Special Enterprise Risks Innovative solutions for individual risk profiles

Transcription

1 Special Enterprise Risks Innovative solutions for individual risk profiles

2 Special enterprise risks A new heterogeneous risk type on companies radar Canada Expands Recall of Cold Cuts and Raises Death Toll (New York Times, August 2008) In recent years, global media coverage focused more than ever on consumerism and company scandals. Although the reasons for such scandals are manifold, protection is not available on a standardised basis, either in the capital or the insurance markets. Well-known companies benefit from child labour in developing countries, food or toys contain cancerogenic ingredients, failure to deliver as a complex supply chain breaks down, or recall of buggy products these are just a few examples of what can be categorised under special enterprise risks. The question of the root cause may often remain unanswered but, as public perception is tremendous, the reputation of companies is very much at risk. No one is quite sure how long the situation will last, what kinds of action should be taken and to what extent the company will be able to recover. In each case, a de - cline in turnover and revenue is likely to be the direct consequence; claims for compensation may follow after protracted legal actions; it is also conceivable that substantial goodwill payments will have to be made and downgrades in rating are likely to follow. Thus, it s all about an immediate sufficient liquidity supply that helps the company to endure such an extreme situation. Munich Re Group Special Enterprise Risks 1

3 Enterprise-wide risk management Old wine in new bottles? Over the past years, there have been different activities across all industries to set up or improve enterprisewide risk management (ERM). While the banking industry has now had to complete its broad riskmanagement framework just for newly defined operational risks that meet the requirements of Basle II, other industries sometimes still struggle to handle basic risks such as foreign exchange or interest-rate risk as well as credit risk. Even if they were able to cope with this, it often remains a challenge to gather all the risk information that is available throughout the company and provide the management with a holistic risk report. There is no doubt that there are many obvious advantages to using professional ERM: It helps to identify and quantify new risk types. (Existing) risks can be overcome through viewing a company s risks overall rather than individually. Evaluation of the company s risk profile is more comprehensive. Senior management receives better information. Specific mitigation of identified risks is possible. As the cost of capital is known, the company can easily judge the fair value of the premium for the risk transfer. Nevertheless, ERM is an ongoing process that is continuously evolving, as is the development of risk solutions. 2 Munich Re Group Special Enterprise Risks

4 The current situation Scope for innovative ERM solutions The current situation in the market for ERM solutions is exemplified in Figure 1. Management of on-strategy risks (e.g. success of acquisitions) is a major task for the company s management. Thus, no risk-mitigation products are available. The market for off-strategy risks is highly competitive. Standardised products are readily available, usually provided by insurance companies (e.g. property, casualty), the capital market (e.g. swaps, derivatives), or as a blend of both (e.g. cat bonds). However, there is still a wide-open market with a rising interest in and strong need for innovative ERM solutions. Just a few standardised, insular products such as product recall or D&O have been developed so far. Market for ERM solutions Off-strategy risks Standardised products, already available Solutions to be individually developed for On-strategy risks Insurance market Capital markets Clinical trials Extended warranty Loss of human capital Pandemic Regulatory risk (e.g. REACH) Renewable Energies Reputational risk Supply-chain interruption Figure 1: Current market situation Rising interest in and strong need for innovative ERM solutions. Munich Re Group Special Enterprise Risks 3

5 Just two examples ERM has to deal with quite a variety of risk types Supply-chain interruption In the past, just-in-time production depended on one supplier around the corner. Nowadays, as a result of globalisation, suppliers are spread widely all over the world and deeply specialised. In particular, regions in Asia such as China, southeast Asia or India that have experienced dy namic development have created a vast number of production facilities. The supply chain itself became longer, more complex and harder to control. What would happen, if one or more of your suppliers suddenly fail to produce? products are not allowed to be exported for political reasons? a pandemic restricts production capacity for an unknown period of time? environmental catastrophes disrupt local or international logistics? quality defects are discovered in one production facility or line? Reputational risks For every company, achieving and preserving a good reputation is essential for prospering business, especially for companies producing everyday consumer goods such as food and toys or providing customer services such as banking or medical care. Ultimately it is all about trust, and once your reputation is in question, it does affect the company s figures. The following aspects may quickly add up to a huge loss: Managing a campaign after unfortunate media coverage Avoiding a recurring or broadening problem with your image Compensating customers sufficiently for any inconvenience Dealing with possible lawsuits (Re)stabilising the stock price, credit ranking and turnover level Mitigation for risk events like those given in the two examples can now be arranged on a customised basis and will help to cover incurred losses. But, the examples also clearly reveal the absolute need for prompt liquidity. 4 Munich Re Group Special Enterprise Risks

6 Our approach Filling the gap with innovative solutions for individual risk profiles Meeting the individual risk profile and offering a suitable solution is no trivial matter. In order to do so, we put together an individual, clientfocused team of risk consultants, industry specialists and actuaries. However, close collaboration with our clients and their broker (if employed) is essential. The steps shown in Figure 2 are followed closely. If clients know their risk profile and mitigation needs already due to advanced ERM, the initial workshop serves as a kick-off meeting. Otherwise, their risk profile and specific needs are identified and assessed in this workshop. Steps to achieve individual mitigation solution Initial client workshop/ meeting Analysing client s risk situation Workshop for common understanding Development of mitigation concept Finalising solution Individual mitigation solution Figure 2: Step by step to your individual mitigation solution. Munich Re Group Special Enterprise Risks 5

7 A comprehensive analysis of the individual risk situation follows, including a review of the market environment, trends and best practice. Based on the information taken from the first two steps, we start to sketch our mitigation concept. We make full use of our toolbox (Figure 3) and, if necessary, call in further specialists, thus activating all the knowledge and experience available within Munich Re. The concept is presented in a workshop. A lot of scenarios and examples are discussed to guarantee a common understanding of the mitigation solution. We take into account our client s remarks at all times, while pointing out pros and cons. In the last step, the agreed upon solution is finalised, i.e. working out the contract including terms and conditions. Toolbox Insurance, e.g. Parametric triggers Portfolio transfer Blended products, e.g. Cat bonds Structured products Capital markets, e.g. Risk swaps Derivatives Flexible combination of techniques Definition of independent, industry-specific triggers Figure 3: Our toolbox includes a variety of risk-mitigation instruments to generate the best possible solution. Supply-chain interruption risk: A double-trigger product could help The concept could be based on a double-trigger product: first a production facility of a (sub)supplier is seriously damaged by an environmental catastrophe (trigger 1) and, in addition, the delivery delay for a certain percentage of the client s products causes contractual penalty payments (trigger 2). 6 Munich Re Group Special Enterprise Risks

8 Munich Re Group A reliable global partner As one of the leading reinsurers in the world as well as one of Germany s largest primary insurers and asset managers, the Munich Re Group is a global player serving the whole insurance and capital market value chain. Today, the Munich Re Group offers its clients risk solutions across the value chain through a family of specialised sub-brands. Therefore, Munich Re is best positioned to satisfy a complex demand of multi national corporations beyond traditional covers. Munich Re is able to serve complex demand of multinational corporates Traditional strengths of Munich Re Superior financial security Strong capacity Global player with local knowledge Client-centric culture Industry-specific knowledge + Appetite for innovative deals Customised structured insurance Risk-structuring and -trading capabilities Coverage beyond existing boundaries Added value for our clients Reduced counterparty risk Low coordination/transaction costs Worldwide coverage Reliable long-term partner Discussions at expert level ERM-driven tailored solutions Enhanced capital-market access Holistic balance-sheet protection Extraordinarily well diversified portfolio allows competitive risk premiums Munich Re Group Special Enterprise Risks 7

9 Special Enterprise Risks A new unit within Munich Re (MARP) With its new unit Special Enterprise Risks (SER), Munich Re acknowledges the strong demand for individual risk-mitigation solutions and moves beyond the boundaries of traditional reinsurance. SER focuses on enterprise risks where the management has little or no influence. An intensive analysis of the risk situation will highlight possible needs and result in tailor-made solutions. SER is part of Munich-American Risk Partners (MARP), a unit of the Munich Re Group with offices in Munich and London. We provide and arrange insurance and reinsurance covers for large corporates and their captives from a diverse range of industries and geographies, who seek risk transfer and financial solutions. Please do not hesitate to contact us. 8 Munich Re Group Special Enterprise Risks

10 2008 Münchener Rückversicherungs-Gesellschaft Königinstrasse München Germany Tel.: +49 (89) Fax: +49 (89) Contact Michael Sorg Tel.: +49 (89) Picture credits Cover: Peter Casolino/Alamy Insert: Foto Meinen, Munich Printed by Lipp GmbH, Graphische Betriebe Meglingerstrasse München Germany

11 Our contact partners in Munich Michael Sorg Head of Department Tel.: +49 (89) Wolfgang Boffo Risk Consultant Tel.: +49 (89) Dr. Volker Kraus Senior Risk Analyst Tel.: +49 (89) Christian Scharrer Risk Consultant Tel.: +49 (89) Michael Hauptmann Underwriter Tel.: +49 (89) Dr. Mathias Hörmann Underwriter Tel.: +49 (89) Julia Moser Underwriter Tel.: +49 (89) Werner Richter Underwriter Tel.: +49 (89) Andreas Gebler Assistant Underwriter Tel.: +49 (89)

12 Our contact partners in London Alan Fraser Underwriter Tel.: +44 (020) Jeffrey Sirr Underwriter Tel.: +44 (020) Alvaro Nunez Assistant Underwriter Tel.: +44 (020)