Smooth earnings are something of a holy grail for risk managers – no one likes to get nasty surprises, whether losses from a factory fire, foreign exchange movements or even a damaged reputation. So Zurich Financial Services is spearheading a new kind of ‘insurance’ package that seeks to cover both traditional insurable losses and financial exposure under one umbrella.
‘Risk tends to be managed in compartments within companies, and they don’t talk to each other,’ says Tom Kaiser, head of Zurich Corporate Solutions Worldwide. ‘They really don’t share the knowledge they need to understand what risks the business is facing.’ The answer, he says, is to undertake a risk mapping exercise to discover where the risks are, then to model likely scenarios and assess the appropriate mix of risk management solutions.
These solutions would include matching up non-correlating risks to save money on premiums at the most basic level, moving up to the more sophisticated balancing of financial and non-financial risks at the complex end. ‘We discuss what the company’s aversion to risk is and what losses they can afford to carry,’ Kaiser says. ‘Then transfer structures can be built, and derivatives can be embedded into insurance products, for example. It could be an earnings smoothing challenge, or it could be insuring things that have never been insured before.’
The idea is that the customer can still compartmentalise risks by area – strategic, operational or financial – but let a consultant mix and match the various ways of offsetting that risk beneath a single level of acceptable liability for the business as a whole. ‘We talk about integrated financial insurance,’ Kaiser explains. ‘Integrated means it all works together; financial means it includes all of the treasury and market risk and business risks that can be embedded; and insurance, because that’s where our roots are.’
Kaiser sees the main benefit for FDs coming from the initial mapping process, which can also highlight non-insurable risks. ‘Two employees in one company we visited recently controlled about £300m-worth of business, and they could have taken it with them had they left,’ Kaiser says. ‘They were looking at fire risks and so forth, but they weren’t looking at that.’
As companies generate more information and find better ways to analyse it using technology, it not only becomes possible to undertake the degree of analysis that is needed to formulate an integrated solution, but business are beginning to demand that it be done.
Companies with existing risk management products – a range of derivatives, for example – can incorporate them into any proposed package, says Kaiser. The corporate approach still works because the rest of the solution will dovetail with the existing packages and help offset its costs.
For example, a company using an equity portfolio to generate income for operations might want to minimise the risk of a physical loss coinciding with a downturn in the market. In that case, income above a gain threshold on the equity position could fund the premium for the insurance risk. At the same time, a stop-loss instrument would minimise the risk of equity losses.
‘It’s about managing risk in alignment with the way that companies see their exposures,’ Kaiser concludes. ‘That means we still use experts in individual areas, but it is important to take an overall view.’
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