Gustaf Hamilton and Charlotte Barnekow

Gustaf Hamilton, StrategicRISK European Risk Management Awards Lifetime Achiever 2008

Charlotte Barnekow, SWERMA chairwoman and head of insurance risk management, Ericsson

Lennart Edström vice president group risk management, Electrolux

The role of risk managers has been transformed since companies first started hiring them to look after insurance. Back in those days, risk managers rarely moved from beneath a mountain of insurance contracts. In Sweden, home of an established risk management tradition, Gustaf Hamilton was the country’s first risk manager. Hamilton, a former Swedish artillery officer, turned to insurance in 1974 when he joined Procordia, a state owned conglomerate. After an intensive three week insurance ‘boot camp’ in the US, Hamilton was thrown into the deep end and asked to transform the group’s insurance strategy. Property and workers’ compensation insurance were the main focus. Hamilton is credited with setting up one of Sweden’s first captive insurers. And he is held in high regard amongst Swedish risk managers for his curious and inquiring mind. As one of the founders of SWERMA, the country’s national risk management association, the Swedes have also named a scholarship after him.

When Hamilton started his career, the risk manager’s world was a very different place. For one thing, companies rarely retained any risk themselves. Now risk retention has become much more important, meaning that companies are far more concerned about managing those risks. Further, international insurers were practically unheard of, with the exception of the unique London market. Most companies at that time dealt with many different insurers.

Now the risk management cog is a central component of the corporate machinery. The role and importance of risk managers have been enhanced to cover all business risks. But Hamilton thinks the shift may have gone too far. ‘Risk management is too broadly defined today,’ he says. ‘I am afraid that risk management covers too much. There should be set limits about what fits into a risk manager’s job description. A risk manager cannot be an expert on all of the risks that a company faces.’

Charlotte Barnekow agrees: ‘The profession is broad, and there is a lot that fits into it. We must identify our responsibilities and clearly define them. The uncertainty surrounding the role and responsibility of risk managers is a big issue.’

Another change is the deteriorating levels of service in the insurance market, says Hamilton, with more than a hint of nostalgia: ‘In my day each business had its own representative from the insurer who could discuss their particular situation.’

Today’s business climate is extremely tough and risk managers are rightly concerned about the stability of their business partners. The ‘big three’ brokers, who tend to provide risk management services to multinational companies, have all been hit by falling profitability as a result of the financial crisis. Since the beginning of October 2008, Aon, Marsh and Willis have all seen significant slides in their share prices. And, like other businesses, they have all started looking for ways to cut costs. Their poor performance is a significant concern for risk managers, who are worried that service levels will suffer a hit. Barnekow thinks the problems stem from the brokers’ business models. ‘Brokers are suffering,’ she says. ‘They need to look at their business models. Why can’t they get their costs and income right?’ In Sweden the problem has been compounded by an unhealthy twist in salaries, she adds. Professional brokers tend to move between firms a lot and each time they move their remuneration goes up. ‘Brokers need to look for new blood rather than hiring from each other. That could have a positive impact on the whole industry,’ she says.

“We must identify our responsibilities as risk managers and clearly define them.

Charlotte Barnekow

Other things remain the same. Risk managers need bucket loads of core skills. ‘They need to be curious and good communicators,’ says Hamilton. ‘That is essential, so that the rest of the company can understand what they are doing and why they are asking questions.’ Barnekow adds: ‘Risk managers have to defend their job descriptions, otherwise they could be cut out if they cannot clearly demonstrate their role and how they add value.’

Current concerns

Swedish risk managers share similar concerns with their other European counterparts. The future development of premium prices is a big worry for them. Lennart Edström, vice president of group risk management for home appliance manufacturer Electrolux, explains: ‘There has been a lot of noise from insurers saying they would like to raise premiums but we haven’t seen that yet. I expect that the insurance market will raise premiums for those companies that don’t have good risk management and loss prevention practices and reward those companies with good risk management. There should be a benefit for being active and investing in loss prevention. If that doesn’t pay off in the shape of a premium reduction, how do I convince my boss to keep spending money on it?’ asks Edström.

Buyers are also worried about the stability of their insurance partners, particularly when it comes to placing long tail risks. Following problems with several large

insurers and reinsurers, including AIG, XL and Swiss Re, buyers are far from convinced that their insurers will still be around when claims come in. Claims on long tail risks tend to materialise only after a long gestation period, sometimes decades.

The financial crisis has laid waste to the European insurance landscape, but recent moves are welcomed. ‘What AIG is doing by separating its insurance operations from the rest of the company is very promising,’ says Edström. ‘I hope they will keep the whole property and casualty operation together and not split it up into regional companies, because they will lose their big advantage, which is their global reach.’

Lawmakers can also generate big headaches for corporate risk managers. Governments should ‘get their hands off retroactive legislation’, says Edström. Retroactive laws create huge liabilities for companies, which insurers find it hard to cover because they have had no time to gather premiums to cover the claims.

New laws introduce uncertainty. The risk-based capital regime proposed by Solvency II leaves a question mark hanging over the heads of European captives. Under the proposals, an insurer that writes many lines of business is required to set aside a smaller amount of capital because they can spread risks across a portfolio. But captives only insure company-specific risks, which means there could be a disproportionate request for capital. ‘That is an unrealistic request,’ says Edström. ‘I think captives should be treated with different parameters.’