MALCOLM LAMBERT - Financial risk manager, London Underground Limited
In terms of insurable risk the main issue in the last 12 months has been the cost of maintaining terrorism and asset damage insurance. We looked seriously at moving our property terrorism cover away from Pool Re, as their rating strategy does not recognise or reward deductibles or 'first loss' sums insured. Pool Re applies a standard rate to declared values at risk and, having undertaken an asset revaluation exercise, we faced a doubling of the premium despite the underlying risk not having really altered.
Our asset damage insurance had to be re-marketed because we suffered a major fire at one of our offices in Paddington and this caused the primary reinsurer to reconsider the premium they required for the first layer above our self-insured deductible and the layer retained by our captive in Guernsey.
As far as resolving these issues is concerned, in the case of Pool Re it is difficult to negotiate with an insurer of last resort. Their attitude, quite understandably is, if you can do better, go somewhere else! The specialist terrorism team at Aon were very supportive and managed to obtain some very interesting alternative quotes using the London and Bermuda markets, but the Madrid bomb concentrated the mind of senior management on the vulnerability of transport infrastructure to terrorist attack. Hence, despite the high premium we decided to remain with Pool Re on an 'each and every claim' sum insured basis. The alternatives either excluded certain assets or were subject to a sum insured with an 'any one claim or series of claims in the period' limitation.
We have moved the primary layer of our asset damage reinsurance to AIG and so we now have to start to build a new risk management relationship with them and Aon our broker. It was sad to have to part company with Zurich Municipal who have supported us for years. They were happy with the risk, but we could not agree to their renewal terms, which opened up the opportunity for AIG.
Terrorism cover will continue to be a major issue for us. For everyone's sake, it is important that the Government and Pool Re sort out the 'gap risk'. Pool Re may not cover religious and ideological risks although the Government definition of terrorism includes such risks. This could lead to terrorism claims being excluded by both Pool Re and the property insurers.
The insurance market has become much more selective and risk averse since 9/11. Generally, we are content to take a £5m deductible and limit our cover to a 'first loss' sum insured, but there is no incentive to do this with terrorist risks if the premium remains unaltered by doing so. By placing the terrorism risk via our captive, Pool Re will provide reinsurance for the same premium, but with a much lower deductible and on a full reinstatement basis. We also avoid the terrorism surcharge that applies to conventionally placed risks. We could transfer more of our risk to external insurers, but there must be a justification for doing so.
Conversely, we are now uninsured for public liability claims arising from terrorist attacks. The market has disappeared. This year our public liability insurers have withdrawn cover for asbestos claims because this has become a general exclusion on their reinsurance treaties. The risks are assessed as being low, particularly above the £5m deductible we would retain, but we have little choice but to self-insure such uninsurable risks.
Transport for London/London Underground Limited is fortunate to have a captive and it is no secret that we are seriously considering increasing its share capital in order to give us greater capacity to underwrite more of our own risk.
Insurer solvency is a concern. We rely heavily on the market security departments of our insurance brokers and we will only use approved insurers. However, as the demise of Independent Insurance showed, things can change very quickly.
For me, attending the AIRMIC conference is an ideal opportunity to try and recruit members for the recently formed railway industry special interest group (SIG) which I have been invited to chair. Insurers tend to view the railway industry as 'accommodation business' only. We need to change the perception of the market and can only do that if we address the underlying causes of concern. Lead business has polarised to a few supportive underwriters, but we need the capacity of the market in order to be able to place catastrophe level insurance at realistic rates. Unless we change our risk profile this is unlikely to happen. I hope the SIG will act as a forum to draw out and discuss these issues and perhaps act as a catalyst for change.
The formation of the SIG was announced in AIRMIC Express in April 04 and the initial meeting is unlikely to take place until late June 2004. I have had some encouraging promises of support, but in order for the group to be effective we do need a wide representation from the sector, particularly from TOCs and contractors. Membership is open to any AIRMIC member involved in railways, including suppliers, contractors and other stakeholders. We are not consulting directly with the insurance/broking sector at this stage, but it will be essential to develop a closer understanding of the issues as perceived by the insurance industry.
In order to obtain a railway operator's licence, members regulated by the SRA need to purchase a minimum limit of indemnity of £155m for public liability. This cover must extend to indemnify contractors for any shortfall in their own public liability arrangements. I think this requirement in a hard market is central to the problem faced by the industry in being able to obtain cost effective liability, property and business interruption insurance cover.
The Claims Allocation and Handling Agreement (CAHA) also influences insurers' perception of the risks they are asked to underwrite. The SRA requires licence holders to be members of CAHA and the primary purpose of CAHA is to safeguard the public by ensuring that liability claims are handled in a centralised way. However, CAHA also states that in the absence of more specific contractual agreements, CAHA members are precluded from recovering their financial losses from other members. This restriction of subrogation rights, linked with the contractor indemnity requirement mentioned above, is not viewed favourably by insurers.
We need to reach agreement with our contractors over what risks it is fair, reasonable and cost effective for them to retain. If this causes us to question the viability of the current CAHA conditions, then they will be subject to a review.
Insurance is only one aspect of the risk management process. I am hoping that the SIG will address the fundamental issues that influence the railway industry's risk profile. We need to understand those issues and work with the insurance industry to get the right balance between risk allocation, financing and retention.
GEOFF TAYLOR - Nike Europe BV
I've been focusing in the last year on bringing some structure and infrastructure into decision-making and management of risks. We're still in the early stages of putting together some of our programmes here.
As a US company with an iconic brand, one of the key challenges that we face is the treat of terrorism and that will probably always be high on our agenda. In the last year, we've obviously done a lot of work relating to this. We rely on getting intelligence from our local police, from the broader risk management security specialists and having close relationships with local and national law enforcement - it's really about establishing an early warning system.
Most of our insurance is through global programmes which are controlled by our global risk manager. We haven't had any problems in getting the cover we need. In fact, we think we're pretty good at risk management and would be happy to take high retentions, but the insurance market does not want to give us the premium breaks that would encourage this because underwriters like our business as well! There's more capacity available to us than we really need. For example, we have just renewed our property programmes and although we have taken some underwriters off the coverage, limits, etc, remain the same.
The AIRMIC conference gives me the chance to meet up with people whom I only see once a year and hopefully hear some current thinking on risk management issues, as well as the views of some people who are not in risk management. The outside speakers add a lot to the conference.
DES VERNON - Managing director of Group Risk Management Services (Pty) Ltd, South Africa, and former chairman of IFRIMA
The big issue for us is still availability of insurance cover at a reasonable price. Cover has been disappearing and pricing is still fairly erratic. And the problem with this lack of coverage is that it tends to be greatest in the catastrophe areas like terrorism. Although you can do quite a bit by way of self-insurance, you cannot protect yourself against the really catastrophic losses.
The risk manager's portfolio has now spread into enterprise wide risk and therefore we are becoming involved in much wider risks to the business such as risks to reputation. The Institute of Risk Management South Africa has drafted enterprise risk management guidelines. These will certainly help to put risk managers on the map although it may seem that they are straying into other people's territory - taking ownership of aspects that other departments within the organisation believe belong to them.
In the past, we have had some conflict in South Africa between the roles of internal audit and risk management but this is no longer the case since the publication of King II (the King Report on Corporate Governance for South Africa 2002). This sets out quite clearly that the risk identification process and management of risks are outside of internal audit. Companies have to have a separate risk management committee or appoint someone responsible for risk management. So internal audit has been put back in its box! And the same applies to external auditors who were also trying to encroach on the risk management function.
Insurer solvency is an issue. We are the risk management arm of a pool of large South African companies known as the Mutual Risk Group. Some companies are financially stronger than some of the insurance groups so why transfer risk to someone who is weaker than yourself? We have had to become more flexible in terms of the ratings of the insurers that we deal with. We rely on our brokers and their solvency criteria and tend to go along with their recommendations.
By far the most important aspect of the AIRMIC conference for me is the networking opportunity and the chance to meet other risk managers. The great thing about this conference is that it's quite a personal event - I know beforehand whom I will be talking to and what their business is about.
- Des Vernon's term as chairman of IFRIMA ended in April this year although he remains on the IFRIMA board.
DAVID KETLEY - Cargill
The key issues that I've faced as a risk manager in the last 12 months are: the escalating costs of fronting for the captive; the sword of Damocles of the FSA hanging over us; the extent of our liability to customers for non-spec products, and the extent of the cover we have under our products liability policy for such claims. We have tackled the first of these by using the same fronting company for both property and liability business, but the others remain ongoing. The product liability issues are unresolved as English courts are giving differing judgments regarding how far exclusion clauses can be relied on and what is foreseeable. And insurers are reluctant to give opinions as to what will or won't be covered.
The issue of FSA regulation of insurance risk managers will hopefully be resolved soon but I think that both fronting costs and product liability uncertainties will remain problems. And new issues are always arising - which is why we need risk managers!
On the subject of risk transfer, we are using more self-insurance strategies but we are still managing to transfer those risks that we want to transfer and at a price that we are prepared to pay. Insurer solvency is a concern. The whole point of having insurance is that the insurer will be there in the future to take the cost of those losses you cannot afford.
I regard the AIRMIC conference as an opportunity to meet old friends and colleagues and to make new ones - and to discuss the problems they are facing and how they are tackling them, especially with regard to FSA regulation.
