A massive new study has found that corporations want to transfer risks to earnings, as well as risks to assets. Adrian Leonard summarises the results

The insurance industry doesn't under stand how value is created or destroyed in its customers' businesses," Bruce Hepburn, managing director of the research consultancy Mactavish, bluntly informed reinsurers at a recent conference. He should know: he had just completed an massive study identifying the areas of risk management and risk transfer which corporations feel the insurance sector is not adequately addressing.

"We are looking at areas where, historically, no risk transfer instrument was available," he said. The research was conducted for a group of clients including brokers Marsh and Aon, corporates such as IBM, and insurers ranging from Allianz to Zurich. They wanted to learn more about the areas of risk which keep business managers awake at night. "A chief executive has a requirement to transfer risk that could have an impact on his corporation's earnings growth," Hepburn commented. "We needed to bring that down to a very specific level."

To that end, the research project not only pinpointed the exact risks, but also gauged the level of willingness among corporations to transfer them. Mactavish sought to determine what role traditional risk transfer players, including intermediaries, insurers and reinsurers, would play, along with others including investment banks and audit companies.

Mactavish claims the project is the largest ever global investigation into the requirement amongst corporate customers to mitigate and transfer risks for which conventional insurance cover has not previously been available.

The effort focused on ten industrial sectors and divided each into three subsectors. Researchers conducted over 1,250 interviews with chief financial officers and risk managers in six countries on three continents. It isolated 10,537 possible risks, and asked companies how risks specific to their sector were being handled. In aggregate, 29% of those risks are currently being transferred, but the share will leap to 41% if respondents' intentions come to pass. However, the survey found that, of the specific risks currently retained by companies (6,569 in total), a staggering 93% of respondents, had never considered risk transfer as a way of ridding themselves of the uncertainties they present.

VariationsNot surprisingly, the numbers vary considerably for different types of risks. Financial risks (Mactavish asked about 2,903 different ones) are the most frequently transferred in 41% of cases and are the most likely to be transferred in future, achieving the survey's risk transfer penetration potential high of 49%. New product risks scored the lowest, with just 14% of 866 risks transferred, and potential for 31%.

Results varied dramatically by country. Only 9% of 238 UK new product risks have been transferred, while 25% of Swiss respondents say they transferred 51 such risks. However, in almost all categories in all countries, the survey found that respondents would consider transferring risks in the future. "There is a substantive interest in transferring a much wider range of risks," Hepburn says.

Mactavish also asked about core competencies, and found that very few corporations count risk management functions among them. About 38% said their company was very good at identifying risk, while only 17% said they were very good at training staff in risk management. Yet half said there would be real value at getting better in that area, 46% made the same comment regarding identifying risks, and across a range of eight risk management activities the average was 45%. The value of improving skills at evaluation of risk transfer and financing options scored second lowest, just above improving claims handling. More encouragingly, all companies expressed an intent to buy more of all eight risk management services from third parties in the future. Already 43% buy in services, while 60% hire people to help with risk identification.

More than half of the respondents said the top three characteristics of risk management suppliers were a solid understanding of the client's business, customer service, and responsiveness and flexibility. Exactly half said financial strength was very important.

Hepburn identified an irony arising from the findings. "Risk management does not appear to be a core competence for most companies, yet they have a strong desire to improve. Most risk management services have a penetration of less than 50%, but there is a strong interest in considering more external services. That adds up to massive scope for growth, but it will require a step-change in the calibre of the propositions." Suppliers focus on products that protect assets, but buyers want products which protect earnings. Creating new products based on old products will not be sufficient. "That's why the existing suppliers have failed to extend the market in any meaningful way," Hepburn declared.

--Adrian Leonard is insurance market correspondent, StrategicRisk

What Risk?The Mactavish Survey comprised about 250 face to face consultations and 1,000 telephone interviews, each with individuals stating they had responsibility for the management of risk within their organisation. Each respondent was presented with sector-specific risks from the following categories:

  • risks which have impact on a company's ability to physically produce and supply products and services
  • risks which have impact on the demand for their products and services
  • risks which have impact on their ability to optimise their margin
  • risks associated with the development of new products and services
  • financial risks, including risks to employed capital and financial market risks.
For each risk, each respondent was asked to rate:
  • the probability of the risk arising
  • the severity if it did arise
  • the extent to which they were actively involved in the management of the risk
  • the extent to which the management of the risk is a core competence of their organisation
  • whether or not they currently transfer the risk
  • whether or not they would consider transferring the risk in future.