Getting to the heart of the risk

Underwriting global property portfolios requires much more than traditional risk assessments. Veronica Cowan considers the specific challenges of providing international cover

You are a global property underwriter asked to insure tall buildings in Chicago and Madrid but how do you define a tall building - is it one with three stories, eight or as many as 12? The answer is, it depends.

As Mike Stones, European property technical development manager for Ace Europe, explains: "Building codes around the world differ. Even within Europe you would not find the same building code." So, he asks, if there is no precise definition of what constitutes a tall building, how do you write a property manual? This is just one example of the multitude of challenges facing underwriters when they are looking to provide cover for clients' global property portfolios.

Information is the key to underwriting major global property risks - not taking things at face value or viewing then with a superficial eye.

While sophisticated forensic accounting is one facet of predicting business interruption losses, business continuity planning is not all rocket science. However, timely preparation is essential.

"Planning is better done with a cool head, not when you are in turmoil," observes Mr Stones. "It is not difficult - 90% is common sense, 8% is analysis, and 2% is documentation, yet people tend to focus on documents." But sometimes, he explains, the obvious things are missed. "We can predict major things like a fire or a flood, yet we can forget to analyse what is likely to happen if a supplier goes down. You need to think outside the box."

This is echoed by Oliver Schofield, global manager at Aon, who stresses the importance of understanding the business dependencies, such as the knock-on effect of a loss on Company A because it is reliant on parts being supplied by Company B. "BI and continuity planning is now a major issue for insurers. If the client has all the information upfront, showing they are taking it seriously, insurers will respond by raising insurance limits but clients have to be thoroughly prepared."

BI costs are increasing relative to property losses and there is also a supply-chain issue, notes Mr Stones, with everyone becoming more reliant on very lean supply chains. On top of that, machines are becoming more bespoke and sophisticated rather than 'off the shelf', making it difficult to source a new part easily. "In a global society, people are sourcing them from the other side of the world, which impacts on delivery times and puts costs up", he explains.

Proximity to client

As to the specific challenges facing global property underwriters, whose clients have international schedules of insured locations, John Woodman, director of Risk Solutions at Royal and Sun Alliance, says: "It is all about the proximity to the client. The risk manger becomes a key part of the operation instead of just an access point or facilitator. You need to get to the key person who knows what is what and can identify the important information. In really large companies with big schedules, it is impractical for one person to know everything. So you need to talk to several people and strive for longevity in relationships. The key is to keep the client because there is a danger when clients churn." A customer who is willing to share information is worth building a relationship with, he adds.

FM Global offers products and services in more than 110 countries and is solely focused on property exposures rather than liability. Martin Fessey, vice-president of FM's international operations, says clients with good risk management genuinely get a better deal from insurers. "It really does translate into premium reductions," he says.

But if premiums are static or falling yet risks are remaining the same or growing more complex, how do clients and underwriters ensure there is adequacy of cover? Duncan Southcott, head of property at Allianz Global Risks UK, comments: "The key to ensuring adequacy of cover, regardless of market conditions, is to consider all the risks and match the premium to them. Each trade sector will have its unique risk profile, which will have to be understood by the underwriter." He explains that the traditional method of risk assessment used by underwriters involves sending risk engineers to the site to assess the physical risks, but cautions: "This struggles to keep pace with advances in modern technology and does not match the risks to the profit and loss component of the business effectively."

Understanding the risk

Information is not enough on its own - it has to be understood. Mr Southcott cites recent losses in the food industry sector, where underwriters had not fully understood the nature of risks associated with the goods being produced. "As suppliers of non-branded goods can be replaced more quickly and easily than those supplying branded goods, the BI risk will have a greater effect on suppliers of non-branded goods. The telecoms industry, on the other hand, has a more contingency-based profile. As the network must be running 24 hours a day, there are many robust back-up and recovery systems in operation. Consequently, any damage to the network may not always involve a major BI loss for the insurer," he explains.

Kevin Hubbard, partner at Jardine Lloyd Thompson Risk Solutions, comments: "As the broker, it is our role to liaise with the insured to get the policy wording that ensures it is adequate. It is not the role of underwriters to ensure adequacy of cover - the broker should have done the liaison work to ensure the required cover is in place." He adds: "Brokers need to be aware of restrictions placed on cover; insureds always have a wish list but the broker has to try and meet realistic expectations."

Mr Schofield says adequacy of cover is not an issue at the moment as there is increased capacity but he adds that underwriters will not provide cover without full information from the client. "We are moving away from preset market policy forms to manuscript bespoke forms, which are becoming common again."

Falling premiums

Premiums are falling because of market conditions, confirms Mark Platten, head of property underwriting for Zurich Global Corporate UK: "But the risk is more complex, in manufacturing in particular, where there has been a lot of rationalisation. This means the organisation has less property capacity and a lot of organisations are moving to other countries, all of which make BI costs much higher."

So what are the keys to managing and mitigating large property and BI losses, and are corporate risk managers and insurers working closely enough on this issue? "Risk awareness is the key to managing the losses, using a chartered accountancy approach to determine the appropriate BI limit," says Mr Schofield. "This helps ensure there is sufficient cover in place but the complexity of the supply chain means underwriters require a lot of information."

In Mr Southcott's opinion, large property and BI losses can best be avoided by effective risk management and maintenance of a quality risk portfolio.

"This requires examining more than just a snapshot of the risk as business continuity plans are critical to protecting the client from both insured and uninsured risks. By keeping pace with manufacturing methods and developments within all the different industry trade sectors, insurers can maintain an up-to-date BI profile for each industry."

He continues: "The key to insurers developing a deep understanding of the risks is to establish an effective two-way dialogue with clients.

Good communication channels with the right people within each industry allow insurers to share knowledge of best industry practice and lessons learned from previous losses, helping clients to manage their risks. This has already been implemented in some key industry sectors, allowing benchmarks to be set for certain critical risk elements."

As to whether the potential losses from BI are becoming increasingly difficult to calculate, Mr Southcott remarks: "Clients have a key role in calculating these potential knock-on losses by sharing their future plans for the business. This will allow insurers to use their specialist knowledge to identify potential bottlenecks where duplicate or back-up facilities may be required to mitigate the BI risk. While in the short term such facilities might not make business sense, a separate production facility could protect market share and keep the client in the market should a BI risk crystallise."

This is echoed by Mr Platten, who says that Zurich looks for all parties to understand their exposure and risk, especially on the BI side, where losses are much less tangible and require understanding of the business itself. He remarks: "Often the local site manager or engineer may not have an overview of the whole thing. Business continuity planning is more important than ever before and plans must be updated."

Business interruption modelling

Zurich uses BI modelling to give a scenario from supply to customer, so that the impact of any given disaster can be understood. "This also gives a monetary measure that concentrates the mind of the customer and some even go back to having a duplicate site as they don't want to lose their business. BI insurance cannot pay for it all," he stresses. BI losses now outstrip property damage in claims and Mr Platten says it was easier to keep businesses going in the past.

However, in Mr Woodman's view, BI is not in itself becoming more complex.

It always has been complex, he says, although this fact might not have been recognised, and certainly not quantified. "Often we have not understood the value of writing the risk. If we had worked harder at understanding the risk, we would have been more likely to pay the claims. This is where the broker has a big role to play - the good brokers get the best match of cover so that the claim is paid," he says. Mr Hubbard adds that the complexity lies primarily in the esoteric types of cover, like that for the telecommunications industry.

As to how clients, brokers and insurers can help each other minimise premium volatility, lost profitability and major property losses, by far the most effective method is to establish strong tripartite relationships, which provide a forum for open dialogue and intimate knowledge sharing, says Mr Southcott. He adds: "This results in the creation of tailored risk management solutions for clients, which minimise the frequency of large losses and smoothes the effects of the insurance cycle."

Is it crucial for clients to adopt a single corporate risk management standard across all business locations, and what challenges does this throw up for risk managers when factors such as political risk and reliability of local power supplies could vary significantly?

"A global corporate risk management standard would be the utopian ideal," says Mr Southcott. "But such a standard would have to be pragmatic enough to cater for the varying risks associated with each client location, product and activity affecting their business."


Every organisation, therefore, needs one philosophy, notes Mr Schofield, "although standards will vary for each location". This view is echoed by others, including Mr Fessey, who observes: "You can have a standard approach if it is a centralised company but it has to be applied locally.

In a decentralised company, you must have a philosophy. The difference is the stick and the carrot - a philosophy is more of a carrot but each has their place and both have been successful." He reports that large companies are now more receptive and risk aware, and says that insurers must support this in a way that is positive and relevant.

The outcome of the first World Trade Center litigation has also thrown the spotlight on the issue of contract certainty in insuring major property risks. This, including the concept of wordings agreed at inception, is clearly on the agenda of the industry and its regulators for 2005. Mr Hubbard comments: "This has been a thorny issue for some time but contract certainty - in terms of policy wordings - should be in place from day one, not months later."

Now there is a whole new topic for consideration on another day.

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