Tough times ahead

StrategicRISK asked thirty readers what kept them awake at night. Overwhelmingly the issue on most minds was the economy. Their concerns centred on two topics. The first was to do with tighter credit, which adversely affects companies in a number of ways. Some said a lack of investment money could prevent them taking advantage of opportunities. Others that it put more companies at risk of insolvency. Cutbacks were another concern. Risk managers fear their department could be on the chopping board. Overall the difficulty in accessing money was expected to significantly constrain business activities in coming years.

The impact of the downturn on the insurance industry was the second major threat identified by the survey. There were doubts about the future of existing insurers and the impact of consolidation on the industry. Risk managers were also concerned about a shortage of capacity and premium increases.

Big risks

Respondents pointed to a number of other problem areas stemming from the economic crisis. These included an increase in fraud and litigation as people fight to get a share of the slimming economic pot, customer or supplier bankruptcy, staff problems, aggravation caused by redundancies, the falling value of investments and pension fund deficits.

A risk manager with a toy manufacturer predicted a particularly harsh winter with fewer Christmas shoppers leaving retailers overstocked. Several other risk managers feared the consequences of supplier or customer insolvency. ‘A prolonged downturn could lead to an increase in theft,’ added Paul Howard, head of group insurance and risk management at the supermarket chain J Sainsbury. Retailers have since reported an alarming rise in crime levels. Managing the business in a slowdown rather than a period of growth was identified as another risk, as was the tendency for short term thinking.

Summing up the challenges posed by the slowdown, Julia Graham, AIRMIC chairman and chief risk officer of global legal practice DLA Piper, said: ‘Given the enormous economic challenge, companies have to go back and look at their risk profile and how the context of the risks have changed.’ She also suggested that captive managers look again at their assets to see if they are being properly managed.

Risk transfer

The respondents were asked how the current period of market turmoil would affect their company’s risk transfer possibilities. ‘Re-insurance costs may skyrocket and direct insurance costs will follow closely. This translates into more risk retention,’ said one. Businesses looking at retaining more risks could stimulate renewed interest in captives.

The general feeling was that the turmoil would impact insurers’ ability to assume risk. ‘Some big corporates are considering how much risk they should be putting into an unsteady insurance market,’ added Graham. The graph shows how much the share price of some of the major insurers has dropped since September. But remember share price does not directly equate to solvency. Risk managers also complained that risks were getting harder to insure. As insurers themselves become more risk averse they only want the best commercial risks. ‘Good risk management is the best way of proving that your risk is worth taking on,’ said one respondent.

Insurance problems

One thing making companies more risk averse is the problems with the insurance market. On AIG’s troubles the responses were measured. Only a tiny minority of the AIG customers who responded to the survey had moved their business elsewhere. A similar sized group were planning to move their business and just under half were considering whether or not to do this. About a third had no intention of going elsewhere.

A respondent said: ‘It is only the parent company that has had difficulties, the insurance companies are stable.’ Other responses were more cautious. ‘AIG will surely lose business, whatever is being stated publicly by their accounts. This may show up only during the next year.’ Financial problems were not specific to AIG, and respondents thought questions needed to be asked about the whole financial system. ‘The broader cultural aspects of the current turmoil need to be brought into the open and dissected to ensure that the industry gets to grips with where it went wrong.’

Wary of insurers getting into difficulties, risk managers suggested that it was best to spread risk among carriers. They also questioned the values assigned by rating agencies. A commercial rating is still ‘extremely valuable’, said Graham, but the agencies need to ‘sharpen up their act’. ‘We need rating agencies and regulators that understand the complexities of what they are doing.’

More duties

Most of those who replied to the survey anticipated an expansion in reporting on risk management during 2009. The risk managers expected their jobs to become higher profile, but with fewer resources at their disposal. This trend was expected to accelerate as conditions got tougher. Some respondents said improvements would be difficult to effect with a hiring freeze.

About half of the sample did not believe their organisation would become more risk averse in 2009. A small minority said it would and the others were not sure. ‘In a slowing economy there is a tendency to become more cautious and that equals risk aversion,’ noted Graham.

She added: ‘Risk managers have an extremely important role to play, but they need to make sure they have the right skills and knowledge to avoid becoming casualties themselves.’