Making insurance relevant to the board – an Airmic roundtable

How can risk managers persuade directors to see insurance as a strategic asset worthy of discussion around the boardroom table? Do buyers have the skills and the clout to educate senior colleagues about the importance of insurance? For that matter, are we kidding ourselves if we think it really is strategically important? These were some of the questions debated at a recent Airmic News roundtable. Mark Baylis reports.

Airmic chief executive John Hurrell began with the observation that any other contract of the size of many corporate insurance purchases would routinely be the subject of due diligence oversight by the board. Yet directors are often just not interested. This is partly, he said, because the premium spend is relatively small, masking the Value at Risk - in other words, the sums potentially at stake in the event of a large claim.

Interest is also diminished to some extent, he said, by the perception that it is becoming more difficult to get big claims paid – a trend that could only encourage chief finance officers to take the lowest insurance prices regardless of quality.

Why should boards be interested in insurance, and how do they view it now?

Whilst boards vary greatly in their attitudes towards risk and their understanding of insurance, a number of common themes emerged from the early discussion. Nicola Harvey of Christies went straight to the nub of the matter. There is no point pretendingthat it is always possible to get the board interested in insurance, she said. This is a realistic aim only when insurance can support areas that are seen to be critical to the business.

Furthermore, she continued, insurance is relevant to a low proportion of corporate risk, and directors take much of what it does for granted. “Don’t overdo it or you turn people off. The critical business issues on the corporate risk register are often things that insurance cannot cover,” she said.

“The critical business issues on the corporate risk register are often things that insurance cannot cover” - Nicola Harvey

A number of people made the point that, in some circumstances, it was a good sign for insurance to be left out of board discussions. To quote John Scott of Zurich: “If everything is going well it should not be top of the agenda.”

Julia Graham of law firm DLA Piper said that insurance is nonetheless of sufficient strategic importance for discussion by the board. “They’re the organisation’s ultimate governors and custodians,” she commented. She agreed, however, that buyers need to be selective in the types of cover they bring to directors’ attention. “Materiality and relevance” are the key words.

Her employers are intensely interested in cover for malpractice, for example. “If you get the malpractice element of a law firm wrong this could be fatal. This class of insurance is a big deal.” Property Casualty, on the other hand, should not require board sign-off". Where this might differ is cover for emerging risks, for example cyber, and the business rationale and strategy for this should be debated.

Chris McGloin of Invensys said insurance was a key enabler when signing off projects. Without it any potential deal might not go ahead and would have to be approved at board level. Echoing Julia Graham, however, he said directors are not interested in the details of  Property or cyber-cover. “How does insurance help us to run our business better? That’s what they’re interested in,” he said.  

“How does insurance help us to run our business better? That’s what they’re interested in” – Chris McGloin

Meanwhile everyone agreed that it is easy, for obvious reasons, to get directors interested in D&O.

Daniel Max of Marsh said that insurance was indeed a strategic purchase, but he said many firms did not approach it in a strategic way, preferring to go about it instead as they had in previous years. “How often do businesses sit down with a blank sheet of paper and say, what is the best way of creating an insurance programme that meets the needs of the organisation?” he asked rhetorically.

“How often do businesses sit down with a blank sheet of paper and say, what is the best way of creating an insurance programme that meets the needs of the organisation?” – Daniel Max.

Developing John Hurrell’s point, Andrew Tunnicliffe of Aon queried whether boards fully understand the value of insurance in the context of a contingent asset. He pointed out that its value was not just financial but also important from a PR point of view. He commented that post-event it can often be a challenging situation for a board to acknowledge to stakeholders that pre-event insurance was available but a decision (no matter how informed) was made not to purchase coverage. He also added that there was growing interest from clients in finding cover for ‘black swan’ events, focusing on the unexpected.

Brian Kirwan of Allianz cited the example of a client that would only agree to install a sprinkler system if it led to lower insurance premiums. Yet it was in their strategic interests to do so anyhow because of the potential disruption involved in any fire. The anecdote, said John Hurrell, wasan illustration of how the strategic and risk functions do not always talk to each other.

At this point Nicola Harvey brought the discussion back to basics; some bad claims experiences have created a perception problem. “We do have a mountain to climb,” she said. “They [directors] often have a somewhat warped view of insurance in the first place, usually due to poor past experiences on claims.”

Chris McGloin took up the theme. “Do we and the board view the insurer and broker as a strategic partner or as an adversary when it comes to paying claims?” he asked.

Insurance payments save businesses from going under – John Scott

John Scott then spoke up for insurers. He said combined ratios (insurer claims payments plus operating expenses as a percentage of premium income) showed that they were paying out all the time. In many cases they were saving businesses from going under. Nicola Harvey agreed, but said the unhappy incidents were the ones that stuck in the memory.

Continuing the theme, John Scott  said that insurers were unsung heroes. “There are many, many occasions when boards get big cheques,” he said.

Brian Kirwan asked whether risk managers examined insurers’ claims departments. Doing so, he said, would encourage them to devote more resources to that area. The feeling around the table was that this type of attention was becoming more common.

At this point in the discussion, John Hurrellasked Airmic technical director Paul Hopkin to sum up the discussion around the first topic, namely under what circumstances insurance is a strategic purchase.

“At the risk of stating the bleeding obvious,” he said borrowing a phrase from Basil Fawlty, “insurance becomes a strategic purchase if it facilitates strategy. It is important to look at the relevance of insurance when considering your tactics and strategy. It can be a very important strategic purchase.”

Julia Graham concurred, stressing again the need to get people to focus on what matters. Paul Hopkin cited D&O as a good illustration.

How to make the case for insurance-purchase as a strategic function

The discussion then moved to how Airmic members could press the case for insurance as a strategic purchase. One argument that was not made at this stage, perhaps because it had already been covered, is its vital role as a source of contingent capital. Nor, (though Julia Graham did so later), anyone make the point that insurance often provides the comfort needed to give businesses the confidence to take risks - especially in times of economic pressure when businesses naturally become more risk averse.  Here are some of the other arguments for insurance that did emerge.

Information gathering.The insurance-buying process throws up a huge amount of risk data that can be of value throughout the organisation.

Customer relationships.Customers and other business partners draw great comfort from the knowledge that insurance is in place to protect their interests. Nicola Harvey of Christies used the example of works of art entrusted to their care.

Mergers and acquisitions.To quote Daniel Max: “M&A is clearly going to be a strategic decision for any board and, apart from mitigating risk, insurance buying helps the board to understand what they’re getting into and what their contingent liabilities may be.”  

Attracting and retaining key staff.Although D&O is an obvious area, Julia Graham used another illustration. In her company a group life assurance scheme enabled them to offer unique added benefits to existing and potential partners.

 Corporate Social Responsibility. Insurance has a role in enabling companies to meet their CSR obligations, with considerable reputational as well as compliance implications.

Getting into new markets. Andrew Tunnicliffe made the point that insurance can have “a part to play as a strategic partner” in enabling the opening up of new markets and business opportunities. He gave the example of a major pharmaceutical company looking to develop opportunities in China in connection with cancer-related illnesses. Working in combination with the insurance markets to develop meaningful healthcare insurance capacity alongside the business roll-out is not only innovative from a business development perspective but also socially responsible and supportive. John Hurrell commented that company AGMs are often dominated by discussion about new markets. He asked whether risk managers ever speak up in these situations.

John Scott pointed out that the risk manager normally has a wider understanding of risks than his or her colleagues, incorporating those associated with location and political and economic issues.

Risk managers should broaden their risk bases – Brian Kirwan

The conversation was now getting away from pure insurance and into wider Enterprise Risk Management. And a good thing too, felt Brian Kirwan.He urged risk managers to “broaden their risk bases”, a process that would also broaden their relationships and value within the organisation.

“Risk managers know things about the organisation that others do not. They should share that knowledge.” – Julia Graham

Yes, said Julia Graham. “Risk managers know things about the organisation that others do not. They should share that knowledge.” Nicola Harvey agreed, but guessed that only about 20% of pure insurance buyers had the necessary skills. Chris McGloin said the challenge was to convert that knowledge of the organisation into meaningful actions.

How to increase the insurance share of risk map?

Given fifteen or so minutes, the group was never going to resolve the fundamental issue of how to extend the proportion of the risk map covered by insurance. Some interesting themes emerged nonetheless.

Daniel Max described in some detail the process of using insurance as a strategic purchase in M&A activity, from teasing out the issues to designing a product. What it demonstrated was the amount of time needed. Given the critical importance of making the right decisions about M&A, it was time they were willing to invest. As a result, insurance and risk managers were elevated within the organisation.

Most other areas of insurance receive less attention than M&A, and that is arguably one reason why the product becomes commoditised and the risk manager marginalised, with the parties lacking the understanding to make it a truly strategic purchase. “Too often we see ambiguity of wordings at the point of claim when you realise that the policy does not deliver against expectations,” he said.

Greater use of scenario testing to identify areas where insurance would be effective – Andrew Tunnicliffe

Andrew Tunnicliffe then urged greater use of scenario testing as a means of identifying areas where insurance would be effective. He illustrated the point with a food company that had decided to take out $100 million of cover for product recall post an event where salmonella poisoning had been experienced. This demonstrated a reaction to a specific event that may have been anticipated if robust scenario testing had been in place.

Fine in principle, said Julia Graham, but how do you know which scenarios to test? Would anyone have foreseen the horse-meat scandal? She did acknowledge, though, that there are some basic supply chain practices that can be deployed whatever the scenario.

Brian Kirwan agreed that clients should up the game when it comes to scenario testing. He said the process can help tease out issues and give clients more confidence as to what is covered. This, in turn, would make companies more likely to use it. Chris McGloin countered by describing a recent episode where his company had indeed carried out scenario testing and then gone back to their insurers to ask whether certain losses would have been covered; the underwriters were unable to provide the requested clarification.

John Scott spoke about the role of insurance in enabling companies to adapt to new business models, citing the mobile phone and motor industries as good examples.

So what happens now and what can Airmic do?

By way of conclusion, John Hurrell asked what can be done and, specifically, what actions Airmic should take.  Brian Kirwan gained agreement for the need to promote insurance. “We should be going out and publicise success stories  - case studies where insurance has made a difference,” said Chris McGloin.

Another key theme was education. To quote Nicola Harvey, “Education is really important. Airmic can help its members achieve the necessary skills and visibility .”

Julia Graham brought up the importance of segmentation. Identify those businesses, situations, classes of business where insurance really can be strategic – and indeed those Airmic members with the necessary aptitudes and aspirations to carry the torch. One size does not fit all.

John Hurrell concluded by saying that Airmic would produce a guide on the subject before the end of the year. All eyes turned to Paul Hopkin, who had been patiently taking notes and who will have the job of producing it.

Taking Part...

	Julia Graham, Chief Risk Officer, DLA Piper UK LLP
	Nicola Harvey, Group Risk Director, Christie’s International plc
	Paul Hopkin, Technical Director, Airmic
	John Hurrell, Chief Executive, Airmic (chairing the meeting)
	Brian Kirwan, Head of Market Management, Allianz Global Corporate & Specialty
	Daniel Max, UK Practice Leader, Marsh Private Equity and M&A Practice Chris McGloin, VP Risk Management and Insurance,Invensys plc. Deputy Chair, Airmic
	John Scott, Chief Risk Officer, Zurich
	Andrew Tunnicliffe,  Chief Operating Officer EMEA at Aon Risk Solutions