Insurers need to spend more time with risk managers, and think about captives

Oliver Wild, president of French risk management association AMRAE, arguably speaks for all risk managers when he highlights the sharp rise in rates, reduction in capacity and increased risk adversity from insurers as a spectre looming over 2021. It’s a problem that persists in multiple lines, regardless of efforts to minimise risks: risk managers who have, for example, worked closely with cybersecurity officers to mitigate cyber risk are still seeing price hikes and restrictions in terms of the coverage they are being offered.

As discontent grows, self-insurance is becoming a more attractive solution.

“What that means is that the government needs to make it easier for companies to create things such as captives or other financial mechanisms,” says Wild, who is group chief risk and insurance officer for French multinational Veolia.

“It’s vital to help companies invest in risk management and to allow them to self-insure, because the market is not responding—and the government should be pushing the insurance market to respond and make sure that we have the capacity to build a bit more resilience into the economic tissue.”

With this in mind, AMRAE is working hard to get the French government to make it easier and more attractive to domicile captives in France. It’s an issue AMRAE had been pursing pre-COVID-19, but its efforts have intensified as a result of the pandemic.

“French companies do have captives, but not located in France, and that’s purely because in other markets—such as Luxemburg, Malta and Ireland—the legislation and conditions are more attractive to companies,” says Wild.

“AMRAE is working with the government to see how we can make France a more attractive land for captive insurance, and you will probably see some changes in legislation in the weeks to come.

“That has been a result of the COVID-19 crisis: we have been saying we don’t have a robust mechanism to deal with pandemics or other exceptional or systemic risks, so while the discussions began purely focused on COVID-19 or pandemics, we were able to broaden that to all exceptional and high intensity risks.

“A mechanism such as a captive is great because you can mutualise different types of risks in the vehicle.”

He adds that while some companies use captives purely as a financial mechanism, they also have a lot of value as way of checking the effectiveness of risk prevention plans.

“Self-insurance is a great dashboard to monitor the effectiveness of your risk management—but we need the insurance and reinsurance market to be there as well to build that tower of risk management.

“To have good risk management we need all those players around the table, we need the strong foundation of risk management within the company, and we need investment in prevention plans.”

Looming problems

The insurance part of this picture is currently causing a problem. In Wild’s view the rate increases happening in the insurance market are “indefensible and risk alienating insurers from their clients”.

“Although one can understand that this is happening after 15 years of rates going down and that there is always a cycle, the brutality of the increase is not acceptable,” he says.

“Insurers have been irresponsible in terms of managing their books and it’s unfair to have on one side risk managers or companies who are investing in making sure they are protecting their assets and that they have very strong prevention plans, and on the other hand not having the recognition from the insurance market.”

Wild sees a dangerous disconnect emerging, where companies that are doing great work to mitigate risks, and have a good claims history with decreasing claims, are facing huge increases in their premiums.

“This is hard to explain to CFOs—it doesn’t make sense, and if you’ve had the experience of having a captive for a number of years, that is becoming a critical tool in being able to negotiate with the insurance market,” he says.

“But the risk is that effectively you are getting more comfortable with your risk and self-insuring with the use of a captive, and are pushing the insurance market further out. A fracture is being created where the partnership is broken—and it’s possible that companies will no longer be willing to negotiate with insurers.”

As Europe moves out of the COVID-19 crisis, Wild says it will be vital for companies of every size to be able to demonstrate that they can absorb large shocks. The perception of black swan events has changed: COVID-19 has made everything from pandemic risk to power outages and cyber attacks feel more likely.

“There is a limit to the number of systemic shocks you can deal with, so we need to be able to have the measures to absorb at least part of that shock, and writing cheques is a short-term solution,” he says.

“You can see that debt is being accumulated at a very rapid pace and you can’t just be handing out cash to pay for lost business—we need to make sure our businesses can survive these extreme crises.”

With that in mind, he believes it’s not just the larger companies that need to be able to embrace captives; shared captives for smaller companies are going to gain importance too.

Against this backdrop—and particularly in light of COVID-19—risk managers are taking a more prominent role in their companies. A challenging insurance market has placed more emphasis than ever on resilience and the ability to anticipate and mitigate risks. It’s no longer a question of good governance or legislation driving the role of the risk manager; there is increased awareness that the risk management role is critical, and that risk managers benefit companies in multiple ways, including improving processes and identifying opportunities as well as risks.

“The evolution is quite fast and risk managers are now sitting at the table with board members,” Wild says.

“There is some training or learning to be had for risk managers to know how interact with that level of governance, and AMRAE provides that support. There’s still work to be done to make sure risk management is positioned at the right level in the companies that haven’t triggered that change, and AMRAE is there to share best practice and help risk managers position themselves better.”

He adds that within Veolia, that shift has already happened at head office level. Over the last few years he has been helping risk managers in Veolia’s network at a country level to position themselves to be at that table with the C-suite.

“One of the things that corporate risk managers need to do is to help their network to apply that change at the ground level,” he says.

Cyber

When it comes to the discussions that are taking place at board level, Wild highlights cyber as a particularly hot topic. He adds that many companies will have updated their risk maps and business continuity action plans in late spring and early summer to include not only cyber but also consequences of COVID-19 including political unrest, economic downturn, pressure on employment and the multiple factors related to working from home.

“There are a lot of intensified or emerging risk around human capital: how you manage teams at a distance, how you maintain company culture when people are not in the same building,” Wild says.

“It’s putting a lot of pressure on middle management—the psychological risks and social risks are going to be intensified; people are already seeing the first signs of that, so risk managers will be working more closely with human resources.”

He adds that this is what happens when dealing with a crisis: the silos break down so that people can work more collaboratively, with more agile decision-making and more responsive action plans.

“A lot of good is coming out of this,” he says. “Some companies such as Veolia have used that time to push digital or e-training, to review client-supplier relations and to roll out solutions for their clients such as digital tools for billing.”

He notes that as these solutions are introduced, it’s important to stay on top of the evolving risks.

“The more you use digital solutions the more you have to make sure you are not exposing yourself to increased risk such as cyber-attacks. On one hand, you are gaining on effectiveness, but you have also to be measuring your increased exposure on certain risks,” he says.

While there is inevitably a lot of focus on COVID-19 and the challenges and opportunities stemming from that, Wild emphasises the importance of remembering the other risks that have not disappeared.

“Addressing climate-related risks, for example, is essential,” he says. “It’s an even stronger argument to invest further in risk management, so I don’t think companies should be reducing budgets on risk management.

“On the contrary they should be increasing them, because the challenges we had pre-COVID-19 will only get stronger and time is running out. I think the best investment you can make is in risk management.”

Spreading the word

With that in mind, AMRAE has been very active in supporting risk managers and keeping the French government aware of their importance. After COVID-19 hit, AMRAE rapidly produced and shared best practice advice on how to manage the crisis.

“We have over 1,500 members and the ability to collect information from those members and to share best practice has been great—that’s why our plan for next year includes reinforcing AMRAE’s regional footprint.

“We already had these antennae in place but we going to push for them to gain a bit more meat and probably create new ones to make sure that we cover the whole of the national territory,” he says.

AMRAE works closely with other risk management associations around the world, particularly the Federation of European Risk Management (FERMA). It has members on FERMA’s board and has shared feedback from the work it has been doing with the government in France to help FERMA drive discussions at a European level.

“The development of solutions such as captives needs also to be a European solution,” Wild says.

“We have to drive resilience at a European level, not only a France level.”

While expecting progress on captives in France and Europe, he hopes that insurers will take steps to improve their relationships with the companies that are increasingly turning to self-insurance.

“Insurers need to revise their position so that they provide an adequate response to covering the risk companies are flagging to them rather than just saying ‘it’s uninsurable’,” he says. “They need to revise that position and take more time to understand the value of the risk management investments being made in companies and appreciate those, because we know our risks better than they do.

“If you want to be efficient at managing your portfolio you need to be able to distinguish the good from the bad effectively. You need to spend that time not just crunching data on claims history and sector data and so on, but spending time with risk managers and site operators to understand how they are managing the risk.

“Then insurers will be able to price differently and have a diverse book where they have good risk,” he concludes.