RICHARD REDDAWAY, vice president, corporate insurance and risk management, GlaxoSmithKline, outlines to Adrian Leonard his...

RICHARD REDDAWAY, vice president, corporate insurance and risk management, GlaxoSmithKline, outlines to Adrian Leonard his approach to risk and the use of alternative solutions

What risks does GlaxoSmithKline face, and how are they audited?
RICHARD REDDAWAY As a major pharmaceutical company, product safety is critical. Following from it is manufacturing risk, and the associated risks of environmental liability, as well as the safety of our employees and of third parties. Major units within the company regularly audit all these aspects of our operations. Financial, liquidity, and counterparty risks are the responsibility of our treasury operation; I am responsible for insurance and loss provision within the operational risk management sphere. I have carried out over 40 country reviews in the last 22 months, partly driven by the need to see that insurance and loss prevention are properly understood in a newly combined corporation. Glaxo and SmithKline merged on 27 December 2000. As the merger settles down, I expect to carry out about 10 or 15 country reviews each year. Has GSK implemented an enterprise risk management strategy?
RICHARD REDDAWAY My own view is that ERM is really an American term for what we in the UK would call good corporate governance. I have yet to be convinced that there is anything more to it. It appears to me to be a phrase used by some consultants seeking to get a foot in the door. What tools does the company use to manage risk?
RICHARD REDDAWAY As far as classic loss prevention is concerned, we work with FM (Factory Mutual) in assessing the risks to our companies, and to the earnings that ride on our manufacturing operations. FM's assessments have always been, in my opinion, a vital tool for good corporate governance, as they highlight key potential areas of exposure and concern, as well as the cost of reducing those exposures if their recommendations are implemented. GSK and its legacy companies have always used the conventional insurance market, and GSK continues to feel that insurance has a central place in our corporate needs. That said, the legacy companies have had captive insurance companies in place for many years, and in the past we have used a finite risk solution. At the time of the GSK merger, we found that we had three captives in Guernsey, Bermuda and Lloyd's of London. We have taken the decision to focus on Bermuda. Our captive there will continue to play an increasingly important role in our insurance arrangements. What is the role of your captive?
RICHARD REDDAWAY In the traditional way, we use our captive to take risks from our companies throughout the world, as we feel that we should represent a better risk than the norm. Areas of insurance would include material damage and business interruption, public/product liability, including clinical trial liability, goods in transit, fidelity, and life. In the past we have written construction all risks and export credit with success. Gains from the use of our captive, apart from good business, have been the ability to bring together information on our risks and losses, which is a key tool for any proactive risk management programme. It has enabled us to access reinsurance markets directly, as well as, for example, being a member of Pool Re in the UK. Is GSK likely to participate in an industry pooling arrangement?
RICHARD REDDAWAY Along with several other pharmaceutical companies, we have been seeking to develop a new mutual, which would be based in Bermuda. While we are still seeking to gain critical mass, it is my hope that this mutual will commence on June 1, offering its members material damage and business interruption insurance. It could develop over the years along the lines of OIL (Oil Insurance Ltd, the energy sector mutual), and enable us to regain control of our insurance arrangements, which have certainly been blown off course by events in the insurance market. We would access the pharmaceutical mutual via our captive, highlighting yet another potential use of the captive approach. Following industry losses, does the supply of product liability insurance remain sufficient?
RICHARD REDDAWAY The lottery which is certain areas of the US litigation system means that it becomes very hard to underwrite our product liability exposures. This has been recognised by the potential liability insurance market, with the result that companies such as ours are having to take substantially more risk than we would have done in the past. Basically, the perception of insurers is that pharma liability is a operating risk that comes with being in USA, and regrettably I have sympathy with this view, given the litigation that one reads about daily. I am following the debate over legal reform in USA with great interest. What risk management measures are taken in relation to foreign ventures and third-party partners?
RICHARD REDDAWAY GSK operates in 118 countries, with over 100,000 employees. We have more than 100 factories in 38 countries. The phrase 'foreign venture' is almost redundant. All the corporate governance structures and procedures that I have outlined affect all of our overseas companies. As far as suppliers are concerned, we are very interested. For example, we use a chemical risk assessment tool to look at key suppliers. The results show where the company lies in terms of loss control and inherent hazard, both before and after the implementation of the recommendations coming out of the assessment. We have found such tools valuable in assuring underwriters about the potential risk in providing insurance cover to our company. This is particularly the case in the current insurance market, which is very concerned about client dependencies and potential accumulations of risk.Has GSK calculated its cost of risk?
RICHARD REDDAWAY In the past I have benchmarked our cost of risk with other companies, for example through an exercise that was conducted annually by the Risk & Research Group in UK. This company was recently acquired by Aon, and I am interested to see that Aon is reactivating this annual process. It really is very difficult to benchmark one company against another, and the real benefits come when benchmarking my own company, on an annual basis, against its own earlier annual reviews. What lies ahead in the company's risk management approach?
RICHARD REDDAWAY A key issue coming to the forefront is the role of multinationals in society. Our company now has a corporate social responsibility committee that advises the board on the social, ethical, and environmental issues that could seriously affect GSK's business and reputation. We have recently issued a second corporate social responsibility report, which provides indicators as to how we are progressing the issues outlined in our first report. In 2002, we invested £239 million in support of global community programmes, donations, and charitable contributions. The public expects companies like ours to take a proactive corporate and social responsibility stand, and this interest can only increase. The views expressed are those of RICHARD REDDAWAY, and do not necessarily reflect the views of GSK.Adrian Leonard is insurance market correspondent, StrategicRISKMoving Towards Self-Insurance
David Gamble, executive director, AIRMIC, reviews risk financing trends in a hard market.There has been little evidence of significant take-up of the highly complex and much talked-about alternative risk transfer options of the late 1990s, nor that they have proved very successful. However, virtually all companies now are looking at a new approach to risk financing in terms of higher deductibles and changes in coverage. Insurance from the ground up is quite simply too expensive.Similarly, risk managers are making greater use of their captives. For example, one group's head office, based outside the UK, which had shown little interest in the UK company's captive, has now become much more aware of its potential as a useful risk vehicle. And offshore centres confirm that there has been a significant increase in the numbers of captives being established.Another factor which is influencing the move towards greater self-insurance is the reduction in the credit ratings of many insurers. A number of major organisations have better credit ratings than almost all the insurance companies. Therefore, it makes economic sense for them to take more risk onto their own balance sheets, rather than transfer it to less credit-worthy organisations.Mutualisation is a possibility for the future, although there can be problems. For example, following September 11, the airline industry investigated establishing a mutual insurer to provide the terrorism cover it needed. But forming a pan-European mutual proved too complicated with, problems arising from the different jurisdictions involved.However, it is very noticeable that there has been a mutualisation of risk management in a number of areas. This occurs where an industry identifies a risk that insurers find difficult to assess and then designs guidelines on the best way of managing that risk and agrees the standard that all insurers will apply for underwriting purposes.For example, we have recently seen AIRMIC's food industry special interest group working with the food industry to produce the fire risk minimisation guidelines, and then working with the Fire Protection Association and insurers to agree a standard with which both large and smaller companies will be able to comply.Our construction special interest group is also looking to establish standards in that industry and working with insurers to achieve this. The philosophy behind this approach is that best practice for risk minimisation and developing a common standard, acceptable to all, simplifies the insurance process.I believe that this type of co-operative approach to difficult issues will become more common. And while, at present, it focuses on sharing knowledge rather than risks, it is not hard to imagine mutual insurers developing on the basis of these common standards, should traditional insurers become unable or unwilling to underwrite certain industry risks.The longer the hard market goes on, the more likely we are to see other schemes emerging. But some risks will not be shared. For example, it is unlikely that major companies would agree to pool their directors and officers' liabilities in a mutual!Will taking some risk out of the traditional insurance market damage it by increasing its volatility? You cannot stop companies acting in their own best interests. Therefore, the issue comes down to insurers. Insurers picking up worse and more difficult risks will realise that they need to be paid a great deal more. Managing the resulting volatility will become very important. Risk managers will need new tools. And if the insurance industry can provide these through mechanisms such as hedging and derivatives, then a new market will develop – reinforcing the concept that risk can provide an opportunity as well as a threat.