy to shift the payment to India without paying double tax.

HR: Maybe in such a case it helps to be a Swiss company because you do not have to feed the premium back into India, China or Brazil over the insurance channel. This is compliant since the Swiss company is the policy owner, has paid the premium and therefore is also entitled to collect the indemnification for the loss.

CT: We would need to transfer the capital required to the country where the loss was suffered. This could be through local bank borrowings. If you have an insurance policy in place, then funding the loss via the insurance programme will minimise the funds required. If you don’t have the funding where the loss occurs then the margin can be affected.

PG: So this is no longer a compliance issue but more about funding and this could still have legal and tax implications.

HR: It is quite simple: in the local insurance policy the loss was not covered, so it cannot be paid locally. If the group company needs to be funded for the (not covered) loss by the mother company, this can be done via capital injections which of course have to be compliant.

EL: But what if a third party is involved who needs indemnification?

HR: That is why you need a local policy with a certain limit too.

EL: Certainly, but you probably still have a limit or respectively an additional coverage problem. In liability lines a general limit of CHF5m–10m is common without special additional coverages.

HR: In China CHF5m is enough.

EL: It is difficult if it concerns for example a product recall.

HR: If you have a local policy you can pay the premium and loss there over the local insurer.

EL: In respect of a recall coverage, especially in the automotive business, you can’t shift recall coverage onto local policies.

HR: Generally we give coverage eg. for erection of all risk based on the DIC clause out of the master policy. In certain (red) countries like China you are no longer allowed to do this. So we have extended the coverage of the local policy with this risk and don’t have to provide coverage from outside the country. This is a way to solve it.

DH: The main problem is the lack of consistency because the rules are open to different interpretations. So if you ask your property insurer and your liability insurer what the rules mean you receive two different answers.

AL: Another area that poses a lot of questions but few answers is Solvency II. What impact do you think the new capital rules will have upon the corporate insurance market and captives in particular?

HR: It involves a lot of work and added cost. If you have no employees for your captive then you have to do all the work yourself. In addition, there is another compliance risk!

CT: I like Solvency II for a number of reasons as well because it is a concept that is well established for evaluating pension arrangements. I also believe there is a clear choice. Either comply with the regulation or not. If not then the future of the captive is called into question. There is a cost to compliance but conceptually I like it. What I don’t like is the prospect that insurers may have lower standards of solvency than captives because insurers will adopt a model that requires less capital than the standard model. It is interesting to see that fronting insurers may have lower capital standards than the captives they front.

HR: The key point for me is how the national supervisors will react and how the principle of proportionality will be applied. We cannot be treated in the same way as the big players in the insurance industry.

CT: Why not?

HR: Because we only bear our own company’s risks in the captive. We have no third party risks. What is the main goal of Solvency II? To protect the customers! Who are the customers of a captive? Other group companies and finally the holding company. I don’t think that Schindler Holding has to be protected from its own group company. We have more than enough internal control systems in place.

CB: It is likely that national supervisors will insist that captives adopt partial internal models because the standard model is not really fit for purpose.

CT: We have used the standard model to assess both of our captives. I think it is really quite simple. If you comply no problem, if not then you need to use the capital elsewhere. Thus if one wants to keep one’s captive one will need to comply and use at least the standard model.

PG: It is positive that Solvency II will ensure that governance standards will have to improve in all companies, captives and standard insurance companies. It has maybe gone too far for smaller captives and will force the closure of some captives but at the same time it will raise the quality of management and it is a good tool for medium-sized companies.

DH: What is the purpose of a captive in your view, to provide indemnification or minimise tax spend?

CT: First, it is a risk management tool. We use the captive retention to quantify the effect of the loss on the business. Tax may have been the reason to set up a captive in the first instance, but now tax is more of a threat than an opportunity to captives.

DB: Solvency II was created to protect customers. But the problem is that it does not distinguish between industrial companies and private individuals. Perhaps individual customers need to be protected against some kinds of intermediaries but professional insurance buyers that work for big companies do not need that kind of protection and can make their own decisions.

The Participants

Commercial Risk Europe would like to formally thank the following individuals who took time to join our Switzerland roundtable and contribute towards our annual Risk Frontiers survey project:

Dieter Berger, Head of Corporate Insurance, Alpiq Management

Creighton F. Twiggs, Group Risk Manager of Clariant International

David Howells, Director Group Risk Management & Insurance, Tetra Laval

Evelyn Lämmli: Head Corporate Risk and Insurance Management, Rieter Management

Roberto D’Ambruso, Head of Risk Management, Swissgrid, the electrical utility supply-grid operator

Heinz Risi, Director Corporate Insurance & Risk Management, Schindler Management Ltd

Daniel Zimmerman: Group Risk Manager, RUAG Holding AG

Philippe Guerry, Director, MF Risk Services, Groupe Maus Freres,

Claude Breutel, Head of Insurance, Syngenta International AG

Bruno Länzlinger, XL Insurance

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