CommTech 2006 Forum Newsletter - JLT

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Catastrophe Losses – where will the capital come from to fund them industry, one has to ask whether that success will continue. It would be a brave man who would say that the 2005 windstorms are an aberrational event: earthquakes present a huge hazard in heavily industrialized zones in the US, Japan and elsewhere; climate change heralds the potential for heightened medium term flood risk as well as other changes in weather patterns. I am with Warren Buffett, boss of Berkshire Hathaway, who says: “I don’t know the answer to these all important questions. What I do know is that our ignorance means that we must follow the course prescribed by Pascal in his famous wager about the existence of God. As you may recall, he concluded that since he didn’t know the answer, his personal gain/loss ratio dictated an affirmative conclusion.” Factors other than climate change lead to the inevitable conclusion that cat losses can only grow in the decades ahead. Expanding economies mean enhanced insured values; and as economies like China, India and Brazil develop, their industries, assets and revenues will increasingly be insured too. So insured values at risk are growing fast, just as the uncertainties of global warming loom to the fore. The traditional reinsurance market is just not, by itself, large enough to absorb this risk growth; and the flight to quality also has the perverse effect of concentrating the risk within fewer well-rated players. Majors such as Munich Re and Swiss Re have not to date experienced difficulty in tapping the equity or capital markets. There is a relatively limited appetite within the capital markets to provide capacity for (mainly) third party catastrophe risks. Swiss Re is one of a relatively select band of companies that has regularly utilized this market. But, with an apparent capacity of US$5 billion, this market has been stretched by Katrina and, for that and other reasons, offers no general panacea. Major single cat loss events will inevitably potentially exceed what the (re)insurance market capital bases can cumulatively support, particularly if their frequency increases. The structures in place to support Californian homeowners and businesses in the event of an earthquake, for example, show the need for combining traditional insurance and alternative capital market solutions. There remains a real question mark over whether some cat risks are insurable at all, terrorism being an obvious example. In the UK the Government has for some years been effectively the insurer of last resort of property and BI risks caused by terrorist attacks via its reinsurance of Pool Re. In the aftermath of 9/11, Governments were forced to step in temporarily to underwrite certain specific risks such as aviation liability. Further serious terrorist attacks will re-introduce pressure on Governments to share more in the assumption of such risks either in partnership with the insurance industry, or in place of it. Understandably there will be political resistance to such moves, and there are serious legal difficulties e.g. the prohibition of State subsidies in the EU. But with frequency and size of cat losses set to grow, pressures to find risk sharing and funding solutions within and beyond the insurance industry itself will become ever more urgent. Michael Brown is Co-head of the Insurance Group, Allen & Overy LLP. Allen & Overy is a global law firm. The firm has advised many leading insurance and reinsurance companies in the raising of regulatory capital. In the aftermath of 9/11 the firm was heavily involved in establishing an aviation liability insurance facility backed by the UK Government and is advising the owners of the World Trade Center on their insurance claims. Sigma report: Natural catastrophes and man-made disasters 2005, No 2/<strong>2006</strong>. To ensure that the comparison is true, the loss figures quoted here are inflation adjusted to 2005 cost levels. 1 Source: MMC Securities Inc. 11
Continuity risk within the supply chain – the importance of the macro approach Chris Rigby-Smith, <strong>JLT</strong> Much has been debated on the issue of supply chains recently, within academia, professional institutes and also commercial organisations. With the occurrence of every new variant of disaster whether it be a terrorist attack, hurricane, tsunami, earthquake, flood or fires, it seems that the supply chain risk is a critical issue. Yet despite this heightened awareness, it is still a problematic area from a risk assessment perspective. Some fundamental questions that highlight this dilemma and confusion are: • What is the difference between supply chain risk management and organisational risk management • What is the difference between ‘outsourcing’ risk and ‘supply chain risk’ • How can the supply chain risk be efficiently mapped and analysed • What solutions exist – risk financing or otherwise – to address supply chain risk • How can the supply chain work effectively as one to be adequately prepared, both to respond to a crisis and to manage the recovery from it Supply chains are becoming increasingly complex and interdependent in many sectors and this is self-evident within the communications and technology sectors. The need to source highly specific components from specialist sources, within a global marketplace is a fundamental driver for many organisations. All too often the process of managing the risks that ensue, is an afterthought of the established procurement function. The immediate dilemma for any major company in facing up to this situation, is how to break into the organisational structure and culture in such a way that a robust and systematic process can be put in place, which will collate the necessary information in a way that is replicable, on a regular basis, in the future. Fundamental to this is the process of identifying the best sources for that data and establishing commitment from the business leaders to provide it. Convincing the business of the value of risk management, in the first place, might be an essential part of this! The organisations which have already embedded risk management into their way of doing things will be those that most readily appreciate the need to understand risk within the supply chain. From a risk management perspective, there is a secondary and more specific dilemma, which is the need to meet the various and competing needs of different stakeholders. The insurance market continues to demand risk information on a location-by-location basis. From a property damage and business interruption insurance point of view, the analysis needs to provide maximum foreseeable loss figures, relating to an insured event, impacting on property insured or used by the insured at specific premises. This immediately has a tendency to drive the analysis towards high asset values or critical production processes at key locations. From a business point of view, the interest is much more in understanding what are the critical revenue streams, brands, markets and product groups, and the vulnerabilities within the associated supply chains. In the early stages, this second approach is not likely to be so locationally focussed. It is more likely to be interested in supply chain mapping and interdependencies. 12
Page 1 and 2: Lugano 2006 Contacts JLT Risk Solut
Page 3 and 4: Key JLT CommTech Partners
Page 6: Contents Contents Introduction Pete
Page 10 and 11: The Failures of Corporate Governanc
Page 12 and 13: Corporates increasingly look to cap
Page 16 and 17: Continuity risk within the supply c
Page 18 and 19: Learning the lessons of recent cata
Page 20 and 21: Supply chain management and critica
Page 22 and 23: Cyberspace now on terrorist radar,
Page 24 and 25: Network asset protection - protecti
Page 26 and 27: Corporate Governance driving end to
Page 28 and 29: Corporate Governance driving end to
Page 30 and 31: D&O premiums fall, but pitfalls gro
Page 32: CD POSITION GUIDE ONLY 28 29

CommTech 2006 Forum Newsletter - JLT

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