Although not an event that is primarily focused on captive insurance, the annual Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) conference did have good news in abundance relating to the wider risk management world...
Although not an event that is primarily focused on captive insurance, the annual Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) conference did have good news in abundance relating to the wider risk management world. The first portion of this was dished out by AIRMIC chief executive John Hurrell, who claimed that the campaign to put risk management and insurance firmly on boardroom agendas has made significant advances over the past 12 months.
Addressing delegates on the opening day of the conference, he said risk managers and the wider market are making strides in gaining recognition for their professions. Among several examples, Hurrell cited the long-awaited guidance on risk management and internal controls from the Financial Reporting Council, which calls on directors to take greater responsibility for risk management. Hurrell described the guidance, on which AIRMIC was consulted, as “the perfect opportunity for risk managers to step up and support their boards”.
He also noted the work that AIRMIC has been doing with corporate governance think tank Tomorrow’s Company, urging businesses to set up a dedicated risk leadership function that reports directly to the board.
Hurrell said AIRMIC will be using its 2015 conference to unveil further work designed to educate business leaders and help risk managers raise the profile of risk and insurance. These include a practical road map for risk managers on how to achieve resilience and support their boards; a guide to understanding the importance of business-critical insurance; and a report for members on the hot topic of reputational risk.
Hurrell also used his address to praise the UK Law Commission for successfully getting the 2015 Insurance Act through parliament, one of the most significant legal developments in recent years. He urged insurance buyers to consider amending contract wordings to achieve its benefits ahead of the August 2016 implementation date.
Hurrell continued: “We have been working with our friends at [law firm] Herbert Smith Freehills to issue a clause which would effectively replicate the main policyholder advantages of the new law. These are available now.”
The new law was passed in February and represents fundamental reform of the laws governing commercial insurance in the UK, including crucial safeguards for policyholders. AIRMIC has been campaigning for change for a number of years.
Hurrell also announced significant progress in the journey to achieving official recognition for risk and insurance managers: “I’m delighted to say that a proposal to create the new title of chartered insurance risk manager has progressed through the Privy Council stage and is now going for approval to the Chartered Insurance Institute’s (CII) annual general meeting [in July]. This would entitle current and future CII members with chartered status to opt for the new title. We hope this proposal is able to jump this very final hurdle.”
Concluding his speech, Hurrell said that AIRMIC, its members and the wider market can and are contributing to progress. He added: “This is a tremendous time for our profession. Between us all we will continue to make a difference—and that’s a promise.”
Although discussion of captive insurance in particular was not at the forefront of proceedings, there was a panel on the second day that was devoted to it. The focus of the session was to impress upon the audience that the remainder of 2015 will be challenging for captives, on a face-value level at least.
Unsurprisingly, the impact of Solvency II on EU-based insurers was highlighted as a major challenge, as were the workload- and fee-related complications for non-EU entities associated with EU fronting companies. Unrated captives were also singled-out as a potential risk for the fronting companies themselves once Solvency II is implemented, and the seemingly ubiquitous issue of the ongoing soft market was noted by the panel as another major challenge for the remainder of 2015.
As far as the speakers were concerned, a big priority for captives in the coming years should be to review their risk portfolios and consider diversification by writing new, non-traditional lines of business. The panel pointed out that diversification can ultimately reduce the amount of capital required by captive owners. Rather than going down, premium going into captives has increased in recent years, according to one speaker.
Property and casualty, cyber, and employee benefits were cited by the panel as risks that were growing in popularity, and they agreed that that less traditionally-insured risks such as supply chain, product warranty, and project delay cost should at the top of the list for captive owners to consider.
Despite this optimism in the face of a challenging environment, audience members raised issues with pursuing portfolio diversification. One attendee stated that such ventures made relations with regulators “trickier” and that understanding what the captive can and cannot accept is key before any real decisions are made.
While panellists accepted this point, they reiterated that diversification is a worthy pursuit, as long as the captive and its business are aligned with the parent’s financial strategy, the portfolio is fit-for-purpose, and the return on equity is suitably attractive.
Although suggestions were made regarding the way forward, such as the use of structure reinsurance to assist in growing a captive over time, the consensus was that a great deal more innovation in the space is required in the years to come.
In a report on the importance of business-critical insurance launched during the conference, AIRMIC stated that businesses should be willing to pay higher insurance premiums for contract certainty. Produced in conjunction with PricewaterhouseCoopers, it urges policyholders and insurers to raise awareness of the strategic value of certain types of insurance.
The report stated that insurance policies fall into three categories: mandatory insurance, which is required by law or a regulator; optional insurance used to reduce risk exposures if the risk/reward trade-off is appropriate; and business-critical insurance, which underpins the company’s operations.
AIRMIC said that more needs to be done by all players in the market to recognise these distinctions and, when dealing with business-critical insurance, to make contract efficacy the prime focus of negotiations.
“Insurance can be viewed by boards and business units as just another cost overhead, where value is judged by securing the lowest premium,” according to the paper. In such cases, it warns that many businesses “fail to appreciate the value of insurance in supporting the overall strategy”, and as a result, policies can be “unfit for purpose”.
Julia Graham, AIRMIC’s technical director, explained: “Not all insurance is the same. If a policy is meant to provide cover against events that could lead to balance sheet damage or even threaten the viability of a business, it is strategically-critical and it absolutely must pay out as and when expected. The challenge is for policyholders to convey this to their board, and for underwriters to design and market their products in a way that supports claims certainty.”
The paper, which builds on the Efficacy of Business Insurance report published by AIRMIC in 2014, describes the three types of cover in detail, sets out a framework for categorising individual insurance covers, and demonstrates the importance of mapping business-critical insurances against the context of key corporate financial thresholds.
Alpesh Shah, director at PWC, commented: “Today’s rapidly evolving business environment is a great opportunity for insurance buyers and risk managers to raise their profile at board level. To facilitate better conversations, insurance can be considered in the context of other financial metrics which drive a business forward.”
According to a survey of AIRMIC members that was released during a news conference at the event, UK risk managers are struggling to purchase cover for some of their biggest exposure concerns. Taken together, AIRMIC stated that the results suggest the insurance market is not keeping up with demand for solutions in emerging areas.
The survey revealed that reputational risk is the number one worry for risk managers and, of those that flagged it as a concern, 93 percent do not buy cover, with lack of availability or inadequate cover given as the main reasons.
Cyber risk featured twice in the top six concerns, and approximately two thirds of UK risk managers said they are unable to buy insurance for the risks of loss or theft of personal data and business interruption, largely because of inadequate cover and high costs. The only risks in the top six with substantial insurance availability were catastrophe events and public liability.
The survey of AIRMIC members, who buy approximately £5 billion of insurance per year, was conducted in May, and was designed to provide a snapshot of the views and concerns of risk managers on insurance and risk-related topics.
In support of apprehensions raised during the captive insurance panel, lack of innovation topped the survey’s list of concerns about the insurance market, with 60 percent marking it in their top three.
Broker conflicts of interest were also highlighted as a significant worry (41 percent), along with multinational insurance programme compliance (31 percent).
Hurrell, also present at the news conference, commented: “These results show that it’s more important than ever that insurers, risk managers and brokers work together to find risk transfer options fit for 21st century businesses. Creating relevant products is no easy task but will benefit everyone in the market, underwriters, brokers and policyholders alike.”
He added: “We are, however, delighted to see that risk management is growing in status and that the vital work of risk professionals is being recognised. This is good for the profession but also good for business.”
