Turmoil, transparency and compliance

The current crisis in the world's financial markets has already affected the viability of some insurance companies. Reduced availability of capital and credit is also having an impact in other industries. At this roundtable meeting, the presidents and board members of the European national risk management associations began by discussing the effects of financial turmoil in their own countries.

Perhaps not surprisingly, credit rating agencies and brokers' security committees came under fire for failing to provide early warning of the problems besetting some insurers. However, this was seen as partially excusable as the agencies and committees were focusing on insurance companies. Generally, those insurers that have experienced problems have done so because they are part of a larger group with the cause of the difficulties originating in another operation.

Failure of managements to understand fully the complex financial products with which they were dealing, and incentive and compensation schemes that encouraged people to take what should have been unacceptable risks were two factors identified by our panel as major contributors to the crisis. Increased regulatory focus was seen as inevitable by some participants, although one considered that the considerable time and money that had been spent on compliance with Sarbanes-Oxley had been totally wasted. Will further regulation bring more costs but no real assurance for the future?

The panel then turned their attention to broker remuneration. Despite the decision of the world's three largest brokers to forego contingent commissions, the total amount paid by insurers in respect of such commissions has risen. There was some discussion on whether insurance companies should spearhead reform by refusing to pay these commissions or whether it was up to the risk management community to demand transparency. Forthcoming legislation in Switzerland which will change the status of a 'broker' which accepts commission from an insurer to that of an 'agent' was seen as one solution.

Finally, participants looked at compliance issues in respect of multinational insurance programmes. Some considered that certain insurers did not possess sufficient knowledge in this admittedly complex area, and that they should upgrade their expertise. In any event, it is clear that no insurer or risk manager can equivocally guarantee that a programme is 100% compliant in view of both frequent legislative changes around the world and difficulties in interpreting sometimes ambiguous and complex laws.If you take unfavourable decisions, you normally do so to protect the balance sheet