Published on February 18, 2014
TRANSFER THE RISK WHAT IS THE BEST ? October 1st, 2013 1
Introduction One of the most relevant particularity of a risk manager’s activity is its responsibility to imagine and set up the transfer of risk. The transfer of risk may assume several aspects or possibilities. The transfer of risk must start with an internal evaluation and preparation by the company which intends to do so. The transfer of risk obviously affects the organization which accept to receive it as well as, potentially, the organization to whom the risk could be retransferred The transfer of risk implies that all the parties involved must be aware about what they are doing and what are the consequences for themselves and for their correspondents We will study the link between insured, insurer and reinsurer and the importance of risk management to succeed on it. 2
Introduction of the speakers Gilbert CANAMERAS Group Risk & Insurance Chief Officer, VP Finance Chairman AMRAE Gaëtan LEFEVRE Group Risk & Insurance Manager Group CMI Chairman BELRIM Michel JOSSET Insurance, Prevention and Real Estate Manager Goup FAURECIA Emmanuel FIERENS Chief Underwriting Officer, Head of Business Solution 3
What could go wrong ? Risks, incidents and accidents People Property Information Finance Liability RISKS Accidents, Illness Property loss Business interruption Theft, fraud Product & Environnement claims Currency, Credit & other risks
Transfer the risk – where is it ? External world Suppliers Investors, competitors, ... Internal world Business profile External world Customers Society People Property Weather,... Legal, ... Results LIABILITY Information LIABILITY
Example of a loss due to a supplier 1st experience, the 1st day as Faurecia risk manager : A staff of the external security company in charge of the watch service in Audincourt bumpers plant considered that his skills were insufficiently rewarded and wanted to be noticed by his hierarchy He ignited a fire on plastic parts in a large bumpers warehouse, failed to extinguish the fire … but fully achieved his goal to be noticed by his bosses As a result : Warehouse + 6000 bumpers destroyed : loss of 2.2 M€ Propane bottle storage affected. Luckily, no injury. 6
Insurance status & Legal procedure Faurecia property insurer indemnified the loss above the property damage deductible (400k€) The responsible was found legally incapable and had no resources Faurecia & its property insurer started a recourse against the security company (small company with limited liability insurance) and collected 1.1M€ from the security company liability insurer The recourse was shared between Faurecia and its property insurer This event emphasizes the importance of the exposure suppliers and the importance of contractual prevention due to
Liability : The (re)insurer experience «The scene » The liability insurance market is segmented by domain : (Comprehensive) General liability, Professional Indemnity (E&O), Stand- alone Products liability, Motor liability, Marine liability, Aviation liability, Pollution liability, Directors & Officers liability, ect.. Depending upon its activities, to protect against its liabilities, each Insured is required to purchase several of those insurance policies The “responses” of those insurance policies depend upon their nature 12
Without full knowledge of the contracts signed by the Insureds, to provide the appropriate insurance solutions for both parties, the (re) Insurer must solve an equation at five factors : 3 factors iro Insured’s exposures (U+A+E) 2 factors iro Insured’s contractual approach (CM+CP) 13
The (re)Insurer must well assess the Insured’s exposures Understand the Insured’ activities Assess the risks inherent to the scope Evaluate the reduction of Products vs Services, Underlying risks & potential perils Geographical scope, activity scope risks by the Risk Management policy Impact on exposure level Markets of Insured’s clients Growth rational: Organic, acquisition, diversification,.. Business model: own operations ; use of Partners/ contractors – Prevention & mitigation capabilities Development plan Joint Venturers, … Strategic objectives 14
The (re)insurer must well understand the Insured’s exposures U + Products vs Services, Underlying risks & potential perils Markets of Insured’ Clients A Geographical scope, activity scope Growth rationale: organic, acquisition, diversification, … + E Impact on exposure level Prevention & mitigation capabilities Business model: own operations ; use of Partners/ contractors – Joint Venturers, … Development plan – strategic objectives 15
The (re)insurer must well understand the Insured’s contractual approaches Contract Management Parties to the deal: definition of the Insured(s) Contractual Policy / Practices Contractual culture, contractual discipline, legal support Jurisdiction Position towards performance guarantees, financial loss bearing Retention vs Transfer of liability Position towards: hold harmless / waiver of subrogation Stability of contractual relationship with Insured’ business Partners (“repeat risks” vs “transactional risks”) 16
The (re)insurer must well understand the Insured’s contractual approaches CM + CP + Parties to the deal: definition of the Insured(s) Jurisdiction Retention vs Transfer of liability Contractual culture, contractual discipline, legal support Position towards performance guarantees, financial loss bearing Stability of contractual relationship with Insured’ business Partners (“repeat risks” vs “transactional risks”) Position towards: hold harmless / waiver of subrogation 17
Illustration : Main current technical issues by Occupancy Electro Magnetic Fields (EMF) : Telecom Genetically Modified Organisms (GMO) : Food, Agro Nanotech : Manufacturing Mould, Chinese drywall : Homebuilding REACH – Registration, Evaluation, Authorization and restrictions of Chemicals : Chemicals Pollution – Environment Impairment : Oil& Gas, Manufacturing Occupational Diseases : Mining, Manufacturing Silicosis : Mining Workers Compensation, Employers Liability : Manufacturing 18
Risk analysis Faurecia depends more and more upon suppliers (supply of products, service,... including presence on Faurecia sites) Faurecia is seriously exposed in case of damage due to suppliers if the latter is insufficiently insured or if a limit of liability of the supplier exists in the contract. Faurecia would get its indemnification from its Property or liability Insurer but would lose its deductible and may suffer increase of premium due to loss record if the Insurer can not file recourse against the supplier.
Training set for purchasers established with our broker How to review & negotiate the liability & insurance provisions in a supplier contract : Avoid a waiver of recourse or a too low limit of liability from Faurecia side Obtain a sufficient level of liability coverage from the supplier’s side How to review the insurance certificates provided by the suppliers
Level of liability insurance for the supplier Guidelines given to the purchasers. The level of insurance will depend on : The type of supply : on site service, products (safety subcomponents or not) The type of liability : professional liability, products liability The size of the supplier (local or worldwide) The country of origin of the supplier depending on the maturity of the local liability insurance market
Faurecia minimum required covers versus Local Insurance market offer by country Pure servicing (cleaning, security, …) Faurecia Minimal required covers Equipments (transfer, conformity, IT, maintenance) Products (sorting, retouche, interim work) General Liability including Professional Liability : 15 M EUR from which Pure Financial Loss/ Professional Liability : 5 M EUR CHINA General Liability including Professional Liability 1,5 M EUR From which Pure Financial Loss/Professional Liability 1 M EUR Idem Idem MEXICO General Liability 15M EUR OK from which Pure Financial Loss/Professional Liability : 5 M EUR: OK Idem Restrictions for security equipment Idem -----
LESSONS LEARNT In a large corporation where thousands of contracts are signed yearly with suppliers, the insurance department can not review each and every contract : Training of the purchasers is the key Absence of waiver of recourse is the main point to be achieved Level of insurance of the suppliers : the expertise of the brokers is needed to give realistic objectives to purchasers All should be well-received by the Insurer
The underwriting by the liability (re)Insurer : From the review of the parameters of the “Insured’s specific risk equation: (U+A+E) X (CM+CP) When the (re)insurer is satisfied with its risk mapping When the (re)insurer has established loss scenarios of different scales When the (re)insurer has identified what he does not know ! The (re)Insurer can come up with the Appropriate Solution, negociated with the Insured and its Broker 24
Aggravating items in a liability insurance policy from an underwriter ‘viewpoint : Each and Every versus Annual Aggregate Accumulation between policies Additional Insured, Joint-Venture Reinstatement: Around The Clock or side by side Full Prior Acts, Retro Date at Inception, Continuity Date Extending Reporting Period Aggregation: Batch or Serial Clause Single year versus multi-years policies; Duplication of Limits versus anti Stacking Underlying Erosion and Drop-down Defence costs outside limits of indemnity 25
From our claim experience in liability classes , the risk transfer from the Insured’ viewpoint …. Success Factors • Adequate procurement policy • Regular re-assessment of business partners • Alignment between contractual policy and self financing capabilities + liability insurance market capacity • Regular gap analysis and remedies embedded in the Risk Management policy • Knowledge of capacity levels available in the concerned liability insurance segments (class/country) • Opening to Alternative Claim Resolution before litigation • Existence of monetary caps in contracts • Recognition of which size matters to access adequate insurance solutions Failure Factors • Inadequacy between risks conditions faced and contracts wording • Insureds accept contract conditions that he does not master • Lack of knowledge of legal environment where Insureds have operations or sales of products/services • Insufficient awareness of globalisation impact 26
Risk Management Standard Process Define Strategic, Organisation and Risk Management Context C O M M U N I C A T I O N Identify Analyse Evaluate Treat P I L O T A G E / M O N I T O R
How to manage the identified risks ? G O Prevention Reduction Transfer the risk Keep the risk L •Workmen compensation •Insurance •Self insurance •Vehicles •Contractual aspects •Deductible •Property •Subcontractor •Liability A •Outsourcing •Waiver of recourse SPECIFIC ACTION PLANS •Prevention / Protection programs Incident Management Risk Assessement committee
Risk Management Standard Process Define Strategic, Organisation and Risk Management Context Identify Analyse Evaluate Transfer Treat Protection/ Prévention
Q&A THANK YOU FOR YOUR ATTENTION 30
Illustration : key features of Professional Indemnity (PI) vs General Liability (GL) PI: Damages arising from professional services breach GL: Damages arising from operations PI: Costs included within limit of indemnity GL: Costs in addition to limits PI: Written on claims-made basis GL: Written on occurrence basis PI: Financial loss claims GL: Bodily injury and property damage with consequential financial loss PI: Allow additional Insured clearly determined GL: Can provide additional Insured on blanket form basis 32
Illustration : main items of vigilance today for tomorrow anticipated manifestation (Sourcce Marsh Mac Lennan doc) 33
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