European risk and corporate governance solutions www.strategic-risk.eu [ October 2011 ] Issue 73 €25 NEWS & ANALYSIS » Bank share slump » China US cyber row » Water risk map » Food crisis index Mega Risk Atlas Pull out and keep our global risks wall chart Internal fraud Practical steps to prevent fraud in your organisation Top five The world’s biggest bribery fines and worst offenders VIEWPOINTS [ PEOPLE ] GDF Suez’s deputy chief risk officer, Michel Dennery, on dealing with the media in a crisis RISKS [ THREATS ] In the wake of the Norwegian terrorist attacks, an examination of the violent political extremists who could threaten Europe in the coming years GOVERNANCE [ ETHICS ] The growing risk of civil unrest is showing companies the danger of being seen as bad corporate citizens THEORY & PRACTICE [ BEST PRACTICE ] In the age of austerity, one area that companies can easily save money is energy. How to manage the costs and keep the lights on As the world grows together, multinationals derive huge benefits from the free flow of goods and services. But globalisation brings major risk management challenges GLOBALISATION RISKS
Transcript
European risk and corporate governance solutions
www.strategic-risk.eu
[ October 2011 ]
Issue 73 €25
NEWS & ANALYSIS » Bank share slump » China US cyber row » Water risk map » Food crisis index
Mega Risk AtlasPull out and keep
our global risks
wall chart
Internal fraudPractical steps to
prevent fraud in
your organisation
Top fi veThe world’s biggest
bribery fi nes and
worst off enders
VIEWPOINTS[ PEOPLE ] GDF Suez’s deputy chief risk offi cer,
Michel Dennery, on dealing with the media in a crisis
RISKS[ THREATS ] In the wake of the Norwegian terrorist attacks,
an examination of the violent political extremists who
could threaten Europe in the coming years
GOVERNANCE[ ETHICS ] The growing risk of civil unrest is showing
companies the danger of being seen as bad corporate citizens
THEORY & PRACTICE[ BEST PRACTICE ] In the age of austerity, one area that
companies can easily save money is energy. How to
manage the costs and keep the lights on
As the world grows together, multinationals derive huge benefi ts from the free fl ow of goods and services. But globalisation brings major risk management challenges
GLOBALISATION RISKS
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 1
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Norway, July 2011Seventy-seven people were killed inOslo and Utoya by a far-right extremist,
Anders Behring Breivik. Breivik wroteextensively on the dangers ofimmigration and the influence of Islamin Europe. The attacks in Norway havecaused many people to question the
ates, January 2011oughner killed six people inttack in Tucson, Arizona,hief US district court judge
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Just like the murder of Archduke FranzFerdinand, which precipitated the startof World War 1, the public act of self-immolation by a young Tunisian manwill go down in history as the spark thatfired up a regional revolution across theMiddle East. Beginning in Tunisia,popular uprisings against despoticregimes also took place in Egypt, Syria,Yemen, Bahrain and Libya, which wasthe most critical to the world economybecause of its immense oil wealth. Asthis paper went to press, the curtain wasclosing on more than 40 years of rule inLibya by the tyrant Muammar Gaddafi.
Attacks at sea hit an all-time high inthe first three months of this year.There were 142 attacks worldwide,with 97 of these off the coast ofSomalia where, with no centralgovernment, pirates are free tooperate at will. The country, whichfronts onto some of the mostvaluable shipping lanes in the world,is rapidly becoming the world centrefor piracy with at least 18 commercialvessels and around 355 hostagescurrently held by Somali pirates,according to the InternationalMaritime Bureau.
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Northern Ireland, April 2011A car bomb killed a police officerhis home in Omagh and dissidrepublicans were blamed for theThe amount of terrorist attackNorthern Ireland has increased past two years, and the region coto be one of the most deprivedof the UK.
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Canada, May 2011
The French financial market authority(AMF) fined seven individuals C$2.8m(€2.1m). At the heart of the affair wereSerge Ollu and Guy Drouin of Ressources minières Andréane. The fines wereparticularly complex, with sevenindividuals and three companies being charged.
Scotland, May 2011
The Royal Bank of Scotland was fined £3.5m for mishandled complaints relatingto retail investment products. The bankreceived 2,592 complaints about itssales of personal investment plans. RBSallegedly wrongly rejected a significant number of these complaints and was found guilty of mistreating customers,many of whom were older with little or no experience of investment products.
United Kingdom, June 2011The hacker group Anonymous postedfake stories on the websites of Britishnewspapers The Sun and The Times.The hacking group planted an articlerecounting the death of media mogulRupert Murdoch. Anonymousannounced the news of the article byposting a link on its Twitter feed.
United States, August 2011The US federal government’s creditrating was downgraded from AAA toAA+. This move came a�er a politicaldeadlock made a US default on debttechnically possible. The downgradeincreased volatility in markets and theUS government was criticised, notablyby China (the largest owner of US publicdebt), over how it handled the crisis.
These days, there’s no such thing as a local incident. If you lose production in India, you can
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SR_Ad_Page_ID.indd 5 16/09/2011 16:17
CONTENTS [ OCTOBER 2011 ]
4 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Risks[ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
25 COVER STORY: Divided they fall
European fi rms that increase global reach
may become more vulnerable to local unrest
and suff er from a lack of corporate culture
27 The greatest risks and opportunities
The top four barriers to success in
emerging markets
28 RISK FINANCING: Marine and cargo
How to keep afl oat despite pirates, natural
catastrophes and still economic waters
30 TERRORISM: Extreme threat ongoing
Even companies that take mitigating steps
can never aff ord to take safety for granted
Governance[ ETHICS ][ COMPLIANCE ][ REPORTING ]
35 Top fi ve bribery fi nes
The fi ve mega-fi nes for corruption that
leave Willis’s £6.89m looking positively puny
38 Pressure points
It is crucial that multinationals operating
in volatile communities are seen to be
good citizens
Theory & Practice[ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]
45 Switch on to energy risk
Put energy on your board’s agenda,
develop an integrated strategy and
explore unexpected benefi ts
46 Dig deeper to combat employee fraud
Background checks before and a� er
employment are the fi rst line of defence
and should be taken seriously
47 How to manage a global supply chain
Global outsourcing is popular to cut costs,
but a full understanding of the new risks
it introduces is vital
News & Analysis[ THE LATEST BUSINESS ROUND-UP ]
6 News Matrix
The biggest stories online, including food
security rankings, the cost of Hurricane
Irene and SocGen’s share price fi asco
8 Risk Indicator
A new study on food insecurity reveals
the extent of the eff ects of famine on risk
worldwide; the top fi ve superhackers
10-15 News Analysis
A� er Air France, the hazards of highly
automated systems; A decade of lessons
from 9/11; Protectionism in Brazil; and the
UK’s ‘missed opportunity’ on bribery
16 News Feature
Climate change is one of the least
predictable risks, but businesses can start
to adapt by monitoring their water use.
What does the weather hold for insurers
and wine growers?
Viewpoints[ PEOPLE ][ OPINION ][ COMMUNITY ]
19 Summer of discontent
For Sue Copeman, the August riots in
UK cities spelled out a warning that no
country is safe from civil unrest
20 Forging ahead
GDF Suez’s Michel Dennery believes social
inequalities combined with increasing
commodity prices are a bitter cocktail for
risk managers
22 First build your allies
Abengoa’s chief risk offi cer Rogelia Bautista
Guardeno on the benefi ts of becoming an
expert in not buying insurance
48 Headspace
Pirelli’s group risk manager Jorge Luzzi
on the importance of listening and the
futility of possessions
2016
SPECIAL REPORT
Captives41
What day-to-day issues
can arise when running
a captive, and when is
it time to bring in
specialist managers?
PULL-OUT
Risk AtlasCentre pages
Global risks as you’ve
never seen them
before, in our handy
pull-out wallchart
Special Report
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 41
INTRODUCTION
SPONSORED BY
This special report has been produced with input from:
Qatar Financial Centre Authority
IN PREVIOUS REPORTS THIS YEAR, STRATEGICRISK HAS LOOKED AT companies’ considerations when establishing a captive insurance company
and surveyed a selected group of risk managers and others involved in captives.This report goes a step further, outlining some of the day-to-day issues
that can arise with operating a captive. Some of these – particularly the administrative functions such as issuing and monitoring policies and premium invoices, maintaining the captive’s fi nancial and operational records, and completing and fi ling premium tax returns – can, it is hoped, be left safely to the appointed captive management company. In addition, a good management company will advise on any relevant changes in the captive domicile’s regime and generally contribute expertise when it comes to meeting the parent company’s objectives.
However, risk managers need to take control of strategic decisions. A key issue can be which coverages to pass to the captive rather than insure in the conventional third party market. Traditionally, risk managers have used captives to cover the risks that insurers were reluctant to consider – or charged very high premiums for. These risks tend to evolve with time. For example, some time ago insurers were reluctant to cover the costs of product recalls. Companies that considered themselves vulnerable to this risk would pass it on to their captives. Now insuring product recall cover is probably not such an issue for most businesses, although particularly exposed companies – for example, those in the food and drink and pharmaceutical sectors – may still consider that they will get a better deal by using their captive to cover the primary loss.
Employment practices liability is another example where companies may feel that they can arrange cover more cost eff ectively through their captive, particularly if they don’t have a very good loss history in this area. This is a liability that to date has probably most aff ected US and UK companies but there is no doubt that increasingly claims will spread to continental Europe.
More recently, a trend has emerged for wrapping employee benefi ts cover within the captive’s remit. Spearheaded in the US, this trend is now extending to European captives. Risk managers with multinational insurance programmes also need to consider how they can use their captive to smooth some of the diff erences in approach that can exist between the parent and its subsidiaries.
Contents
[ CAPTIVE MANAGEMENT ]
46 Mapping management
Who’s looking a� er your captive?
47 Tightening up on tax
Captive tax rules and considerations
48 What do you cover?
Captives can insure ‘virtually anything’
Finally, this report looks at the knotty problem of captives and taxation. In years gone by some companies seized upon captive formation as a way of avoiding or minimising tax. Those days are largely gone, but sadly fi scal regulators have long memories.
Captives – and their domiciles – are exposed to considerable scrutiny, as demonstrated by this year’s (successful) challenge to Liechtenstein’s tax regime. Captives can produce some taxation benefi ts but this aspect is something that their parent organisations need to keep a close eye on. SR
How can businesses
prepare for the eff ects
of climate change?
GDF Suez’s Michel Dennery
embraces both the positives
and negatives of risk
All products are written by insurance company subsidiaries or affiliates of Chartis Inc. Coverage may not
be available in all jurisdictions and is subject to actual policy language. For additional information, please
visit our website at www.chartisinsurance.com.
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as your company.
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NEWS MATRIX [ THE LATEST BUSINESS ROUND-UP ]
6 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Top 10 essential online stories
0506
Re
ute
rs
Somalia: The country
tops the global ranking
for food insecurity
Re
ute
rs
01
04
0902
0310
04 FOOD CRISES
Food crisis index highlights growing impact of global political turmoil
05 OVERSEAS EMPLOYEES
Accident-prone Brits get GPS travel helpline
The world’s most concerning food crises are being intensifi ed by drought, confl ict
and corruption, according to a report published by Maplecro� . The Food Security Index
assessed the availability and stability of food supplies across 196 countries. Countries
in the Horn of Africa and Sub-Saharan Africa topped the list, lead by Somalia and DR
Congo – mostly as a result of political turmoil and extreme drought.
web. goo.gl/k9XLl
In response to a report by the
British Foreign Offi ce that
more than 19,000 UK citizens
are involved in emergencies
abroad every year – most of
them in Spain – a personal
emergency service has been
launched. The small GPS
alarm service, Skyguard
International, is available to
British travellers in a total of
34 countries. It enables them
to communicate in times of
need with a UK-based
management centre to gain
advice and to summon
national emergency services
of the country in question.
web. goo.gl/L9vyF
02 SOLVENCY II
Finance body calls for tighter regime
01 CYBER CRIME
London university opens research unit
03 HURRICANE IRENE
Irene could cost more than €4.3bn
The Institute of International Finance has
published a report calling for greater
co-ordination in regulatory reforms. It says
Solvency II could go against risk management
best practice, citing incentives to shorten the
maturity of insurers’ corporate bond holdings
that may encourage insurers to shorten the
tenor of their asset portfolios while cashfl ow
profi les remain long term.
web. goo.gl/3Y5Hl
City University London’s new Centre
for Cyber Crime and Security opened
this month to research and tackle
the threat posed by cyber crime and
terrorism. Lead researcher
Muttukrishnan Rajarajan said cyber
security is one of the key issues faced by
governments and organisations today,
so the demand for research is huge.
“Engineering is a science, computing is a
science, security is a science too. And
cyber security is a growing area of
concern for the country,” said Rajarajan.
A goal of the centre is to produce a higher
number of trained cyber security
professionals to work against the threat
in the industry.
web. goo.gl/DZI09
Hurricane Irene, which hit the US East
Coast in late August, was said to have
caused insured losses of $3bn-$6bn
(€2.2bn-€4.3bn). Bringing a downpour
of more than a foot of rain to parts of
the Atlantic coast, the hurricane raised
rivers to record fl ood levels and forced
more than two million people to evacuate
their homes.
web. goo.gl/wMquS
0708
www.strategicrisk-.eu [ OCTOBER 2011 ] StrategicRISK 7
09 POST 9/11
Terrorism risk profi le unveiled
Re
x
Taj Palace hotel in
Mumbai, during
terrorist attack in
the city on 26
November 2008
LINKS TO THE WEBSITE About goo.gl
Type the goo.gl address into your web browser to access our
recommended articles from strategic-risk.eu
Online contents
Most read storiesRogue trader costs UBS $2bn
web. goo.gl/M3XKH
Infographic: Future risks
web. goo.gl/HKVF3
9/11 anniversary: Terror threat “no
less severe”
web. goo.gl/etXoQ
German DVS Dailies
web. goo.gl/hrRAF
Companies aren’t prepared for cyber
attacks
web. /goo.gl/6vV63
Online analysisTerror risk on the rise Over the past year, the number of
terrorist incidents worldwide increased
by 15%, according to new analysis.
Islamic terrorism is a factor in many, but
not all, of the most dangerous parts of
the world, according to Maplecro� ’s risk
analysis. The fi ve most at risk countries
are Somalia, Pakistan, Iraq, Afghanistan
and South Sudan. Countries identifi ed as
“extreme risk” sustained 75% of last
year’s fatalities.
06 HACKING
China and USA in cyber row
China has claimed it has been
the victim of 500,000 cyber
attacks in the past year. The
fact that many of the attacks
trace back to US IP addresses
has caused tensions between
the nations. A recent hack into
the Hong Kong stock exchange
forced the suspension of
trading in seven companies.
web. goo.gl/AOXzx
10 WATER RISK
Water risk atlas
07 CORRUPTION
First scalp for Bribery Act
08 SOCGEN STOCK FALL
SocGen shares drop following media gaff
More than 2,400 macro terrorism attacks have been committed in
the past 10 years, according to RMS’s recently published report,
Terrorism risk in the post-9/11 era. The report demonstrates that
the threat has become more diverse, extending beyond the Middle
East and South Asia regions. Attacks throughout the past decade
have dispersed into more than 40 countries worldwide. The way
terrorism risk is managed has progressed in recent years too.
“Insurers are managing accumulations using realistic scenarios
and event-specifi c footprints to monitor exposure across multiple
lines of business,” said RMS senior vice-president of emerging
solutions Peter Ulrich.
web. goo.gl/5rhbs
An interactive global map showing the
current and future situation of water
scarcity and quality has been launched by
the World Resource Institute. The Water Risk
Atlas has been developed to help businesses
better understand the global threat of water
risk. It is based on a system of 22 risk
indicators that determine the overall risk
assigned to a location. The programme can
use this information to display the location’s
water risk from today until 2095.
web. goo.gl/FZLZO
The fi rst prosecution under the
much discussed UK Bribery Act
was carried out recently.
The case involved
administrative clerk Munir
Yakub Patel, who allegedly
accepted a £500 bribe.
While critics would rather
have seen a corporate corruption
case than the domestic bribery
allegation against Patel, legal
experts were satisfi ed that the
act had been successfully shown
in operation. The fi rst big
corporate off ence, say experts,
is still some time away.
web. goo.gl/HtOSw
An inaccurate article by UK newspaper
Daily Mail has led to a steep drop in the
price of French bank Société Générale’s
shares. The article was based on fi ctional
stories published on the website of
France’s newspaper Le Monde and
examined a possible collapse of the euro,
naming real banks as examples.
The Daily Mail article claimed that
the French bank was on the “brink of
disaster” – words that sparked the share
price plunge. Two days later, the paper
retracted the article stating: “We now
accept that this was not true and we
unreservedly apologise to Société
Générale for any embarrassment caused.”
web. goo.gl/KOblS
RISK INDICATOR [ VISUALISING DATA AND TRENDS ]
8 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
FOOD SECURITY
Famine feeds risk challengesA new index reveals the extent of food insecurity
worldwide and the factors exacerbating the problem
T HE WORLD’S MOST SEVERE FOOD CRISES ARE BEING INTENSIFIED BY
man-made factors and extreme weather events, a newly released food
security risk index fi nds. Countries in the Horn of Africa and Sub-Saharan Africa
are the most vulnerable to food insecurity, according to the index.
Maplecro� ’s Food Security Risk Index (FSRI) assessed the stability and
availability of food supplies in 196 countries. It measured the availability, access
and stability of food supplies across all countries as well as the nutritional and
health statuses of populations.
Rising global temperatures and a growing population are probably the two
biggest factors leading to food scarcity, the report notes. The study indicates that
Somalia, rated with the lowest food security in the index, has been ravaged by
infl ationary pressures on the cost of staple cereals. This, combined with the
country’s ongoing political turmoil, has resulted in the disruption of trade and the
destruction of transportation networks.
Thirty percent of the population within southern Somalia is suff ering from
acute malnutrition. In all of drought-stricken Eastern Africa, which has seen crop
failures and livestock death due to the worst drought in 60 years, an estimated
17.5 million people currently require food assistance.
While the world’s underdeveloped nations such as DR Congo (ranked number
1 with Somalia), Haiti (ranked seven) and Zimbabwe (ranked 14) are topping the
list, emerging economic power India was categorised as ‘high risk’ on rank 51.
While India’s food production is suffi cient for domestic consumption, the
nation’s food security situation is worsened by political violence and endemic
corruption. Despite the country’s substantial economic growth over the past
decade, approximately 25% of the world’s hungry poor live in India due to its
severe income inequalities.
“As global demand for food grows due to rising populations, food security will
take on increasing importance for governments and it needs to be on the risk
agenda of multinationals,” Maplecro� chief executive Alyson Warhurst says.
In addition, food security can be a key driver of political and social
volatility. Many sources point to competition for food and water as one of the
key causes of the confl ict in the Darfur region of Sudan, for example. Scarce
water and grazing land almost certainly fuelled tensions between Arab and
non-Arab Sudanese nationals. Any area suff ering from food or water stress has
a higher risk of confl ict, explains Maplecro� analyst Kimberlee Myers. “You’ll
start to see more and more confl ict, both violent and non-violent, as water
supplies lessen and demand grows.” Improving infrastructure could help
off set food security in developing countries.
Food security is also tightly wound up with access to clean water for
drinking and using in agriculture. “For companies, it has a lot to do with where
you’re operating. You need to know how much water is available to you and
how much is available to the local population. You don’t want to be involved in
a project where your company is taking water from the local population. That
will end up being a reputational risk for you and also a possible water pricing
risk,” Myers adds. SR
Food insecurA new study rated the food security of Somalia and the Democratic Republicof Congo as the lowest in the world, while countries in the drought-strickenHorn of Africa are also at “extreme risk”
According to the study, a number of critical factors have combined to intensify the current food crisis in the Horn of Africa. This region, along with much of Sub-Saharan Africa, is particularly vulnerable to food insecurity.
Somalia’s ranking as first in the indetwo decades of conflict and political thas led to ineffective government aninfrastructure. The human and econoconflict has been profound.
Which countries have the least secure supplies of food?
01 02 03 04 05 06 07 08 09 10 11 1
DR
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Som
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Bur
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Eri
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Ang
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Eth
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Afg
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In southern Somalia alone, more than 29.000 children under the age of five have died over the course of the current crisis.
The total number of people requiring food assistance in eastern Africa is estimated at 17.5 million, more than 12 million of whom are in urgently need of humanitarian assistance.
Inflationary pressures on the cost of staple cereals have also rendered many Somalians acutely vulnerable.
Maize prices in Mogadishu were 100% higher in June 2011 than in June 2010.
The price of sorghum in Somalia rose by 180% compared with 2010 prices.
3pthocfrmth4so
East Africa
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 9
CYBER RISKS
Top fi ve[ MOMENTOUS HACKS ]
OVERHEARD
“Soundbites”
1. Stuxnet (2010, industrial systems)
Deemed to be the most
sophisticated cyber weapon to
date, it infected about 100,000 PLCs
(‘programmable logic controllers’
or small computer devices used
in industry), including those of
an Iranian nuclear plant and a
uranium enrichment facility.
2. RSA (2011, key cryptography)
It compromised the authentication
system of RSA Security and
attacked the security of the USA’s
major defence contractors.
3. Gary McKinnon (2002, US
government and military)
McKinnon, diagnosed with
Asperger’s syndrome, hacked
thousands of PCs within the US
armed services, NASA and the
Department of Defense.
4. Lulzsec (2011, consumer data)
Hit the networks of Nintendo,
PBS and the FBI.
5. IMF (2011, World Bank)
In May, hackers forced the
International Monetary Fund to
cut its computer link to the World
Bank.
‘Brazil is and will be more a country of opportunity for investors, reinsurers and the business community in general’ Antonio Fernandes President of Apogeris
and head of risk management at MDS
>> see News Analysis page 14
‘You have to develop strong communications to advance and to undertake new tasks. You must always advance while being vigilant at the same time’Michel Dennery Deputy chief risk offi cer,
GDF Suez
>> see Viewpoints page 21
rity
ex is the result of turmoil, which
nd poor omic toll of the
According to a 2011 World Food Programme report in India, approximately 25% of the world’s hungry poor live in the country.
Around 43% of children in India under the age of five suffer from malnutrition.
It is not just poor underdeveloped nations that are at risk. India, one of the world’s emerging powers, is ranked 51st by Maplecroft and is categorised as high risk. India remains blighted by poverty and stark income inequality. Food security within India has
been worsened by significant overpopulation, environmental degradation, political violence and endemic corruption. Many people with low incomes in the country remain food insecure as a result of increasing food prices.
12 13 14 15 16 17 18 19 20
Sud
an
Cen
tral
Afr
ican
Rep
ublic
Djib
outi
Zim
babw
e
Yem
en
Sie
rra
Leon
e
Moz
ambi
que
Nor
th K
orea
Ken
ya
Contributing factors to food insecurity
Source: Maplecroft, data based on the key elements of food security as laid out by the UN’s Food and Agriculture Organisation (FAO).
43%
30% of the population within he southern areas of Somalia are currently suffering rom acute malnutrition, with he rate exceeding 40% for children in some areas.
A low capacity to combat the effects of extreme weather events such as drought
High rates of poverty
Failing infrastructures, which undermine bothfood production and emergency food distributioncapacity
Conflict is also a major driver of food insecurityas it displaces people from their normal socialnetworks and livelihoods. For example, the ongoing violence in eastern DR Congo is largely responsible for its precarious foodsecurity situation
25%
India
NEWS ANALYSIS [ CONTEXT & INSIGHT ]
10 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
W HEN AIR FRANCE FLIGHT 447
disappeared over the Atlantic Ocean
on 1 June 2009, with the loss of all on board,
there was consternation. Modern passenger
aircra� are not supposed to fall out of the
sky. It was vital to fi nd out what happened.
Three major searches failed to fi nd the
aircra� ’s data and cockpit voice recorders,
but a fourth search in May 2011 discovered
both, at a depth of about 12,000 feet, thus
enabling the Bureau d’Enquetes et d’Analyses
(BEA), the French air accident investigation
body, to start piecing together what had gone
wrong. So far, the BEA has issued three
interim reports, with a fi nal report expected
in the autumn. But the contents of the
interim reports give substantial pointers to
the cause of the accident, and raise
considerable – if predictable – concerns about
the relationship between human beings and
highly automated systems.
Fly-by-wire passenger aircra� , such as
the Airbus 330, largely fl y themselves, with
the automatic systems depending on
computer analysis of the data fed in by the
various sensors. Additionally, the automatics
have built-in protections, preventing the pilot
from making excessive control inputs that
might take the aircra� beyond its designed
parameters. It is hardly surprising that the
automatics, which are tireless, reliable and
precise, are perceived as the safest method of
conducting a fl ight. Indeed, there is ample
reason to prefer the automation of any
hazardous process to the alternative of
control by a human brain, which evolution
has not always equipped to provide an
unemotional, rational, or consistent response.
But if automatic systems receive
inaccurate data, they turn from being
reliable to potentially hazardous. This is what
happened on AF477, when the 3 pitot tubes
– which sense indicated air speed – appear to
have simultaneously iced up. Finding that
none of the readings agreed with each other,
the automatic pilot cut out and handed
control back to the crew.
Situational awarenessThere is debate all over the professional
forums about what the pilots should have
done next and why they didn’t do it. But, in a
nutshell, the pilot fl ying appears to have lost
situational awareness, put the aircra� into a
steep climb and stalled it. This was possible
because the automatic protections had been
lost when control was handed to the pilots.
Therea� er, none of the crew seemed to have
recognised what was happening and, rather
than drop the nose and attempt to regain
fl ying speed, persisted in pulling the
aircra� ’s nose up even though they were
losing 10,000 feet per minute.
And here we have the implicit risks
hidden in automation. If the automatics fail,
it is up to the human operator to resolve the
potential emergency. But if the human lacks
direct experience of the system (because the
automatics have always done the job), they
have less to rely on. And since there is evidence
that much decision-making derives directly
from the recognition of similarities between
current events and past experience, his
decision-making capacity may be impaired.
A suffi cient back-up plan?How do you train humans rigorously enough
to make the right decisions when automation
fails, without incurring the costs (and risks) of
disabling the automatics in order to gain
hands-on experience? A common answer is to
use standard operating procedures and
checklists. The aircra� industry uses both,
plus simulator training. But these may not
cover a particular emergency, or, as may have
happened in AF447, the standard operating
procedure for one situation may not be the
correct solution for what occurs.
And in the diffi cult and confusing
environment of a cockpit ringing with aural
warnings, in darkness, possibly in turbulence
– the chances of standard procedures and
checklists being an adequate substitute for
decades of hands-on experience are limited. SR
AUTOMATION
The hidden risks of highly automated systemsThe Air France fl ight accident raises more questions than answers over
automatic systems and what steps should be taken if they fail
Flight 447: Wreckage was
obvious but it would take
nearly two years to recover
the fl ight recorders
Re
x Fe
atu
res
Airbus 330-203 carried 216 passengers and 12 crew members.
1 June 2009: Aircra� vanishes en route to Rio de Janeiro from Paris
6 June 2009: Wreckage from AF477 confi rmed
8 June 2009: Vertical stabiliser salvaged and bodies found
26 June 2009: Initial search ends
2 July 2009: The BEA releases interim report
20 August 2009: First search for fl ight recorders ends
24 May 2010: Second search for fl ight recorders ends
1 May 2011: Flight recorders found and recovered
27 May 2011: Second interim report released by BEA
29 July 2011: Third interim report released by the BEA
Air France light AF447
QBE European Operations is a trading name of QBE Insurance (Europe) Limited and QBE Underwriting Limited. QBE Insurance (Europe) Limited and QBE Underwriting Limited are authorised and regulated by the Financial Services Authority. QBE Management Services (UK) Limited and QBE Underwriting Services (UK) Limited are both Appointed Representatives of QBE Insurance (Europe) Limited and QBE Underwriting Limited.
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NEWS ANALYSIS [ CONTEXT & INSIGHT ]
12 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
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T HE HORRIFIC CARNAGE AND
destruction visited on New York City 10
years ago was a defi ning moment in modern
history. Those events and America’s foreign
policy moves in the a� ermath of September
11, 2001 have had an impact on people the
world over (and many more have lost their
lives in the years since the Twin Towers fell).
But 9/11 was also a watershed moment
in the evaluation of risk, which brought
home the new complexity of the global risk
landscape. Not only was the direct scale of
loss so dramatic but the a� ermath of the
attacks also led to a whole spectrum of
indirect losses. One of the most well
publicised of these is the increase in car
accidents as a result of people taking to the
roads for fear of air travel.
For the insurance industry itself, putting
aside the direct losses, the distribution of the
claims burden was remarkable. According to
Munich Re, of the approximately US$32bn
(£20bn) in claims payments a� er 9/11, about
a third were for business interruption losses
(such as at airport duty-free shops). The
attacks also caused widespread turbulence
in the stock markets, further weakening
global business and impacting on insurers’
fi nancial strength. It is a good guess that the
terrorists who committed these acts had an
idea of the symbolic and real blow that they
would be dealing America and the West by
their actions. But it’s unclear whether they,
or anyone, would have understood exactly
how far-reaching these impacts would be.
Munich Re’s reinsurance chief executive,
Torsten Jeworrek, says: “Today, good risk
management requires a much deeper
understanding of interrelationships than
in the past. Modern risk management
has to identify and evaluate these
interrelationships in advance.”
New concentrations of risk are
arising all the time, and spotting these
accumulations is extremely hard. Severe
natural disasters, for example, have always
led to a severe accumulation of risk, but
these losses mainly involved property in
the aff ected area and did not spread to
other regions. Today, however, the situation
is very diff erent.
The earthquake in Japan in March
showed the true scale of loss potential
arising from disrupted global supply
chains. especially in the automotive
and technological industries. Motor
manufacturers worldwide had to reduce or
suspend some plant operations as a result
of lack of parts. Technological companies
issued profi t warnings.
The disaster in Japan was exacerbated
by the concentration of suppliers to certain
industries. This is not unusual. Specialist
industry suppliers are o� en located in a
single country (for example, semi
conductor production is focused in Taiwan,
China and Korea). Where the countries
concerned are in natural catastrophe
zones, a major incident, as in Japan, can
limit availability of components for an
entire global industry.
As far as natural catastrophes are
concerned, the situation only looks set to
get worse. Aon’s Annual Global Catastrophe
Report 2010 highlighted that natural
catastrophic activity in 2010 was far higher
than the previous three years, with 314
separate events causing signifi cant damage
in various parts of the world.
“These 314 events, defi ned as natural
meteorological and climatological
occurrences that have caused a signifi cant
impact in terms of insurance claims,
economic loss and/or fatalities or have had
a large humanitarian eff ect, resulted in
economic losses of $251.95bn (€184bn) and
insured losses of €28bn,” said the report. “By
comparison, 2009 tallied 222 events that
combined to produce €42bn in economic
losses and €14bn in insured losses.”
Companies and countries can’t prevent
natural catastrophes – but they can
improve risk management and reduce the
impact of natural disasters.
Many of these problems are the result
of living in today’s increasingly globalised,
interconnected and complex world. But this
reality only heightens the necessity for
early recognition of the interactions
between risks. It may be possible for risk
managers to (in some instances) work with
their insurers to understand risk
accumulations and interconnectivity.
Working with research institutes and
universities, some insurers have begun
developing new so� ware and solutions to
support the qualitative and quantitative
analysis of complex risk accumulations.
Risk managers entering into partnerships
may be able to access some of this expertise
and know how to decipher and reveal the
interdependencies between risks. SR
LEGACY OF 9/11
A decade of harsh lessons in interconnectivityThe fall of the Twin Towers and its a� ermath show the ripple eff ect of global
risk. Ten years on, in the year of the Japan earthquake, what have we learned?
Be prepared: Japanese school
children take cover under
their desks as part of a
nationwide earthquake drill
At a recent conference in Germany, Willis chairman and chief
executive Joe Plumeri outlined his top 10 global risks:
10 Reputation
09 Supply chain
08 Cyber security
07 Globalisation
06 Cost and availability of credit
05 Reputation and compliance
04 Market cap risk
03 Pandemics
02 Terrorism
01 Climate change
Joe Plumeri’s top 10 risks
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With you from A-Z
Ingo Zimmermann, Head of EADS Corporate Insurance Risk Management
NEWS ANALYSIS [ CONTEXT & INSIGHT ]
14 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
O VER THE PAST FEW MONTHS,
Europe’s risk managers, spearheaded
by Ferma, have been lobbying for the
Brazilian government to change its policies
towards reinsurance entities.
One of the sticking points is a rule that
insists 40% of reinsurance business is
placed with local reinsurers. Ferma believes
this will reduce capac+ity in the market and
increase exposure for companies operating
in Brazil, leading to an inability to obtain
some types of cover.
“Most of the large corporations that
operate in Brazil have captives or global
insurance programmes, so these
regulations will increase their costs and
reduce their coverage,” says Ferma general
secretary Pierre Sonigo.
Others are more guarded. “We do not
see any immediate eff ect on the insurance
market, but problems may arise if the local
insurance/reinsurance capacity is not high
enough to cover some new risks,” says
Portuguese risk management association
Apogeris’s president, Antonio Fernandes,
also head of risk management for MDS, a
division of Portuguese corporation Sonae.
It’s not only in reinsurance that Latin
America is showing worrying signs of
protectionism. A key point of Brazil’s new
industrial policy is the abolition of tax
for labour-intensive industries such as
clothing, footwear, furniture and so� ware
to increase the competitiveness of Brazilian
manufacturers against Russia, Korea and
China (tax was previously 20%).
Government procurement regulations
will also be overhauled to favour Brazilian
companies over multinationals operating in
Brazil. Competition for the multinationals
will increase signifi cantly overnight and
their exposures will also change.
“These kinds of regulations can make
risk management more diffi cult, as you
have to keep up with changing policies as
well as trying to anticipate and act on the
regulations before they come into eff ect,”
Sonigo says.
Brazil’s new set of incentives and tax
breaks for domestic businesses could
represent a developing trend of
protectionism in emerging markets, at a
time when many companies in Europe are
looking to these markets for growth.
Certain developing economies are
taking steps to shield themselves from the
eff ects of the crises in Europe and the USA.
Countries such as China and Brazil are
concentrating on developing their own
businesses, technologies and markets,
rather than focusing on commodities and
low-margin manufactured goods.
While Fernandes sees Brazil as a huge
opportunity for foreign companies – “for
investors, reinsurers and the business
community in general” – he believes it may
suff er from a lack of highly skilled workers
in key sectors such as engineering and
energy. “It may have to import specialists.”
According to the Brazilian government,
almost 30 million Brazilians entered the
middle class between 2003 and 2009 – it now
accounts for more than half the population.
But the new industrial policy could make it a
lot more diffi cult for multinationals to access
this burgeoning market. SR
BRAZIL
Europe’s search for growth crosses Latin protectionistsTax breaks and incentives to boost Brazil’s businesses against other emerging
economies herald a home-loving trend that increases risk for multinationals
‘I think this is the most critical
economic situation in my time
as a risk manager’
>> Rogelio Bautista Guardeno,
chief risk offi cer, Abengoa (p22)
Co
rbis
Emerging benefi ts
A� er a brief slowdown in 2009, the
emerging countries recovered strongly
in 2010 at an average GDP growth of
7.3%, according to IMF fi gures. Asia led
the way, with real growth of 9.5%,
followed by Latin America with 6.1%.
The BRIC nations performed well and
this is expected to continue throughout
2011 and 2012. Against slower growth
in advanced markets, founded in a need
for debt consolidation and austerity
measures, emerging markets are
becoming increasingly attractive.
42% of European companies anticipated
doing business with 19 emerging
markets this year. Exporting to
emerging markets is the most widely
expected action.
33% of European businesses believe
emerging market businesses are able to
develop more economic production.
China is considered to be the most important
emerging market, followed by Russia,
Poland and the Czech Republic.
5.8% is the expected GDP growth for Asia
Pacifi c in 2012. Projected global growth
is 3.1% this year and 3.5% in 2012.
Source: 2011 doing business in emerging markets survey, Atradius
Brazil key stats
1. Most important
sectors (2010, %
of GDP):
Services: 67%
Industry/mining:
27%
Agriculture: 6%
2. Main import
sources (2010,
% of total):
China: 14.1%
USA: 12%
Argentina: 7.9%
Germany: 6.9%
3. Main export
markets (2010,
% of total):
China: 15.2%
Argentina: 9.2%
Netherlands: 5.1%
USA: 4.6%
Source: Atradius
NEWS ANALYSIS [ CONTEXT & INSIGHT ]
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 15
T HE FIRST PROSECUTION UNDER THE
UK Bribery Act has been met with
disappointment from some legal experts.
Critics claim the authorities missed their
fi rst opportunity to send a stern signal in
their fi ght against corporate corruption.
The test case, concerning an alleged
£500 bribe accepted by administrative clerk
Munir Yakub Patel, could have infl uenced
how organisations perceive their risk under
the new Bribery Act regime.
“Although a valid violation of the law,
this small footnote of a case seems
insignifi cant given the buzz around the
revamped Bribery Act,” says information
management fi rm Recommind’s senior
corporate counsel, Howard Sklar. “The UK
has talked the talk, but with this it has
shown it’s not ready to walk the walk.”
Unfounded criticismThis criticism, however, is not shared by
everyone. In a series of interviews with
StrategicRISK, leading lawyers commented
that a test case of this kind is no surprise
and that the controversy around it is
unsubstantiated.
“It is not a surprise that this is the fi rst
prosecution we’re seeing,” says Hogan
Lovells’ head of the global bribery and
corruption task force, Jeremy Cole. “It’s
inevitable that the simpler cases are going
to be pursued at an earlier date. And the
prosecutors cannot pick and choose which
cases they prosecute based on PR value.
“This recent prosecution concerns the
receipt in the UK of a bribe by an
individual. However, what corporates and
practitioners will be most interested in is
how the courts will deal with the new
corporate criminal off ence of failing to
prevent bribery – not least as corporates
are exposed on a strict liability basis.
“There is no doubt that such
prosecutions of corporates will follow –
but it will take longer,” Cole says.
Critics deemed that a foreign
corruption case carried out by the Serious
Fraud Offi ce would have been a more
appropriate test case, rather than a minor
domestic one (with charges laid by the
Crown Prosecution Service). In the view of
various legal experts, however, this kind of
‘big splash’ is some time away.
“We are seeing this case now because
it is a typical single instance of individual
bribery whereas corporate bribery is
usually committed over a period of time,”
says Peters & Peters partner for business
crime litigation David McCluskey.
“Corporate bribery is o� en investigated
and prosecuted as a course of conduct,
against a complex backdrop of large
corporate contracts, involving a series of
negotiations. It’s not surprising that there
hasn’t been a corporate prosecution yet.
“I believe it must necessarily be a
couple of years before there is a big
splash – particularly when going a� er
corporations and overseas corruption.”
Corporate focusIn the extensive press coverage that the
Bribery Act received, the main focus lay
with its infl uence on companies. Behind
the shadow of this key aspect, less
emphasis was put on the prohibition of
bribery on a personal level. That is, say the
experts, as much a part of the act as the
fi ght against corporate corruption.
“The Bribery Act’s fi rst purpose was to
consolidate some incoherent old legislation
into a single modern piece of legislation,”
says law fi rm Herbert Smith partner
Alexander Oddy.
“In this respect, the act is nothing
fundamentally new. It has always been a
criminal off ence to accept or off er a bribe as
much as it is a criminal act now.”
“No doubt the authorities were anxious
to bring the fi rst prosecution under the new
act to court to show it in operation. But the
prosecution of Mr Patel doesn’t strike me as
a completely missed opportunity – the fact
is that the new act is now being used for the
job it’s supposed to do. What will of course
really be a big deal is the fi rst prosecution
of a corporate scandal.” SR
‘I believe it must necessarily be a couple of years before there is a big splash – particularly when going a� er corporations and overseas corruption’David McCluskey Peters & Peters
CORPORATE CORRUPTION
‘Disappointment’ over UK’s fi rst bribery prosecutionLegal experts claim the act’s test case has missed an opportunity to set a strict
precedent, while others believe its potential will only be realised in time
Crime and corruption
is a huge problem in
many parts of the world.
Download StrategicRISK’s
world risk map at
goo.gl/wdtjC
In the dock: Some
believe corporate
bribe-payers are
getting off lightly
Re
x Fe
atu
res
NEWS FEATURE [ CLIMATE CHANGE ]
16 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Climatic activity on
the other side of the
world can have a
disproportionate
eff ect elsewhere
Co
rbis
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 17
CLIMATE CHANGE
Rising temperature
C LIMATE CHANGE IS ONE OF THE GREATEST THREATS facing humankind. But it also represents one of the most
uncertain, unpredictable risks, and while there is a broad consensus that we face enormous challenges, quite what those will be remains a matter of debate.
“It’s very hard to establish the risk,” says environmental NGO Earthwatch head of climate research Dr Daniel Bebber, who works with HSBC on climate issues. “The central issue is uncertainty.” But the limits of scientifi c knowledge are only the beginning of the problem, and our understanding of the risk is further complicated by the diffi culties in mapping human response to change.
“Even a tiny fl uctuation in the climate can have an eff ect on agricultural production, but this can be magnifi ed out of all proportion by public panic, market speculation and government response,” says Dr Bebber. “In 2008 a drought in Australia caused a collapse in their rice harvest. They are not a big producer, but the government panicked, worrying that there would be a shortage, which prompted larger producers to react with their own embargoes; then speculators got involved and the price went through the roof. By the end of the year, there were food riots in many countries.”
Small changes in the weather can have disproportionately devastating aff ects in other areas. For example, coastal cities are exposed to a far greater risk from increased storms, surges and sea level rises than inland, yet these areas are where the world’s businesses and populations tend to cluster – and where our fi nancial powerhouses tend to sit.
From agricultural production to changes in the weather, most businesses will be exposed to climate change. But with its risks clouded by uncertainty, how do they reduce that exposure?
»
Key points
01: The threat of climate
change is huge, but
establishing the risk
is diffi cult
02: Changes in weather
can have
disproportionate
eff ects in other areas
03: The total value of
assets exposed in
2005 was estimated
to be $3 trillion
04: Businesses should be
reducing water
useage to help reduce
their exposure
IN A WORLD OF INCREASED
climatic volatility, one industry
that is already trying to adapt
is insurance.
With an increasing number of
extreme weather events widely
predicted by scientists, it follows that
there will be more and more
weather-related claims made to the
companies that insure everyone
from farmers to homeowners.
“Munich Re has already
assembled an extremely impressive
and probably unique database of
claims,” says Dr Bebber. “It has
separated them into those that are
climate-related, such as fl oods, and
those relating to ‘natural’ disasters,
such as earthquakes.”
In 2010 there were 950 natural
catastrophes, according to Munich
Re, 90% of which were weather-
related, giving last year the second
highest number since 1980.
Overall losses were estimated at
around $130bn (€95bn), of which
$37bn was insured. That puts 2010
among the six most loss-intensive
years for the insurance industry
since 1980.
Making changes to the insurance game plan
NEWS FEATURE [ CLIMATE CHANGE ]
18 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
However, Dr Kohn warns: “It’s worth remembering there are no political or economic islands in the world, and we will always be aff ected by what happens elsewhere.”
Whatever the outcome, there will undoubtedly be opportunities in adaptation. “For example, in developing new crop varieties better able to cope with drought and temperature extremes,” says Dr Bebber. “Or – providing governments and the international community agree on the right legislation – carbon markets, as well as sequestration and alternative technologies.”
Getting to grips with this and securing the right investment with the world’s economies being buff eted by some serious storms may be tricky – but the alternative is a future that looks even more uncertain. SR
A recent OECD Environment Working paper ranked the top 10 cities in terms of exposure population as Mumbai, Guangzhou, Shanghai, Miami, Ho Chi Minh City, Kolkata, Greater New York, Osaka-Kobe, Alexandria and New Orleans. But in terms of assets exposed, the list changes to Miami, Greater New York, New Orleans, Osaka-Kobe, Tokyo, Amsterdam, Rotterdam, Nagoya, Tampa, St Petersburg and Virginia Beach.
The total value of assets exposed in 2005 was estimated to be $3 trillion (€2.2 trillion) – around 5% of global GDP. Flash forward to the 2070s and, according to the OECD, the total population exposed could grow more than threefold to around 150 million people and the asset exposure could reach $35 trillion – roughly 9% of projected global GDP.
However the fi gures are stacked up, it’s clear that a huge section of the world’s population and economy are at risk from climate change – a point underlined by Manhattan’s recent narrow escape from the jaws of Hurricane Irene. Refl ecting on a stormy 2010, Munich Re reinsurance chief executive Torsten Jeworrek says: “[Last year] showed the major risks we have to cope with … once again, that there must be no slackening of our eff orts to analyse these risks in detail and provide the necessary insurance covers at adequate prices. These prices, calculated by the insurance industry, make it possible to assess the economic consequences of these otherwise diffi cult-to-evaluate risks.”
Almost all businesses – either directly or through their supply chains – will have some exposure to climate change. “For example, water availability is already becoming a major issue,” says Dr Bebber. “A lot of businesses need a lot of water, and they may not realise it. Working to reduce the amount used is just one thing managers should be doing to reduce their exposure.”
Tomorrow’s worldBut among all the confusion and complexity of our changing planet, there are some emerging trends that businesses can use to model what the future will look like. The most signifi cant of these are based on location.
“Broadly speaking, climate change will exacerbate the existing diff erences between a comfortable north and a strained south,” says Dr Marek Kohn, author of Turned Out Nice Again: How the British Isles will change as the world heats up. “In particular the fate of the Mediterranean basin looks pretty bleak, not only on the European side, but the African and Middle Eastern sides as well, and this is a region already under serious strain that does not have the developmental cushion of the West. Spain will suff er but Morocco more so. Migration may well be the biggest story as labour is pulled north towards employers.”
This could also mean that developing markets in Africa and western Asia could, quite literally, dry up in the coming decades.
“The UK will also have a diff erent experience to mainland Europe, and our climate may become an object of envy rather than mockery because weather extremes will always be softened by the eff ect of the Atlantic, just as they are now,” says Dr Kohn.
“This might make the British Isles quite an attractive place, relatively speaking, for inward investment and migration. Not only for the retirees who currently head for the Dordogne and Costas, but also the yuppies of Paris, Berlin and Barcelona might fi nd a new aff ection for Manchester, bringing their money and business with them.”
»
WINE IS ONE OF THE MOST ICONIC
European products; not only an exportable
and profi table industry but, for many, a
foundation of the civilisation that has
shaped life on the Continent with
pronounced regional trends.
Over the centuries, grape varieties
have acquired strong associations
with particular areas – in French the
word ‘terroir’ is used to denote the
special characteristics a bottle acquires
from local geography, climate and geology.
But all that could be about to change
as climate change bites. “There will be a
general northward march of crops,” says
Marek Kohn.
That could be great for new producers,
but disastrous for established vineyards.
“We could be seeing champagne in the
south of England while poor old Portugal
is le� growing raisins, and this could be a
relatively rapid, decadal shi� ,” says Kohn.
Climate change brings winemaking woes
MumbaiGuangzhouShanghaiMiamiHo Chi Minh City
KolkataGreater New YorkOsaka-KobeAlexandriaNew Orleans
Top 10 climate change exposed cities
A northward march
of crops could bring
decline to Spanish
wine-growing regions
Co
rbis
Viewpoints [ PEOPLE ][ OPINION ][ COMMUNITY ]
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 19
> Profi le Michel Dennery ......... 20on considering sustainability within risk mitigation
> Q&A Abengoa ........................ 22Chief risk offi cer Rogelio Bautista Guardeno on his career so far
‘Many European businesses have embraced globalism and the benefi ts
it provides while ignoring what’s happening on their doorsteps’
IN MY OPINION
Sue Copeman, EDITOR-IN-CHIEF, STRATEGICRISK
A season of discontent
T HE UK RIOTS AND ENSUING DAMAGE that occurred in August took businesses by
surprise, not least those whose premises were looted or burned. The root causes are far wider than the alleged direct trigger – the fatal shooting by police of a local man in the municipal borough of Tottenham.
Drugs, a crime-funded lifestyle and laziness may play a part – if one believes the media – but it’s too easy to blame these and not look beyond them to the fundamental failings of a society that has let a large proportion of its members down. And while the UK may be the victim today, other European countries are also likely to fall prey to this worst kind of activism.
Many European businesses have embraced globalism and the benefi ts it provides while ignoring what’s happening on their doorsteps. This includes communities divided by racism, disaff ected minority groups falling outside the education system and turning to crime, and a general feeling of hopelessness among the unemployed as regards changing their situation by any legal means.
Clearly economic circumstances and demographic changes have played a major part in reducing the number of jobs and opportunities available for young people. Many European companies have chosen to outsource some of their more labour intensive activities to countries in the developing world where employment costs
Deprivation and the London riotsLocations within deprived areas are more vulnerable to unrest, especially those that have high deprivation levels but have also experienced an infl ux of upmarket retailers and high-income groups
INSIGHT
[READ MORE ON-LINE] Sue Copeman also writes a regular column at www.strategic-risk.eu
Although the August riots have undoubtedly damaged the UK’s global reputation, no country is immune from civil unrest
are lower. As Europeans look forward to a longer life span, retirement ages are being extended with a consequent reduction in new recruits. And, with fewer jobs available, despite anti-discrimination legislation, I suspect that some companies give preference to applicants that they view as ‘nationals’.
It would be unrealistic not to recognise that racism still abounds, certainly in the UK. In Britain, today’s target is the black community, but at one time Jewish people were hated and hounded, Irish immigrants came in for their fair share of disapprobation, Asians were – and to some extent still are – mistrusted and discriminated against.
If the UK is typical of Europe, it’s a sorry state of aff airs. And it doesn’t seem so much diff erent from the tribal tensions that we all deplore in countries like Libya and some parts of Africa – those tribal tensions that all too frequently lead to war. So the UK, and perhaps other countries in Europe, has little to congratulate itself on how it is handling the inhouse issues that are now creating civil unrest in other parts of the world. This is the macro picture. How does it translate to the micro – in this particular context, what risk managers can do to protect their outlets against riot damage? Hopefully, there will not be a repeat any time soon of what happened in August in the UK. And there’s no easy answer as to how any European company can protect its premises against mob vandalism. But there are some strategies that might help.
I believe that the key is involvement with the local community. Large retail chains with a presence in every high street can be pretty anonymous and, as such, expose themselves as targets to rioters and looters. Individual outlets should pursue a policy of employing local people and getting involved in local aff airs, for example funding school initiatives, scholarships, land for allotments or whatever.
Perhaps, more controversially, they need to address head on the ‘more diffi cult’ sectors of their local community. Funding a drug rehabilitation centre or providing support for families in need may be diffi cult, but in the UK where the government is looking for the ‘big society’ to support services that can no longer be funded by the public sector, such initiatives are now feasible.
The fundamental principle as far as risk management is concerned is that it is far more diffi cult to trash something to which you feel an allegiance. Have the riots harmed the UK’s reputation globally? Probably yes, but – in these times of civil unrest and national uncertainty – few European countries can be sure that they may not be the next victims. SR
Most deprived areas
Unrest incidents
Least deprived areas
Source: Exclusive Analysis
VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]
20 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
PROFILE
Forging aheadSocial imbalances will play a major part in future risk mitigation, GDF Suez deputy chief risk offi cer Michel Dennery believes, with ERM playing a critical role
M ICHEL DENNERY, DEPUTY CHIEF RISK OFFICER AT GDF Suez, is one of the most active members of the French
risk management community. As well as being a Ferma board member, Dennery is the president of the French risk management association Carm. Throughout his diverse career in risk management, Dennery has strived to promote the profession in France.
After graduating from the École Centrale de Lilles in 1981, Dennery began work as an engineer. Yet, despite this technical background, it is probably his experience with the media that has had the biggest infl uence on his approach to risk management.
“I had three diff erent operational engineering jobs, after which I wanted to get involved with the corporate side of the business,” he says. “So I was given the job of managing the press service at EDF. I had to manage several diff erent media crises, and every time you prepare a press release you anticipate a reaction from the press and the public, which has key parallels with risk management.”
Dennery held the position of head of media relations at EDF for three years, and during this time he spoke at a seminar on business communication in 1996. The event was organised by Thierry van Santen, another prominent fi gure in the French risk management community, who was developing risk management at the French food group Danone.
“At that time I understood how risk management was connected to communication and PR. The risk offi cer’s role is to anticipate the unexpected and that’s one of my key roles now,” Dennery says.
After being inspired by Van Santen, Dennery returned to his work in operational management but he continued to actively study the discipline of risk management. This work culminated in an extensive report on global risks in 2000.
“I had hired an intern and we began to work on a method for a global approach to risks,” he explains. “We worked with the research team at EDF and we contributed to the elaboration of the fi rst method of global risk management for EDF.”
For Dennery, an informed understanding of risk allows companies to act with more conviction and to progress more quickly. “You have to develop strong convictions to advance and to undertake new tasks. You must always advance while being vigilant at the same time,” he says.
He believes that companies need to have a dynamic approach to risk and that over-regulation can sometimes leave companies more prone to disaster. “Organisations that have systems that are too rigid are cutting themselves off from reality, cutting themselves off from the reaction of the public, and sooner or later a catastrophe will take place. Certitudes can be very dangerous.”
Career history
EDF
Head of media relations
1994-97
EDF/ GDF Services
Vice-president of gas and
electricity distribution
1997-2002
EDF/ GDF Distribution
Deputy manager of
procurement
2002-06
GDF Suez
Deputy chief risk offi cer
2006-present
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 21
Experience across
diff erent industries has
given Dennery the
objectivity needed to
work with a global fi rm
such as GDF Suez
Dennery often emphasises the positive side of risk. For example, touching on cyber risk, he says: “Cyber risk is often highlighted as a negative thing – and there is the real threat of hacking and of data loss – but there are also a lot of opportunities. The question for businesses is to know how to anticipate this new business and harness it, protect your brand image and your market share by using this new media to engage with clients and stakeholders. For me, there is also a generational or a cultural issue. I really have the impression that things are changing very quickly and that companies need to manage this change so they don’t get left behind.”
Dennery thinks his experience across various sectors and industries gives him the benefi t of objectivity. This is essential
to co-ordinate risk management for a truly global company like GDF Suez.
For example, Dennery believes pension risk is a manifestation of a more general problem: that of the distribution of wealth. “In a region that is developing economically, such as Europe in the roaring ’20s or Asia now, the cost of looking after
society is relatively low, so you can increase funds going to social welfare. When the economy plateaus – which is the case now in Western countries – we no longer have the economic growth to fi nance the cost of social welfare.”
The challenge is now for governments, and also companies, to address the imbalances that exist in the economic system, he says. “If this social cost is impeding economic growth, you have to fi nd a new balance in society without having huge reductions in the public sector.”
Dennery repeatedly stresses the importance of anticipating risks and eff ectively planning to mitigate future threats. One of the key emerging risks he identifi es is the sustained increase in the price of commodities.
“We’ve seen the prices of metals almost double in 10 years. The price of crops such as wheat and corn has increased signifi cantly. In terms of energy, before the economic crisis the price of oil had risen to $150 or $160, but today the global demand for all kinds of non-renewable resources has seen a huge increase because of demand from economies that are no longer emerging, but have emerged.”
A series of major demographic shifts have already occurred and risk managers need to understand how these changes will aff ect their companies, he says. “In China there are 300 million people who have a standard of living that is comparable to that of western economies; 300 million is the equivalent of the European population. This standard of living increases the demand for energy, water, metal and food. In the long term, there is a real question around price level and the profi tability of business activities that are dependent on these primary resources.”
Like many risk managers, Dennery believes ERM represents the future of risk management. “The question today is to go further and »
‘In China there are 300 million people who have a standard of living that is comparable to that of western economies – that’s the equivalent of the European population’Michel Dennery GDF Suez
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VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]
22 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
Could you tell us about your career history?“I graduated in law and I also did postgraduate studies in business administration and human resource management. My fi rst job as a professional was as a manager for a company owned by the French business Vivendi. I have been at Abengoa for the past 20 years. At fi rst I was the manager of one of the companies of the group, and 13 years ago the chief executive gave me the task of setting up a risk management department in our company.”
Why did he pick you to set up the risk management department?“I think he knew I had the right management experience, but he also wanted someone who had an education in law, was technically minded and understood the engineering industry. From the beginning, our idea of risk management was not related to insurance, it was to analyse and understand our political, fi nancial and regulatory risks. The chief executive wanted someone who could analyse contracts, agreements, joint ventures, clauses, responsibilities and so on. At the beginning it was me and me alone and now we have 35 people working in the risk management department.”
Is ERM gaining infl uence and popularity throughout Europe?“I think there is a lack of understanding of risk management at the highest levels in some big companies in Europe. It’s true that there is a growing number of people who understand that risk management is something that adds value to a company. However, only a few years ago it was still seen as a process that was there solely to protect assets and responsibilities, not to anticipate possible risks or improve the company. In the US the situation is quite diff erent and there are more CFOs than in Europe – my role is more akin to that of a CFO than a risk manager in the traditional sense of the term. I think that Abengoa is probably the only company in Spain where the risk management department engages in all these kinds of activities.”
What is the most important lesson that you have learned in your career?“The most important thing is probably that you cannot achieve real risk management if the executive branch of the company is not convinced; risk managers need the support of the board to do their jobs eff ectively. The most important lesson for me is that risk management has to come from the top down
and not from the bottom up. If risk management comes from the top down, 75% of the battle is already won. The second valuable lesson is that risk management has to be a function that forces the risk manager to understand all of the processes, functions and staff of their company. Risk managers have to have a very broad perspective; you can’t simply be an expert in insurance. I often say that the risk manager should be an expert in how not to buy insurance: ideally they should know how to manage risks without paying for them. Of course, you need to know how to buy insurance, what kind of insurance policies there are in the market, what kind of risk you are able to protect with an insurance policy; but this is the second step. The fi rst step is to manage all other options so that you don’t have to buy insurance.”
Do you communicate with staff at all levels of the company?“Yes, I think that this is very important. We have several internal procedures and we have an internal manual on risk management that is transmitted to all employees in the company. For example, for 10 years now I have been organising internal training in risk management not only for the risk management or insurance team but also commercial people,
ask companies to be more explicit about their risk appetite. Moreover, this is the goal of the green paper published by the EU and the 9th Directive on corporate governance. When we talk about risk appetite, we are talking about the development of the business, the appetite for business growth.”
However, for ERM to continue to establish itself in the corporate culture of companies around the world, a strong risk management community is essential. This is where Ferma can help, Dennery says.
“As professionals, it’s very important to be able to exchange ideas so we can improve risk management in our organisations and share new ideas. Ferma has developed a number of communication
»
Q&A
‘I believe the risk manager should be an expert in how not to buy insurance’ Rogelio Bautista Guardeno,
CHIEF RISK OFFICER, ABENGOA
‘Organisations that are too rigid are cutting themselves off from reality … and sooner or later a catastrophe will take place’Michel Dennery GDF Suez
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www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 23
Communityupdate
On its recent
German launch,
web-based collaboration
platform for the
industrial insurance
sector inex24 was
mired in controversy
for its data security.
Now ThyssenKrupp,
Siemens, Tchibo and
Bosch have jumped on
board and made the
platform popular
among German
insurance managers.
ThyssenKrup was
the fi rst customer to
successfully arrange its
property renewal via
the system.
Austrians living
in regions that
are in danger of fl oods
or avalanches are
unable to purchase
insurance for natural
disasters in their ‘red
zones’ – high risk
regions – because it does
not exist. A request put
forward by the country’s
Versicherungsmakler
(association for
insurance brokers)
asked Austria’s
insurance industry and
government to make
insurance for natural
disasters possible in
every red zone region.
The Nordic
Risk and
Insurance Summit
(NORIS) called on
insurers, reinsurers and
businesses to tackle a
growing array of
emerging risks and to
contend with the new
key dynamic of an
interconnected world.
The consequences of
risk ripples across the
globe are extremely
diffi cult to combat,
warned Swiss Re head
of emerging risk
management Reto
Schneide at the
conference.
DVS Conference 2011
HOT ISSUE
Just days before the hustle and
bustle of Bavaria’s annual
Oktoberfest began in Munich,
insurance and risk management
experts gathered in the picturesque
city at the annual DVS conference
on 7 and 8 September to talk about
the industry’s hottest topics.
One issue was a discussion about
the material damage caused by the
recent catastrophes in Japan. Reiner
Gleiss of Mitsui Sumitomo Germany
released fi gures showing that a sum
of €5.4bn was owed by industrial
insurers. Various (re)insurers have
predicted the overall amount of
damage to be more than €146bn.
Addressing a more
international issue, Agostino
Galvagni of Swiss Re revealed
that natural disasters have cost
insurers worldwide around
€70bn in the fi rst half of 2011. He
predicted the premium for natural
disasters to rise signifi cantly,
saying: “Everything points towards
the fact that premiums will now
start to rise.”
[READ MORE ONLINE] There is an archive of risk management profi les on www.strategic-risk.eu
[READ MORE ONLINE] You can download StrategicRISK’s own local language conference dailies here: goo.gl/G26qx
technical people and the management team. Risk managers must be able to obtain allies in the company. The other people in the business have to see the risk manager as someone who helps, who brings something, not someone who takes away or limits activity. This is because our work as risk managers depends on what these people tell us about the running of the business; we have to be loved, not hated by the organisation.”
How do you think risk management is evolving?“I’m not sure. When you talk with other risk managers, they say that risk management is evolving and that’s a good thing. But in reality, if the awareness and support of executive management is not increasing, risk management cannot develop eff ectively. I believe that the evolution that we are seeing in risk management is the result of the eff orts of risk managers rather than increasing support from the board. The main factor is that there are many great people working in risk management, people who have great ideas and who have the intention of developing the discipline of risk management. However, companies’ boards need to give more support to these kinds of individuals.”
How do you think the economic crisis is aff ecting risk managers?“I believe we are in a critical time. I think that we are in a time when dynamics are changing, there are lots of diff erent pieces which are moving and changing place. For example, you have the Arab Spring and various economic convulsions. I think that risk managers are obliged to understand the implications of these events and also to raise themselves above, to have a more objective view of the situation. We have to be able to see these events from above so we can anticipate the consequences of these events and protect our companies. You have to have a global perspective of the situation and be able to react very quickly to changing factors. I think that this is the most critical economic situation in my time as a risk manager.” SR
tools with social networks – there is a Facebook community as well as a LinkedIn community, and there are videos on YouTube relating to risk management. I really have been pleasantly surprised by the appetite that risk managers have to communicate with their peers.”
As for the future of his own industry, Dennery believes that renewables are important but that it’s the diversifi cation of energy sources that is key. “Renewable energy will never supply enough power to meet all the world’s needs. We can’t really consider covering the world in dams, windmills and solar farms. However, when we can harness renewable energy, we need to do it; so we’re talking about 20% or even 30% of energy production. If we can do that, it will prolong our access to fossil fuels. This is something we have to do.”
The two key lessons, then, that other risk managers can learn from Dennery are the importance of managing relationships with the media and the ability to see the opportunities that are linked to risk. SR
Risks [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 25
> Giant Risk AtlasStrategicRISK has compiled information from a series of reports this year to create this annual risk atlas wall chart
Establishing a common
culture across territories
is essential, but not easy
GLOBALISATION
Divided they fallThe benefi ts of a worldwide presence can be off set by increased vulnerability to hazards including political unrest, natural disasters and lack of a shared corporate culture
E UROPEAN COMPANIES THAT HAVE GONE GLOBAL HAVE GAINED IN lower supply costs, larger markets for their products and, more recently, the ability
to off set western recession. The pain for many began to bite this year when a series of global events spelt out the vulnerability associated with a worldwide presence.
Political tumult began in Tunisia, then Egypt and extended elsewhere. Floods in Australia were the fi rst of several huge natural catastrophes including the earthquakes in New Zealand and Japan and the US hurricanes which, according to Associated Press, have already cost insurers almost $25bn (€18.3bn). In addition, according to a 2010 McKinsey Global Survey, while the core drivers of globalisation remain valid, “executives are still grappling with how to seize the opportunities of an interlinked world economy”.
Until the credit crunch, mergers and acquisitions (M&As) were one of the traditional routes used to speed up globalisation, the potential benefi ts including instant market presence in new territories and increased market share in existing ones. For companies that were not cash-rich, the crunch spelt the doldrums for M&As. Bloomberg reported that global M&A activity saw a ‘strong comeback’ last year. »
RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
26 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
The Organisation for Economic Co-Operation and Development (OECD) also confi rmed that foreign direct investment activity recovered last year for the fi rst time since the beginning of the global fi nancial crisis in 2008.
However, if globalisation in itself presents new risk challenges, so too can the strategies used to eff ect it. With M&As – and divestments – the devil is in the detail, according to the head of Marsh’s M&A practice in London, Daniel Max. Sellers may play down the signifi cance of potential risks and liabilities and be reluctant to give the required warranties or indemnities.
At least half of all M&As do not succeedReports suggest that over half of all M&As – some put the fi gure as high as 90% – do not succeed in terms of meeting corporate objectives. In its study Post-Merger Integration: The Key to Successful M&A, Merrill Corporation says that success depends almost entirely on an eff ective integration process.
Establishing a common corporate culture across diverse organisations in very diff erent countries is a challenge. For risk managers looking to roll out enterprise risk management (ERM), the diffi culties in establishing a universal approach to risk and its management can be profound. Some national cultures are inherently more risk averse than others.
Accenture’s 2011 global risk management study points to the inability of many companies to infuse a risk culture throughout their organisation. “If a broader culture of risk awareness is not created, companies will struggle to realise the full benefi ts possible,” it says.
Similarly, enforcing common corporate social responsibility (CSR) standards across worldwide operations and their supply chains is an imperative that global companies cannot ignore. The OECD, which this year issued new guidelines to promote responsible business conduct by multinational enterprises, also amended its code to take in non-OECD countries.
Learn from News Corp troublesAccording to Global Governance Services chief exexcutive Chris Pierce, the board must be responsible for setting ethical standards. One stumbling block is that something considered legal in one jurisdiction may be banned in another, for example contract facilitation payments or donations to political parties.
Some global corporations, most recently News Corp in the UK, have found that breaching ethics is not just a matter of reputational damage and a few harsh comments on the web – although those never help a business. There can be a direct detrimental fi nancial impact. Investors, particularly in the USA, are never slow to sue.
Pierce notes that directors are now aware that the message the board is giving out may not refl ect what’s happening lower down the chain of command. “I am asked often by organisations to compare the rhetoric with the reality,” he says.
If strategies, risk culture and CSR are the soft issues around globalisation, the hard issue is that some countries are more prone to natural disasters and political unrest than others. Companies
embracing globalisation go to regions that off er the greatest benefi ts in terms of supply costs and indigenous market. These may not be the safest bet in global risk roulette wheel.
Natural catastrophes are aptly named ‘acts of God’. They are largely unpredictable. Even in notoriously hazard-prone areas, no risk model has yet been able to come up with a fi rm indication of when and where catastrophes will occur and their scale. Risk managers may have to carry the can if they do not have mitigation strategies in place.
Traditionally, risk managers whose companies have operations in high-risk areas will seek to protect physical assets as far as
feasible and insure the loss should the worst happen. But some risk managers are moving outside the conventional mode.
New emphasis on mitigationAdrian Clements, general manager of asset risk management at ArcelorMittal, believes that compensation for physical damage may be poor consolation in view of the potential for years waiting to get back into production and lost market share. Although the company transfers some fi nancial risk, Clements has embarked on a programme to mitigate its market share risk.
This involves analysing the vulnerability of individual plants to extreme events such as large earthquakes and providing protection to ensure that they can quickly be up and running. Clements says that it’s also important to look at the surrounding infrastructure to guarantee continuity of production. It’s a new approach, moving away from identifying probability for insurance purposes to assessing and protecting vulnerability for mitigation.
Japan’s earthquake, accompanied by a tsunami and nuclear reactor problems that shut down suppliers’ power, was an eye-opener for some sophisticated western companies that had thought they were in control of their supply chain. Automotive companies had to reduce operations because of lack of supplies from Japan and there were profi t warnings from electronics companies. The winners were those businesses that had already made alternative supply arrangements, says Chainlink Research, whose 2011 supply chain risk survey reveals that multinational companies are pretty poor at managing their supply chains.
Volatile political conditions have also caused concern this year. As well as the need to repatriate employees – in some cases at very short notice – hard-won contracts with governments may be overturned if a new political regime takes over. SR
Key points
01: Global expansion
activity through M&As
is making a comeback
post credit crunch
02: However, at least half
of all M&As do not
succeed, usually due
to integration issues
03: Establishing a
common corporate
culture, including
approach to risk and
CSR, is key to a
successful M&A
04: Some countries are
more prone to natural
disasters and political
unrest than others
05: The Japan earthquake
revealed weaknesses
in many global
companies’ supply
chains
Japan’s earthquake was an eye-opener for some sophisticated western companies that had thought they were in control of their supply chain
The Willis report, Executive Risks – A boardroom guide 2010/2011, highlights the greater
appetite of regulators globally in identifying and prosecuting companies and their
directors for breaches of competition and securities regulation.
“Overall, there is a growing appetite for increased and improved enforcement, and this
can be seen at a local level in just about any jurisdiction,” says the report. There is also
increased co-operation between regulators on an international basis.
SPOTLIGHT
Regulators increase D&O threat
25_26 Risks_SROct11.indd 26 16/09/2011 14:57
RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
www.strategic-risk.eu [ OCTOBER 2011 ] Strategic RISK 27
North Africa and the Middle East. Unrest on this scale in the countries aff ected had not been predicted and the speed of developments took the business world by surprise.
“Some companies with operations, outlets or suppliers in the countries concerned have been directly aff ected, facing serious challenges with respect to expatriates’ safety and repatriation, tangible investments protection and continuity of supply. Others believe that they may experience an indirect impact. And all are concerned that new turmoil in the Middle East could aff ect oil production, pushing up energy prices,” said the report.
Having property, projects, outlets and service contracts in countries with a potentially volatile political regime has to be a signifi cant risk for global companies. Risk managers need to have adequate processes in place for enforcing property security and protecting – or even repatriating – personnel should civil unrest prove a threat. There is also a supply chain disruption risk for companies that source from such countries. And contracts with state-owned or quasi state organisations may be threatened by government changes and possible repudiation.
Understanding risk interdependencePolitical risks and the eff ects of natural disasters are two of the immediate concerns of global risk managers. Following the Queensland and Victoria fl oods in Australia, the Sydney Morning Herald warned that urbanisation, climate change and globalisation are leading to more and greater catastrophes.
It quoted Erwann Michel-Kerjan, managing director of the Wharton Business School’s Risk Centre in the
USA and chairman of the Organisation for Economic Co-operation and Development
(OECD) secretary-general’s advisory board on fi nancial
management of catastrophes. He said that in the 21st century
there has not been a six-month period without a major crisis that aff ected
several countries or industry sectors. The world has become an
interdependent village.The article commented that
classic risk strategies are out of step with the new interconnectedness of
the global economy. “The conventional risk management approach lists possible
events and determines the probability of their occurring based on experience. The problem is that it assumes risks are local and routine and fails to take into account the impact they may have on diff erent organisations and states. It does not factor in the impact of the growing number of unlikely but potentially devastating events. It is an outdated approach that robs organisations of their agility.”
All of these comments suggest that tomorrow’s global risk manager may be a somewhat diff erent animal from today’s. There are new risks to consider, such as lack of appropriately skilled employees, and a far more uncertain geo-political climate.
Expecting the unexpected could be the norm. SR
GLOBALISATION IS THE CHOSEN STRATEGY FOR most large companies but it has a signifi cant impact on
corporate risk profi les – it has the aff ect of both increasing and decreasing risks.
In recent years, the advantages of globalisation have come well and truly to the fore. Diversifying into developing countries with strong market demand has helped large international conglomerates to weather the European and US recession. As one risk manager commented in this year’s StrategicRISK Report, the ability to do “natural hedging” in terms of services and products provided and the countries they are provided to gives more resilience against economic factors. Similarly, access to cheaper labour forces than those available in the West has helped to protect profi tability.
But diversifying into emerging markets without a clear understanding of the threat landscape is foolhardy to say the least. Each region has its own specifi c risk issues and risk managers need to meet the challenge of assisting their boards to assess these issues in order to make the right choice for the business.
“The core drivers of globalisation are alive and well, but executives are still grappling with how to seize the opportunities of an interlinked world economy,” said a McKinsey Global Survey last year. On risks faced by their companies in emerging markets, executives cited breach of intellectual property (40%), volatility of currency or exchange rates (38%), geo-political instability (26%), and lower safety and quality standards (26%) as the top four.
Executives at North American, technology and telecoms companies were most concerned about IP, while companies in the fi nancial sector worried most about currency volatility and energy companies about geopolitical instability.
Globalisation brings with it uncertaintyThe StrategicRISK Report published earlier this year also revealed European corporations’ concerns about political developments in
GLOBALISATION
The greatest risks and opportunitiesIntellectual property, currency fl uctuations, political instability and lower safety and quality standards are the top four barriers to success in emerging markets
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[ October 2011 ]
GLOBALISATION
R E P O R T 2 011
Globalisation risksThe threats facing companies in an
increasingly globalised world
To download a copy of
StrategicRISK’s
Globalisation Report,
go to goo.gl/JfTTQ
RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
28 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
RISK FINANCINGMARINE AND CARGO
Pressure from all sides
IT HAS NOT BEEN A GOOD YEAR SO FAR FOR MARINE AND
cargo insurers. Hit by natural catastrophes around the world
– including the magnitude 9.0 Japan earthquake and tsunami on
11 March – loss ratios have begun creeping up. Yet the market
remains wildly competitive, with new capacity conspiring to exert
downward pressure on premium rates in what is already a very
so� market.
“It’s been a shocking year for cat events but so far that
hasn’t translated into a signifi cant hardening of rates or even
rate increases within the cargo market, except on limited
occasions where you’ve got stock in a known high-cat area,” says
Chartis International vice president of global marine cargo
Jonathan Eaton. “Overall rates are at best fl at, but in reality if it’s
a profi table piece of business from an underwriting standpoint,
there’s still downward pressure on rates.”
The Japan event, February’s earthquake in Christchurch,
the fl ooding in Queensland and severe weather in the US are
adding up to signifi cant claims for the insurance industry – with
reported estimates of about $60bn (€43.5bn). How much of this
falls to the marine and cargo market is uncertain, but there
will be losses.
According to cat modelling agency RMS, while there
were initial estimates of at least 10 ocean-going ships considered
total hull losses in the tsunami, with a total insured value
between €145m and €218m, some were eventually
located adri� . Other signifi cant losses in the marine sector
are cargo coverages, with thousands of 20� equivalent units
(containers) smashed and inundated by the tsunami or washed
away at Sendai Port. Large quantities of stock were also spoiled
by salt water inundation or while they were stuck in warehouses
at port level.
Overall, the impact on industry capital at a time when
investment returns are low suggests underwriters will be under
more pressure to make a profi t going forward. “
There is defi nitely an upward pressure from insurers, but for
the most part we’re managing to stay where we are on renewals,”
says Lockton divisional director for risk solutions, cargo and
logistics, Graham Hambly.
Major natural catastrophes, piracy attacks,
continuing cargo the� and a stagnant
global economy – there’s plenty keeping
the marine and cargo market awake at
night this year
45% 40%
35% 30%
25%
1996-2000
2001-2005
2006-2010
Buyer’s marketAn oversupply of vessels in a sluggish global economy remains a
concern, but orders have picked up for bulk carriers, tankers and
containers, with China the source of 41% of the demand. While
import and export activity has picked up as the global economy
emerges from fi nancial crisis, earnings are still lower than the last
peak in 2008 (International Union of Marine Insurance, IUMI).
Any new business in the market is aggressively fought over,
says Eaton. “Most noticeable in cargo is an increase in activity on
project cargo risks as fi nance has come back for some projects that
have been mothballed,” he says. “We’ve seen an increased number
of projects recommencing, so that’s a positive trend. But that
business, which is very much on target for us, is subject to the same
overcapacity, so we’ve seen quite a violent decrease in rating and
widening in terms for good-quality business.”
The continued increase in global cargo underwriting capacity
has created a competitive buyer’s market, according to Gallagher
London. In its February 2011 marine newsletter it comments:
“Trade volumes and commodity prices are increasing in most
sectors, which will increase clients’ turnovers and put pressure on
underwriters to reduce rates further. These increases in volume
will likely increase claims activity, with insurers’ margins
diminishing. To moderate this potential for reduced margins,
underwriters and brokers will be looking to work with clients to
establish and incorporate eff ective risk management solutions.”
One concern is that in such a so� market insurers could be
tempted to take a harder stance on claims. The industry needs
to work together to ensure a high level of professionalism is
maintained, thinks Eaton. Finding new ways of gaining effi ciency
in the market is also to everyone’s benefi t, and initiatives such as
electronic endorsements can help achieve that.
Supply chain disruptionFrom a cargo perspective, one signifi cant impact of this year’s
catastrophes – including the Arab Spring unrest throughout
North Africa and the Middle East – is the impact on supply
chains. Spikes in the price of coal and steel were experienced
when the mining sector in Queensland’s Bowen Basin was
unable to get its product to port, while in the USA car
manufacturers and the electronics industry experienced a
slowdown in activity a� er the Japan earthquake.
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 29
20% 15%
10% 5%
0%
Weather
Grounding
Fire/explosion
Collision/contact
Hull damage
Machinery
Total marine
losses
1996-2010,
by cause, all
vessel types
Other
IN THE FIRST HALF OF 2011 THE NUMBER OF PIRATE
attacks on ships around the world reached 266 (up from
196 attacks in H1 2010, according to the International
Maritime Bureau). Ransoms are increasing, with the average
thought to be about $4m (€2.9m), and there have been
tales of growing violence on board hijacked vessels.
According to Ole Wikborg, the Norwegian president of IUMI,
piracy problems in the Gulf of Aden and the Indian Ocean
are “an absolutely unacceptable disruption of global trade
to which marine insurers must respond”.
In addition to increased capacity for specialist kidnap
and ransom (K&R) covers, marine and cargo insurers have
been doing their utmost to mitigate the fi nancial losses
resulting from piracy, helping in negotiations with pirates
and to provide their proportion of ransoms demanded
to release crews.
“The fi rst thing they want to know is whether piracy is
covered under a cargo policy,” says Hambly. “The problem is
that when goods are taken by pirates, technically they’re not
lost and damaged – they know where they are – so you have a
situation where cargo insurers tend not to pay the claim
straightaway as there’s a good chance of getting them back.
“With ransoms paid, generally vessels are returned in
three or four months,” he continues. “The problem we’ve
encountered is that when you’re dealing with something
that is time-sensitive or goods that deteriorate or
commodities subject to price fl uctuations, the delay of two
or three months could leave you with a substantial loss that
wouldn’t necessarily be covered under a conventional cargo
policy. We’ve been trying to put together some vehicle that
will pay for loss of income from the piracy act.”
While piracy is undoubtedly a concern for insureds, Eaton
urges them to keep a sense of perspective. “While it’s high
profi le and gets a lot of press, the actual number of hijacks
when you look at total volume of shipping is relatively small,
but they are signifi cant nonetheless and the average cost of
ransoms is going up,” he says.
NEW AGE OF PIRACY
“The earthquake in New Zealand, tsunami and fl oods in
Australia have had an impact on the cargo market,” says Hambly.
“Not only have you got goods held at ports and in transit in those
places, it’s increasingly the case that goods are insured throughout
the supply chain – from the time the goods are manufactured and
produced through to the end customer – known as stock
throughput insurance.”
While trade disruption covers are available in the market – and
contingent business interruption if a client is heavily reliant on one
key supplier, for instance – trying to bring new products to market
and encourage additional premium spend is not easy in the
current climate. Delay cover can be put back into policies where it
has been excluded, but again that requires additional premium.
“There’s increased awareness of other products that fall under
the heading of marine – trade disruption is one. The other side of
this is fi nding a market for that in the sense that risk managers are
increasingly price conscious, especially when margins in their own
organisations have been cut to the bone,” says Eaton. SR
‘We’ve seen quite a violent decrease in rating and widening in terms for good-quality business’ Jonathan Eaton Chartis International
Source: Lloyd’s Marine Intelligence Unit
RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
30 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
republicans (see box, over) – and similar groups such as Basque separatists – may pose a risk to life, they are not capable of the massive attacks that have been perpetrated or attempted by Islamic fundamentalists.
“The threat is less from al-Qaeda (see box), which is in a lot of trouble, and more from groups or individuals inspired by al-Qaeda or what al-Qaeda represents,” says Steve Hewitt, senior lecturer in American and Canadian Studies at the University of Birmingham and author of The British War on Terror: Terrorism and Counter-Terrorism
on the Home Front since 9-11.“Statistically, Islamist terrorism is less of a threat than
ethno-nationalist terrorism, but the diff erence is that Islamist violence tends to be more spectacular, with higher losses of life.”
Figures released in 2009 by Europol showed that more than 99% of terrorist attacks in Europe between 2006 and 2009 were carried out by non-Muslims, and out of a total of 1,009 terror
EUROPEAN TERRORISM
Threat level: ongoingTerrorist threats have become an inescapable aspect of modern life and, as these leading terrorism experts argue, countries cannot take their safety for granted – whatever action they take to minimise the risks
D ESPITE RECENT TALK OF A “STRATEGIC VICTORY”, 10 years on from the attacks of 9/11 Islamic fundamentalism
is still the major terrorist threat to Europe. “Any statement that al-Qaeda is a spent force should be treated with real scepticism,” says Maplecroft associate director Anthony Skinner.
The only deaths from terrorism in the UK since the bombings of 7 July 2005 have been in Northern Ireland. And while dissident
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 31
suspects arrested continent-wide in 2008 only 187 of them were arrested in relation to Islamist terrorism. However, the scale of the Islamist threat far outweighs other political violence.
“It’s very hard to measure the scale of the threat,” says Skinner. “It very much depends
what is in the pipeline and although we are seeing a surge in al-Qaeda-inspired activity in North Africa, Yemen, Iraq and Nigeria, it is diffi cult to predict where an attack might happen or what the scale might be. “It’s very hard to spot an individual acting alone (see box, below),” he continues, “and in that sense the intelligence services are on the back foot.”
End of bin Laden, end of al-Qaeda?With the death of Osama bin Laden on 2 May, many might have been tempted to interpret the killing as a full stop to the end of the al-Qaeda era. That would be a mistake.
While it’s true that, alongside bin Laden, many of al-Qaeda’s most important fi gures have been killed and had their networks disrupted by the US and its allies – particularly through drone attacks on the Afghan/Pakistan border – their infl uence endures.
That’s because al-Qaeda was never the single organisation run on a tight hierarchy that many imagined. It was akin to a venture capital fi rm, providing fi nance, training and, most importantly, ideological inspiration to groups that made contact.
As such it continues to inspire Islamic fundamentalists, particularly in Yemen, Somalia and Maghreb, all of which represent serious emerging threats.
So� er targets“If there are attacks, they’d likely be against public transportation
networks or other so� targets because those carrying them out
increasingly seem to be amateurs or even individuals,” says
Hewitt. “There is a fear of a Mumbai-style attack but the lack of
easy accessibility to weaponry might mitigate against that.”
Although all aspects of society are potential targets, transportation, and in particular air travel, remains a favourite. “There almost seems to be a one-upmanship going on, in that the terrorists devise a new method to attack planes, which leads to new security measures, which leads to new ways to attack planes,” says Hewitt.
Other vulnerable industries include any multinationals working in the defence industry, energy or infrastructure. “What they want is a high-profi le, headline-grabbing target,” says Skinner.
“At some level there has to be an acceptance in a free society that nothing can ever be 100% risk-free, so it becomes better to have plans in place in the event of an attack,” says Hewitt. “Luckily, terrorists seem to want to go after better-protected targets instead of lesser-protected so-called ‘soft targets’. Part of that seems to be about a desire for maximum publicity but also an eff ort to send a message that no one can ever really be safe.”
Potential for attacksAlthough there hasn’t been a major fundamentalist attack in mainland Europe since the London bombings in 2005, the developing political context still makes attacks likely. “The increasingly polarised climate in Europe, with the emergence of far right parties in a number of countries and rhetoric and legislation directed against all or some Muslims, makes the situation far more volatile,” says Hewitt. “It plays into a key al-Qaeda narrative in which Muslims are under attack and can
‘There has to be an acceptance that nothing can ever be 100% risk-free, so it becomes better to have plans in place’Steve Hewitt Birmingham university
ONE OF THE MOST SIGNIFICANT PROBLEMS FACING
counter- terrorism is identifying the individuals that pose a
risk. Time and time again attacks have been carried out by
cells made up of people previously unknown to law
enforcement – including the 7/7 bombers, Timothy McVeigh
and most recently Anders Behring Breivik in Norway. These
so-called ‘clean skins’ take full advantage of their invisibility,
and attacks are almost impossible to stop unless the
perpetrator makes a mistake and is picked up by surveillance.
To combat this, intelligence services have dramatically
improved the sophistication of operations since 9/11 –
particularly their eavesdropping on internet, cellphone and
other communications activity. But the truth remains that in
an open society a terrorist acting as a lone wolf can be almost
impossible to spot, until they act.
CLEAN SKINS
The impossible risk
IN THE AFTERMATH OF THE KILLING OF AL-QAEDA’S
leader Osama bin Laden the global terrorism threat has
become much more diverse but no less severe, according to
a new report by Risk Management Solutions (RMS).
On the one-decade anniversary of the September 11
terrorist attacks, the report analyses the way terrorism
risk management has evolved. It surmises that the
assassination of Osama bin Laden caused a blow to the
global “Jihadist” movement that could change the threat
landscape. More than 2,400 “macro terrorism” attacks
have been committed in the past 10 years, according to
RMS. These attacks have extended beyond the Middle East
and South Asia hot spots, spreading to more than
40 countries worldwide.
Terrorism risk may have dispersed but the way it is
managed has also progressed over the past decade, says the
report. “The insurance industry has become much more
comfortable using loss models to manage terrorism risk,”
says Peter Ulrich, senior vice president of emerging
solutions at RMS. “Insurers are managing accumulations
using realistic scenarios and event-specifi c footprints to
monitor exposure across multiple lines of business.”
9/11 ANNIVERSARY
Terror threat “no less severe”
RISKS [ THREATS ][ OPPORTUNITIES ][ MANAGEMENT ]
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AFTER SOME QUIET YEARS following the success of the
peace process, terror is back in Northern Ireland. MI5
currently rates the risk of an attack by dissident republican
groups in the province as ‘severe’ and ‘substantial’ on
mainland UK.
According to security minister David Ford, both the Real
IRA and the Continuity IRA have improved their bomb-
making techniques. A bomb abandoned in north Belfast last
year had the capacity to kill hundreds.
NORTHERN IRELAND
Return of the Troubles?
[READ MORE ONLINE] To download a terrorism risk map, go to goo.gl/96bYo
never really be at home in Western democratic countries. In that sense, I’m much more optimistic about countries such as Canada and the United States that have a history of accepting and integrating immigrants from around the world. European countries seem to be still at an earlier stage of trying to fi gure out how they will adapt to changing populations.”
Hewitt highlights the increasing divisions within European countries. “Falling into far-right politics, repression and exclusion is one path, but it strikes me as going nowhere except to more polarised societies. And the greater the polarisation and alienation, the more true extremists are aided in their recruitment of individuals willing to engage in violent extremism,” he says.
However, having a mainstream outlet for anti-immigration sentiment may be taking some of the sting out of the threat posed by the far right. “Having a legitimate outlet for the right, a political channel, does limit recruitment when compared to militant Islam,” says Skinner. The threat of political violence remains a fact of life in the West, but it is almost impossible to quantify as a risk. All we know is that terrorist attacks happen – unpredictably and infrequently – but when they do, they can destroy businesses, kill hundreds and destabilise the whole of society. SR
More than 99% of terrorist attacks in Europe between 2006 and 2009 were by non-Muslims
EUROPEAN RISK MANAGEMENT AWARDS
INTERCONTINENTAL HOTELLONDON
TUESDAY 8TH MAY 2012
ENTER TODAY
We’ve made it even easier for you to tell us
about your achievements.
1) CHOOSE A CATEGORY
Select from one of ten award categories
2) COMPLETE OUR REVISED ENTRY FORM
Visit www.strategicrisk.co.uk/srawards
and simply answer ten short questions.
These will make up your entry.
3) SUBMIT YOUR ENTRY
All entries must be received by Friday 3rd
February 2012
4) SEE IF YOU HAVE BEEN SHORTLISTED
Shortlisted fi nalists will be announced on
Friday 2nd March 2012. Remember a
representative from each fi nalist will be
invited to attend the awards ceremony free
of charge.
CALL FOR NOMINATIONS Do you know someone who you
think should apply for an award?
If so nominate them now at
www.strategicrisk.co.uk/srawards
For more information visit www.strategicrisk.co.uk/srawards or contact Katherine Ball on +44 (0)20 7618 3492 or email [email protected]
Have you done something exceptional in 2011? If so, you could be a winner in the ninth annual StrategicRISK Awards.
Being shortlisted or winning a StrategicRISK Award is a fantastic opportunity to raise the profi le of your work. It can also help you to raise the awareness of risk management within your organisation and boost team morale.
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www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 35
Governance [ ETHICS ][ COMPLIANCE ][ REPORTING ]
‘The tone set at the top was a corporate culture in which bribery was tolerated and even rewarded at the highest levels’SEC’s Linda Thomsen on Siemens’ record-breaking fi ne
R ISK MANAGEMENT AND INSURANCE INTERMEDIARY Willis’s fi ne late last month of £6.89m (€7.9m), over failings
in its anti-bribery and corruption systems and controls, represents the biggest fi ne imposed by the FSA in relation to fi nancial crime systems. Willis allegedly made payments of £27m to overseas third parties that assisted it in winning and retaining business from overseas clients, particularly in high-risk jurisdictions.
Even while the FSA investigation was under way, Willis identifi ed as suspicious several payments totalling $227,000 (€165,000), which it made to two overseas third parties in respect of business carried out in Egypt and Russia. These were reported to the Serious Organised Crime Agency (SOCA).
SOCA acting director of enforcement and fi nancial crime Tracey McDermott makes clear what is at stake for companies: “The action we have taken against Willis shows that we believe it is vital for fi rms not only to put in place appropriate anti-bribery and corruption systems and controls, but also to ensure that those systems and controls are adequately implemented and monitored.”
Anyone thinking of taking her words with a pinch of salt need look no further than these top fi nes extracted from companies – mainly by US authorities – which make Willis’s appear mild. SR »
‘BONNY ISLAND’ SCANDAL Involving high-level
bribery of Nigerian offi cials in connection with a massive
liquefi ed natural gas plant, this case snagged two of the
all-time big-fi ve fi nes. The bribes were paid to well-placed
offi cials in the Nigerian government from 1995 until 2004
and resulted in contracts – valued at more than $6bn
(€4.3bn) – to build liquefi ed natural gas facilities on Bonny Island, Nigeria.
Last year the US Securities and Exchange Commission (SEC) charged Italian
company ENI and its former Dutch subsidiary Snamprogetti Netherlands
with implication in the scheme, which included deliveries of cash-fi lled
briefcases and vehicles to Nigerian government offi cials to win deals.
Snamprogetti and ENI jointly paid €91m to settle the SEC’s charges,
with Snamprogetti paying an additional €175m penalty to settle separate
criminal proceedings brought by the US Department of Justice. The €266m
paid by ENI and Snamprogetti brought the total sanctions against the
companies involved in the scheme to more than €933m (see KBR, overleaf).
“This elaborate bribery scheme featured sham intermediaries, Swiss
bank accounts, and carloads of cash as everyone involved made a concerted
eff ort to cover their tracks,” says the SEC’s Division of Enforcement director,
Robert Khuzami. “But the sanctions paid by these companies show that
ultimately, there is no hiding or profi ting from bribery.”
The ‘it couldn’t happen to us’ assumption is a dangerous one to make, as these case studies of corruption clampdowns across the world prove
GOVERNANCE [ ETHICS ][ COMPLIANCE ][ REPORTING ]
36 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
»BAE SYSTEMS Admitting guilt in February 2010 to
criminal charges, the aerospace specialist paid one of the
largest ever fi nes over alleged corporate bribery a� er
striking a deal to end transatlantic corruption probes that
entangled it for years. The deal cost the group almost
$450m (€332m) – the bulk of it in the USA. But it stopped
the company from being barred from government defence contracts in the
USA and elsewhere that underpin its business. The deal immediately
sparked debate over whether BAE had got off lightly a� er eight years of
investigation in London and Washington.
Under the settlement – the fi rst co-ordinated transatlantic deal in a
corporate bribery case – BAE agreed to pay a €292m fi ne in the USA and
pleaded guilty to one charge of conspiring to make false statements to the
government in connection with regulatory fi lings and undertakings.
In Britain, the company paid £30m (€34.5m) and pleaded guilty to a
minor accounting off ence. While the UK settlement involved admissions of
wrongdoing only in relation to the company’s sale of a radar system to
Tanzania, the broader US deal covered central Europe as well as the
company’s huge and controversial Saudi Arabian arms sales.
KELLOGG, BROWN AND ROOT In February 2009, the
US Department of Justice fi ned Kellogg, Brown and Root
(KBR) – a former subsidiary of the Halliburton
Corporation – a total of €420m for its involvement in a
decade-long scheme to bribe government offi cials in
Nigeria in exchange for construction contracts on Bonny
Island. The fi ne, imposed following fi ve years of multi-jurisdictional
investigations, was the largest ever for a US company under the Foreign
Corrupt Practices Act. The act forbids the bribing of foreign government
offi cials to obtain or retain business overseas.
KBR entered guilty pleas to a fi ve-count criminal information in the
federal court in Houston, Texas, and agreed to pay €292m in criminal fi nes.
(KBR Inc and Halliburton jointly agreed to pay €128m in forfeited profi ts to
the US Securities and Exchange Commission in a concurrent civil action
without admitting wrongdoing.)
The plea was the partial culmination of no less than fi ve international
investigations, including French, American, Swiss, Nigerian and British
authorities, which had spent years unravelling what happened behind the
scenes of one of the most expensive construction projects in African history.
‘KBR’s guilty plea was the partial culmination of no less than fi ve international investigations, including French, American, Swiss, Nigerian and British authorities’
‘The deal immediately sparked debate over whether BAE had got off lightly after eight years of investigation in London and Washington. Under the settlement, BAE agreed to pay a $400m fi ne in the USA and pleaded guilty to one charge of conspiring to make false statements’
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 37
‘The scope of the bribery scheme was astonishing, and the tone set at the top at Siemens was a corporate culture in which bribery was tolerated and even rewarded at the highest levels’
THALES In June last year French state and defence
electronics group Thales was hit with a record fi ne of
€630m for bribes in the 1991 sale of frigates to Taiwan.
French defence minister Gérard Longuet said the
government had agreed with Thales that the decision,
which upheld a lower court’s ruling, should not be
appealed. He explained at the time: “There won’t be an appeal at the
request of Thales, which considers that it would not be good publicity
for it.”
France’s conservative prime minister, François Fillon, pinned the blame
for the case on the socialist government of former president François
Mitterand. The case centred on allegations that bribes were paid to secure a
deal to sell the Taiwanese navy six Lafayette-class frigates built by French
industrial group Thomson-CSF – which has since become Thales – and the
state-owned naval shipyard DCN.
The Paris Appeals Court confi rmed the 2010 decision of an arbitration
court, imposing a fi ne of more than €435m, to be paid to the Taiwanese state.
The cost of interest raised the total to €630m, making it the biggest ever in a
French corruption case. The French state’s share of the fi ne was €460m, with
Thales picking up €170m.
SIEMENS The German engineering group agreed to pay
fi nes from the US and German authorities amounting to
€1.2bn in December 2008 – the largest such penalty in
bribery history. The US Justice Department fi ned the
company and its subsidiaries in Argentina, Bangladesh
and Venezuela €326m for violations of the US Foreign
Corrupt Practices Act, while the parent company agreed to further fi nes of
€253m to settle charges laid by the US Securities and Exchange Commission.
Siemens also paid a total in fi nes of about €619m to the Offi ce of the
Prosecutor General in Munich.
“For much of its operations across the globe, bribery was nothing less
than standard operating procedure for Siemens,” says acting assistant
attorney-general Matthew Friedrich. Transactions on which Siemens paid
bribes included the construction of metro transit lines in Venezuela; metro
trains and signalling devices in China; power plants in Israel; mobile phone
networks in Bangladesh; telecommunications projects in Nigeria; ID cards in
Argentina; medical devices in Vietnam, China and Russia; traffi c control
systems in Russia; refi neries in Mexico; and mobile networks in Vietnam.
Siemens also paid kickbacks to Iraqi ministries in connection with sales
of power stations and equipment to Iraq under the United Nations Oil for
Food Programme. The SEC’s Linda Thomsen notes: “The scope of the bribery
scheme was astonishing, and the tone set at the top at Siemens was a
corporate culture in which bribery was tolerated and even rewarded at
the highest levels.”
‘The case centred on allegations that bribes were paid to win a deal to sell the Taiwanese navy six Lafayette-class frigates built by French industrial group Thomson-CSF – now Thales – and the state-owned naval shipyard DCN’
GOVERNANCE [ ETHICS ][ COMPLIANCE ][ REPORTING ]
38 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
ANTISOCIAL BEHAVIOUR
Pressure pointsLarge European multinationals are an integral part of the fabric of society and the growth of civil unrest, swiftly and unpredictably mobilised by new technology, is showing companies the danger of being seen as ‘bad citizens’ in struggling economies
E VENTS IN NORTH AFRICA AND THE MIDDLE EAST have made European companies very conscious of the wider
dangers of civil unrest when it evolves into political turmoil and even ferments revolution. They also recognise, perhaps as never before, the power of mobile and internet communications in mobilising and organising protest.
This is our assessment of the views of 30 leading European risk managers interviewed earlier this year for the StrategicRISK Report 2011, sponsored by Marsh.
According to our research, European corporations recognise that today’s technology gives discontented stakeholders far greater ability than ever before to co-ordinate activism that may have an impact in terms of business continuity, asset damage and loss of reputation. For some companies, eff orts to mitigate this may be hampered by political, economic and other considerations, over which their control is limited.
“Our security people are starting to think about social networking, instant messaging and the like,” one of the risk managers we interviewed disclosed. “Each of these, by their nature, allows people to organise themselves rapidly in a highly unplanned, unstructured way.”
The need to balance societal and economic risks is seen as a particular challenge by some companies that have embraced globalisation by choice or necessity. While it may make sound political or economic sense to move the global location of certain services or facilities, the impact on local communities may be severe.
As another risk manager put it: “Cities have grown up around our plants. If we decide that a plant is not doing well and it makes no sense to keep it running, that has a direct social impact, which can lead to strikes and unrest.”
Some risk managers stressed the need for good citizenship when expanding globally. As well as reducing the likelihood of civil unrest, this can also ensure the ability to obtain a good quality workforce.
According to one of them: “Enlightened companies recognise that their future is tied up with the communities in which they operate and in which their suppliers and customers operate. They need to look after these communities.”
The perceived behaviour of a business and/or of its senior executives can make that business the focus of attention for demonstrators and adverse internet comment. Bearing in mind
that it is diffi cult for risk managers to dictate how their senior executives conduct themselves, those risk managers raising this point felt that all they could do was to mitigate the impact and put in place appropriate security against possible activism.
“Media statements might not actually help. There is a danger that activists will see what is going on in other countries and may take more direct action against your business,” explained a risk manager responding to StrategicRISK’s enquiries.
The problem of action by demonstrators across multiple locations was raised by several companies. They look to robust, regularly tested business continuity planning to mitigate the eff ects.
“We look at the extent to which things can happen in several places at once. For example, if a pressure group takes a dislike to you, they might not just protest outside your offi ce but take action at several locations,” was one risk manager’s view.
Current economic pressures are one of the key causes of civil unrest. But some companies predict an equally adverse reaction, including industrial disputes and strikes, when economies start to recover, if that recovery is not accompanied by increased jobs and wages.
“When the economy is bad, people expect to suff er fi nancially. When it restarts, they want to get their share of
the cake and return to what was normal before. Trade unions will become more active, asking for more wages and greater employment, so strikes could stifl e the restart,” explained a risk manager anonymously.
Some risk managers were concerned about the eff ects of recession on young people unable to fi nd work, as well as the restrictions on the buying power of older people on fi xed incomes who would traditionally be expected to make luxury purchases such as travel. And clearly the fact that people are living longer has an impact on the cost of pension payments.
As one risk manager put it: “The diffi culty that young people have in fi nding work can leave a psychological scar that has a long-term impact and may lead to risk aversion later on in life.”
MigrationSeveral other companies saw immigration as an issue. Concerns related to the potentially important impact in terms of social
Key points
01: Discontented
stakeholders have
far greater ability to
co-ordinate activism
through technology
02: Multinationals need
to pursue good
corporate citizenship
when they expand
globally
03: Immigration is an
issue for many
companies,
particularly the need
to provide specifi c
services for the
new citizens
04: Companies consider
the risk to employees
travelling abroad to
be underestimated
‘Cities have grown up around our plants. If we decide that it makes no sense to keep a plant running, that has a direct social impact which can lead to strikes and unrest’European risk manager
38_39_Govern_SROct11.indd 38 16/09/2011 16:13
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 39
Unrest: Egyptian anti-government
demonstrators face pro-regime
opponents in Cairo’s Tahrir Square
instability and the need to provide specifi c services to cater for the new citizens.
Even those companies that perceive the volume of immigrants as providing an opportunity for selling additional services were cautious regarding credit risks and fi delity issues. This suggests a generally low perception of immigrants’ social standing and behaviour.
Protecting business travellersMany European companies place a great deal of emphasis on protecting their employees while they are travelling abroad on business, and consider that this area is a largely underestimated risk.
Making sure that people travel safely and understand what to do if things go wrong in potentially hazardous political areas is a key ethical concern for most companies. It goes beyond dangers relating to crime or terrorism to address the basics of safe travel.
“Motor accidents are probably one of the most likely risks for our people abroad. We provide a specifi c website to give assistance and advice to limit the risk. We also provide a contact point to ensure speedy reaction and help should one of our business travellers have a problem,” explained a risk manager.
PandemicsIn related fi ndings, European companies regard pandemics as a risk but perhaps not as great a concern as they were in 2010. All companies acknowledge that they have a moral responsibility to safeguard the integrity of their business and this includes the safety of their employees.
They also acknowledge that pandemics could have serious aff ects on their business in terms of employees, suppliers, restricted travel, and so on, and could therefore represent a serious problem. However, this seems to be an ongoing concern rather than an immediate major risk.
“We are prepared for the eff ects of a pandemic but do not see this happening in the next year,” said a risk manager. SR
ST
RIN
GE
R/A
FP
/Ge
tty
Ima
ge
s
• CIVIL UNREST• BUSINESS TRAVEL THREATS• DEMOGRAPHIC CHALLENGES• PANDEMICS• MIGRATION
Source: StrategicRISK Report 2011
RISK REPORT
Top societal risk issues
SPONSORED BY
Report 2011 www.strategic-risk.eu
[ May 2011 ]
Against all oddsFrom North African wars to cyber crime
and recession-fuelled unrest on the streets of Europe, this report explores the top concerns of European risk managers
To download a copy of the
StrategicRISK Report 2011
at goo.gl/EIhWS
Special Report
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 41
INTRODUCTION
SPONSORED BY
This special report has been produced with input from:
Qatar Financial Centre Authority
I N PREVIOUS REPORTS THIS YEAR, STRATEGICRISK HAS LOOKED AT companies’ considerations when establishing a captive insurance company
and surveyed a selected group of risk managers and others involved in captives.This report goes a step further, outlining some of the day-to-day issues
that can arise with operating a captive. Some of these – particularly the administrative functions such as issuing and monitoring policies and premium invoices, maintaining the captive’s fi nancial and operational records, and completing and fi ling premium tax returns – can, it is hoped, be left safely to the appointed captive management company. In addition, a good management company will advise on any relevant changes in the captive domicile’s regime and generally contribute expertise when it comes to meeting the parent company’s objectives.
However, risk managers need to take control of strategic decisions. A key issue can be which coverages to pass to the captive rather than insure in the conventional third party market. Traditionally, risk managers have used captives to cover the risks that insurers were reluctant to consider – or charged very high premiums for. These risks tend to evolve with time. For example, some time ago insurers were reluctant to cover the costs of product recalls. Companies that considered themselves vulnerable to this risk would pass it on to their captives. Now insuring product recall cover is probably not such an issue for most businesses, although particularly exposed companies – for example, those in the food and drink and pharmaceutical sectors – may still consider that they will get a better deal by using their captive to cover the primary loss.
Employment practices liability is another example where companies may feel that they can arrange cover more cost eff ectively through their captive, particularly if they don’t have a very good loss history in this area. This is a liability that to date has probably most aff ected US and UK companies but there is no doubt that increasingly claims will spread to continental Europe.
More recently, a trend has emerged for wrapping employee benefi ts cover within the captive’s remit. Spearheaded in the US, this trend is now extending to European captives. Risk managers with multinational insurance programmes also need to consider how they can use their captive to smooth some of the diff erences in approach that can exist between the parent and its subsidiaries.
Contents
[ CAPTIVE MANAGEMENT ]
46 Mapping management
Who’s looking a� er your captive?
47 Tightening up on tax
Captive tax rules and considerations
48 What do you cover?
Captives can insure ‘virtually anything’
Finally, this report looks at the knotty problem of captives and taxation. In years gone by some companies seized upon captive formation as a way of avoiding or minimising tax. Those days are largely gone, but sadly fi scal regulators have long memories.
Captives – and their domiciles – are exposed to considerable scrutiny, as demonstrated by this year’s (successful) challenge to Liechtenstein’s tax regime. Captives can produce some taxation benefi ts but this aspect is something that their parent organisations need to keep a close eye on. SR
SPECIAL REPORT [ CAPTIVE MANAGEMENT ]
42 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
A N ORGANISATION THAT HAS a captive will also have appointed a
management company located in that captive’s domicile to handle the day-to-day running of the business. But, as with any subsidiary – which is after all what a captive is – that’s not the end of the story. The parent company’s risk manager will often be responsible for control and strategic management, and other people within the organisation need to get involved as well.
Having said that, local managers can contribute a lot at the early stage, particularly in the way of ascertaining future objectives for the captive and advising risk managers on opportunities to achieve these. As Kane USA managing director Elizabeth Steinman says, a good manager handles much more than just the book-keeping aspects of running an alternative risk insurance vehicle.
This can be particularly useful for risk managers who have not yet selected their captive’s domicile. “An eff ective captive manager will analyse the specifi c risk profi le of a client and advise on the best way forward, without being bound by a particular domicile or structure. While providing access to a network of insurance and reinsurance companies, the decision of how much cover is purchased by a captive and where it buys its cover is totally impartial. It is based purely on getting the best coverage at the best price,” says Steinman.
While captive management companies should off er a full breadth of service in the day-to-day running of a captive, Steinman believes it is important to choose an independent manager with service packages that are unbundled so that a client can decide how much involvement they wish to have. This will help them to better manage their costs while continuing to work with other valued service providers, she says.
For some risk managers an important element of a captive is the support it can provide for a multinational insurance
DAY TO DAY
Mapping managementWhile local managers contribute a great deal to the running of a captive, specialist captive management companies can ensure all bases are covered
the risk in the excess layer and receives the premium to fund this layer from the French division’s policy. The French unit is happy, and the overall corporate insurance programme costs are minimised because fewer premium dollars are transferred to an outside insurer.
Direction on how the captive can meet the parent company’s needs in these types of situations has to come from the risk manager so that the captive can fulfi l its primary role as a facilitator and cost-saving vehicle.
It is not just the risk manager who will be involved in the running of the captive. Jardine Lloyd Thompson Insurance Management (JLTIM) cites the case of a client that had recently reactivated its captive to better manage and fi nance its risk.
It says both the client’s risk management department and JLTIM recognised that internal education and familiarisation for the various departments of the parent corporation would be needed to ensure the captive functioned properly.
Initiatives included extensive technical briefi ngs for accounting staff – particularly on issues relating to insurance company loss reserves (including incurred but not reported, or IBNR) – and the establishment of committees on the captive board, with invitations for key people to serve on them, giving them a greater sense of ownership in the captive. SR
programme. In an article on Captive.com, Nathan Shpritz and Alison Calder of Liberty Mutual Group explain: “Multifaceted companies with diverse operating units may encounter an interesting dilemma – the parent organisation has the risk appetite and wherewithal to maintain high retentions, but the operating units prefer lower retentions to limit the fi nancial impact of large losses. A captive can be quite eff ective in this situation. The captive itself takes a high retention and sells lower retention policies to its insureds – the local operating units.”
They give the following example. A French division wishes to have only a $25,000 general liability deductible but the US parent has a $1m per occurrence risk appetite. The French division purchases a $25,000 deductible policy from the captive, which then aggregates worldwide general liability exposures into a single excess contract with a $1m retention with the reinsurer of its choice. The captive retains
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 43
TAX MATTERS captives’ parent companies. Where this is not the case, the possibility of deferring tax through the use of a captive still does exist. This could lead to some misuse of the captive where excessive premiums are charged and profi ts artifi cially infl ated,” it says.
CFC laws are common to most OECD member states. There have been recent revisions – for example, in Italy and Spain – but the key aim of preventing tax evasion remains.
Off shore domiciles are generally free to set their own direct tax rules. Domiciles in the EU must apply the relevant EU directives when it comes to governing captives but can charge diff ering taxation rates.
This is not to say that everything in the captive taxation garden is rosy. This year the tiny principality of Liechtenstein, the domicile for some European continental captives, fell foul of the regulators.
While not a member of the EU, Liechtenstein is a member state of the European Free Trade Association (EFTA) which, with the EU, comprises the European Economic Area (EEA). Its reputation as a low-tax haven has in the past attracted the interest of the OECD and national governments, with pressure to improve its fi nancial regulations and apply greater banking transparency.
The latest challenge came from EFTA, which last year concluded that tax
Tightening up on taxThe days when having a captive could produce some signifi cant tax benefi ts for its parent company have largely disappeared. But fi scal authorities are still prepared to challenge where they feel a captive is providing an unfair advantage
T HE INTERNATIONAL ASSOCIATION of Insurance Supervisors’ issues paper
on the regulation and supervision of captive insurance companies sums up the current situation. “Although tax minimisation may have been an early driver for captive formations, many tax authorities have now largely eliminated tax minimisation advantages through CFC [controlled foreign companies] tax legislation that consolidates the profi ts of captives with those of the
exemptions available to certain types of companies under the Liechtenstein Tax Act were incompatible with the EEA agreement. It also ordered that aid granted to captive insurance companies should be recovered.
The Liechtenstein Tax Act exempts captive insurance companies from payment of corporate income and coupon tax, and provides that they pay only half the rate of capital tax applicable to other companies. The authority concluded that such favourable treatment provided the companies with an advantage that was unavailable to other companies in a similar position. Liechtenstein – later joined by two captives registered in the principality, Reassur Aktiengesellschaft and Swisscom Re – disputed the decision.
Judgment was given by the EFTA court this year in favour of the surveillance authority. Subsequently, Liechtenstein’s government pointed out that its new law pertaining to the taxation of captives, which entered into force in 2011, is in accordance with the EEA agreement so the judgment has no bearing on the current tax situation in the principality.
The case illustrates the need for captive owners to keep a careful eye on tax issues. KPMG’s 2010 Captive Insurance Benchmark study, Negotiating the Captive Insurance Terrain, acknowledges that over the years there have been a number of challenges to the accounting treatment of captives as insurance companies. But it reports that more than 90% of the study’s respondents indicated that the level of coordination between the risk management and tax departments addressing captive-related issues was either moderate or high.
“The majority (more than 80%) of respondents indicated they hold periodic meetings with the tax department to coordinate captive issues,” says the report.
The study also shows that risk managers may see a need to increase the tax department’s comfort level regarding its position on the tax treatment of captives. Sixty per cent endeavoured to do this with strategies that included:
• Citing rulings• Citing case law• Citing examples of other captives• Obtaining outside professional
consultation. SR
MOST OECD MEMBER STATES HAVE CFC LAWS.
As an example, UK provisions are summarised below.
• A UK company that has a relevant interest (25% or
more) in a captive insurer is subject to the same CFC
rules as any other UK company. Unless the CFC meets
the requirements of the excluded countries list and the
exempt activities test, and passes the motive test, its
profi ts will have to be apportioned to the UK company.
• To fall within the defi nition of a CFC a company must be
subject to a lower level of taxation. Applying this
standard may require particular care in the case of
general insurance companies because of the potential
for signifi cant diff erences between provisioning and
loss equalisation rules that apply in diff erent territories,
and the possible application of funded (non-annual)
accounting.
• Tax paid by ‘international companies’ in certain off shore
fi nancial centres is treated as tax for comparison purposes.
• While captives are unlikely to benefi t from the excluded
countries list, they may pass the exempt activities test.
All companies carrying on exempt activities must
occupy premises in the domicile and the business
aff airs must be eff ectively managed there and this
requires a suitable staffi ng presence.
• As an insurance company falls within the defi nition
of a wholesale, distributive or fi nancial trader, the
test cannot be passed where more than 50% of
commissions or net (of reinsurance) premiums are
derived directly or indirectly from connected or
associated persons, or from persons with at least
a 10% interest in the company, and which are
attributable directly or indirectly to the liability of
an associate.
• Premiums paid via a fronting company will be treated
as from an associate, so long as the insured liability is
that of an associate. A captive wishing to benefi t from
this test must therefore insure the liability of third
parties. This is most commonly encountered in warranty
insurance and creditor insurance arrangements.
UK RULES ON CAPTIVES AS CONTROLLED FOREIGN COMPANIES (CFCs)
DOWNLOAD StrategicRISK 2011 Captive guide
StrategicRISK surveyed 100 risk managers to discover the factors
that infl uence captive formation and location. Download the
44 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
RISK COVERS
T HERE IS GROWING INTEREST IN expanding the range of coverages
placed in captives.“When over two hundred years ago
some sugar refi ners found that they could not get fi re insurance cover on reasonable terms, they formed the fi rst recorded captive insurance company. Today, many businesses again have increasing diffi culty getting insurance cover on reasonable terms. This problem is compounded by the incalculable potential for loss arising from environmental damage and the increasing expectation of people to be fully compensated for adversity.” So says GRM Consulting, discussing the potential value of forming a captive insurance company.
Despite the extended ‘soft’ insurance market, risk managers still see captives as a useful vehicle for insuring risks that may be less easily or cost-eff ectively placed elsewhere. The survey, conducted for StrategicRISK’s September report – Captives 2011 Going Places – showed that lack of commercial market coverage for specifi c perils/exposures was a factor in the decision to form a captive cited by 44% of the respondents. According to the Kane Group, captives allow risk-savvy parent companies to secure a depth of coverage often not available in the general insurance market, help reduce overall insurance spend and reward companies with superior loss records.
KPMG’s 2010 Captive Insurance Benchmark study, Negotiating the Captive Insurance Terrain, shows that internationally the most common coverages written in captives were property,
employers’ liability/workers’ compensation, general and other liability and motor liability (see chart). Some respondents indicated that they also write crop, deductible buy-down, employee personal lines, fi rst- and third-party asbestos and terrorism insurance in their captives.
Leading considerations on whether or not to place coverages in the captive included:
• Cost of transferring the risk to third-party insurers relative to retaining the risk
• Availability of coverage in the third-party market
• Access to the reinsurance marketplace.
According to the study, some companies annually re-evaluate aff ordability and availability of third-party insurance. Others simply retain as much risk as the company has an appetite for as part of an overall enterprise risk evaluation.
The risks that companies place with their captives are likely to expand. Richard Klumpp, president and chief executive at Wilmington Trust SP Services, now part of the US M&T Bank, says a captive provides ultimate fl exibility in the types of risks it can insure. “Basically, the sky is the limit,” he says. “If structured and fi nanced adequately, virtually anything that makes good business sense is likely be approved and insured by a captive’s domicile regulators.”
The fact remains that most captives are still used to insure standard property and casualty risks, although large captive owners have started to include certain employee benefi t risks such as group life, long-term disability, and medical stop-loss. “Many believe that captives will soon be used to also insure pension and post-retirement benefi ts,” say Klumpp.
BWCI group chief executive Stephen Ainsworth and partner and head of insurance consultancy services Ian Morris agree with Klumpp’s view that employee benefi ts coverages are likely to become a more common inclusion in captives. “While the use of captives and protected cell captives for employee benefi ts business is comparatively new, there is considerable interest and activity in both Europe and the USA,” they say.
“The risks that can be insured by captives are limited only by the needs of the
What do you cover?Most captives are used to insure standard property and casualty risks, but if structured and fi nanced properly, almost anything can be covered
WORKERS’ COMPENSATION CASE STUDY
THE PARENT COMPANY PROVIDES
professional employment organisation (PEO)
services to small- to middle-market employers
throughout the USA. Its services allow
employers to outsource human resource
operations including payroll, benefi ts,
compliance and workers’ compensation.
The company administers $45m of payroll
on an annual basis.
Premium: $4.6m – workers’ compensation
Losses: $900,000 – average per year
ANALYSIS: To reduce cost on its $4,600,000
workers’ comp premium, the company
entered into a high deductible plan where it
took the fi rst $250,000 of each claim. This
resulted in a lower premium, but the carrier
required it to post a large amount of
collateral. Over a three-year period the
company had more than $2.5m of letters of
credit and cash collateral posted with the
carrier. The insurance company was reluctant to
release these funds.
Risk Management Advisors recommended
the client form a captive, pay the premium to
its own insurance company and purchase
reinsurance to cover any catastrophic claims.
RESULT: Instead of paying large premiums or
losing control of a signifi cant amount of cash
and credit with traditional carriers, the client
was able control the money in its own
insurance company.
Premium $4,600,000
Fronting 7% $(322,000)
Premium ceded
to captive $4,278,000
Reinsurance 23% $(983,940)
Captive loss fund $3,294,060
Average annual
losses $(900,000)
Captive profi t/
owner savings $2,394,060
Source: Risk Management Advisors
captive owner, who can choose from a variety of legal structures available within particular domiciles. For these reasons, it is imperative to thoroughly investigate structural and domicile options prior to captive formation,” Klumpp adds. SR
Theory & Practice [ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]
www.strategic-risk.eu [ OCTOBER 2011 ] StrategicRISK 45
INCREASING LEGISLATIVE
requirements, growing volatility in
energy prices and a tough economic climate
have all contributed to making energy more
of a top-level concern over the past few years.
In fact, the 2011 npower Business Energy
Index (nBEI) – an annual report tracking
business opinion on energy use – revealed
that major energy users rank energy as the
top business risk they face. It was placed
higher than health and safety, credit and
security in terms of risk.
While this is not necessarily a new
concern – the issue of energy risk was
identifi ed as a signifi cant business concern
in 2010’s index – it is a growing one.
At the end of last year, npower
commissioned the London School of
Economics to produce a white paper Energy
Risk Management for UK Business. This
provided a comprehensive guide to current
energy risks and forecast how they will
grow in the future.
The report identifi ed specifi c energy
risks and, combined with feedback from
businesses, the following areas are seen as
fundamental elements of energy risk:
• Credit risks – a good credit rating
is typically a requirement of any
energy contract
• Increasing regulatory and technological
complexity
• New price and reputation risks from
carbon regulation, such as the Carbon
Reduction Commitment Energy
Effi ciency Scheme (CRC) in the UK or
the EU Emissions Trading Scheme and
• A continued upward trend and
increased volatility in energy prices.
There are steps organisations can take
to minimise their exposure to energy risk:
1 DEVELOP AN INTEGRATED
STRATEGY
Businesses need to develop an integrated
strategy bringing together the
management of energy consumption and
energy procurement. This will be a step
change for many, but it is crucial that the
diff erent people and departments
responsible for energy work in a
collaborative manner. It is also crucial that
the strategy that is developed has
board-level buy-in.
2 PUT ENERGY ON THE
BOARD’S AGENDA
Energy needs to be a board-level
consideration. In this year’s nBEI, only 14%
of organisations said they had someone
responsible for energy purchasing sitting
at board level. With so much risk attached
to energy purchasing, it is an area that
businesses should look to address to
ensure the right level of focus is being
given to the issue, and that it is at the
heart of all operational decisions.
3 IMPLEMENT AN EFFECTIVE
ENERGY MANAGEMENT STRATEGY
The starting point of any energy
management journey is data. Only with
STRATEGY
Keeping the lights onEnergy risk is a growing concern in a world where resources
are becoming increasingly scarce, but mitigating this risk
now off ers a wealth of additional benefi ts
accurate data that shows where and how
energy is being used, can the necessary
measures be put in place to reduce
consumption.
With more than a fi � h (22%) of
businesses stating they have not reduced
their organisation’s energy consumption at
all in the past 12 months in 2011’s nBEI, it
is clear there is signifi cant room for
improvement. By reducing energy
consumption, companies can decrease
their exposure to the reputational and
fi nancial risks associated with energy.
4 INVESTIGATE THE
OPPORTUNITIES AFFORDED BY
SELF-GENERATION AND DEMAND
MANAGEMENT TECHNOLOGY
This year’s nBEI revealed that 39% of
major energy users and 61% of small to
medium-sized enterprises do not have any
self-generation capability. This means not
only are they missing out on back-up
generation capabilities and reputational
benefi ts, but potential revenue streams.
Only 15% use self-generation to sell back
electricity to the National Grid and just 11%
said they would participate in the National
Grid’s STOR (Short Term Operating Reserve)
scheme. For major energy users in
particular, there is the chance to generate
signifi cant revenues by selling back to the
grid during times of high demand.
Added to this, as demand on the grid
starts to become a major issue, large energy
users in particular will need to assess new
ways to manage their energy more
intelligently, whether through self-
generation technology or demand
management tools.
5 UTILISE ENERGY MANAGEMENT
SERVICES AND PRODUCTS
Organisations can help reduce their
exposure to energy risk by taking advantage
of the energy management services and
products off ered by the market. For example,
smart meters capture crucial data on
energy use, which can then be analysed to
make decisions on energy effi ciency.
This data can be used with monitoring
and targeting so� ware to make it easier to
track energy consumption and reduction
targets, and show where savings are
being made. SR
Wayne Mitchell is industrial and commercial markets director at npower
THEORY & PRACTICE [ INSIGHT ][ CASE STUDIES ][ BEST PRACTICE ]
46 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
A RECENT SPATE OF INTERNAL FRAUD
cases has placed renewed emphasis on
recruitment and staff screening.
Since the global economic downturn
began, the threat of fraud by a company’s
own staff has been hinted as a likely result
of squeezed fi nances. Andrew James Ward’s
incarceration in August for expenses fraud
committed against his former employer
Aviva, and the jailing of former Barclays
Bank employee Wesley Gabriel in July for
selling confi dential account information,
are just two of the most recent examples of
the problem.
CIFAS, the UK’s fraud prevention
service, says internal fraud increased by
45% between 2009 and 2010 and there has
been evidence for many years supporting
the idea that staff in general seem to
disregard the importance of internal fraud.
For example, a study by Leicester
University in 2003 found that out of 2,000
people interviewed, 70% would commit
fraud against their employer if they
thought they could get away with it.
Insurers, banks and other fi nancial
institutions have to place more trust in
their staff than many other types of
business. In these environments,
individuals regularly handle very large
payments as premiums and claims are
reconciled through the books or customer
account data is accessed and changed.
So what factors should risk managers
consider when engaging in the human
resources battle against internal fraud?
1 KNOW YOUR EMPLOYEE
Pre- and post-employment screening
should become standard. Any falsehood on
a job application can aff ect a candidate’s
ability to fulfi l the role. Also, if a new
employee commits fraud or another
criminal act and it turns out that a
reference check could have stopped the
business from hiring that candidate, the
employer can be held liable.
2 BE TRANSPARENT
The company’s recruitment policy, job
advertisements and application form should
specify which pre-employment screening
checks will be carried out. You will also need
written permission from candidates to
contact their former employers. However,
irrespective of whether you have permission,
some employers only release a restricted
amount of information to negate their
potential liability in claims from former or
new employees. Restricted confi rmation is
better than nothing and at least you will
know whether the candidate actually
worked for their stated former employers.
Remember that unexplained gaps in an
employment history could also indicate
periods detained at Her Majesty’s pleasure.
3 BE APPROPRIATE
The level of employee screening should
always be established following a risk
assessment of the work environment and
EMPLOYEE FRAUD
Dig deeper in screening checks to fi ght fraudFinancial institutions are forced to trust their employees, yet 70% would
consider committing workplace fraud. Here are steps towards a counter-attack
the risks associated with the job in question.
A screening policy should be implemented
that should include post-employment
screening – both at periodic intervals and
when employees are promoted or
transferred to new roles.
4 DIG DEEP
In some instances it may be appropriate
to dig a little deeper and, for example, ask to
see proof of activity for each month of a
certain period. If there are periods of
non-employment it is wise to seek
appropriate documentation such as (in the
UK) Department for Work and Pensions
correspondence in relation to unemployment,
travel visas, fl ight tickets, card receipts,
written evidence on headed paper of
voluntary work, and so on.
Scrutinise educational and qualifi cation
certifi cates carefully. Don’t accept poor copies
and contact the issuing institutions to check
dates of study.
5 BE AWARE OF APPLICANTS’ RIGHTS
In certain environments such as
healthcare, criminal records checking is
considered to be proportionate due to the
potential risks involved but it is important
to have a policy in place that governs the
handling of disclosure information and the
recruitment of ex-off enders.
According to the UK’s Rehabilitation of
Off enders Act 1974, criminal convictions
should not automatically preclude
employment, and the discovery that an
employee has a previous conviction should
not automatically result in dismissal. All
candidates should be encouraged to
provide details of their criminal record at
an early stage in the application process
and they should be reassured that criminal
record disclosure information will only be
seen by those who need to see it as part of
the recruitment process.
For certain roles, such as senior
management and fi nance, it may be
appropriate to undertake a credit history
check and, again, confi dentiality
reassurances should be given. Staff
involved in recruitment should receive
adequate training in the screening process,
their legal obligations and how to interpret
and manage the results of these checks. SR
Jane Peters is head of operations for Avertis Risk Solutions
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S OURCING GLOBALLY CAN MAKE
fi nancial sense but may also present
unforeseen reputational and contingent
business interruption issues. And recent
research suggests that companies are
generally still poor at managing their
supply chains.
There is a growing trend among larger
companies to reduce manufacturing in-house
and outsource much of their production
operations. One of the main reasons for
sourcing goods and services overseas is cost,
says JLT partner Tim Cracknell. “Costs are
crucial, particularly if there’s not a lot of room
for manoeuvre in your own pricing and you
want to improve profi tability,” he explains.
If the cost is the plus factor, the
downside is reduced control over
production. “You can’t just drive down the
road and visit your supplier, so you have to
rely on site visits and surveys to check
capabilities and quality,” warns Cracknell.
“If the components concerned are
non-critical and low value, you might be
prepared to take some things on trust – for
example, that the supplier concerned is not
employing under-age workers.”
If suppliers breach the company’s code of
ethics there is the potential for reputational
damage, but the greatest risk companies face
is that circumstances may arise that aff ect
suppliers’ ability to deliver. These can occur
for a number of reasons. For example, with
recession and consequent fi nancial
pressures still continuing in some areas,
there may be the danger that a supplier will
go out of business, leaving its customers
high and dry.
Here are some pointers for how to
manage these risks:
1 IDENTIFY CRITICAL SUPPLIERS
Identify the supply chains and
suppliers most critical to the business.
Ideally, companies should understand the
risk profi le of their entire supply chain and
any particular vulnerabilities and risk
issues attached to individual suppliers,
advocates Cracknell. “You can then come up
with loss estimates. How long would it take
to bring production back on stream? What
stocks are available – and where in the
supply chain – to enable you to maintain
output? How long will these last?” he says.
2 REVIEW FINANCIAL INDICATORS
Consider current and historical
fi nancial data. Reliance on Z and O scores
(a measure used to summarise publicly
available information about the
STRATEGY
How to manage a global supply chainGlobal sourcing can be a cost-eff ective measure, but it does
present an array of potential risks that must be accounted for
probability of bankruptcy) and Dun &
Bradstreet reports do not go far enough to
predict fi nancial instability.
3 CONSIDER QUALITATIVE FACTORS
Analyse governance issues, business
continuity, leadership changes, litigation
and investigations. ChainLink’s 2011
Supply Chain Risk Survey found that some
companies were much more proactive than
others faced with the Japanese earthquake
earlier in 2011. “They swung into action
based on up-to-date and recently validated/
practised contingency plans they had in
place. Some of these fi rms set up a war
room within 30 minutes of the tsunami.”
4 LOOK AT PRIVATELY OWNED
SUPPLIERS
Take additional steps to obtain
quantitative and qualitative data on
private companies critical to your supply
chain. Supplier risk is frequently or always
part of the supplier selection process. And
most companies do not consider risk
beyond immediate suppliers.
5 FINALLY, CONSIDER PURCHASING
YOUR SUPPLIERS
Western companies seeking to preserve
profi t margins may put additional pricing
pressure on their suppliers. The result
can be that these suppliers are tempted
to cut corners, with implications for quality
and, once again, adherence to ethical
standards. If a critical supplier is in
fi nancial diffi culties, the ultimate solution
may be to purchase the company
concerned, says Cracknell. SR
[READ MORE ONLINE] For more practical help on managing global supply chain risk, download StrategicRISK’s Globalisation Report 2011 at goo.gl/JfTTQ
DOWNLOAD StrategicRISK’s supply chain risk best practice guide
Go online and download our practitioners’ guide to supply chain
risk management to develop your company’s approach at:
goo.gl/bv4TP
VIEWPOINTS [ PEOPLE ][ OPINION ][ COMMUNITY ]
48 StrategicRISK [ OCTOBER 2011 ] www.strategic-risk.eu
WHAT’S INSIDE YOUR HEAD?
HeadspacePirelli group risk manager Jorge Luzzi has an international career and a clear vision for risk management, but knows that those alone don’t make him a rich man
What are you thinking about right now?How we can develop our profession in the upcoming years. I believe that we are in a time of change in the profession, so we should be very active in participating in its future development.
What is your greatest fear?I’m worried about the global fi nancial crisis. We’re dealing with an ongoing crisis that started in 2008 and the business community needs to work very seriously to address this problem.
What was your most embarrassing moment?One time when I was in the USA, I had to give a business speech. Before the presentation I was with Italian colleagues, and when I actually got up to make the speech I proceeded to speak for a few
minutes in Italian. The people in the audience were very polite and let me continue speaking in a foreign language until I realised.
What is your most treasured possession?I don’t think that treasure is related to possessions, my treasure is my family and friends. Possessions are transient so they’re not really important in the long term. If you are rich but you don’t have love for your family and friends then you don’t have much at all.
What makes you happy?Spending time with my family and friends makes me happy. I think this is key for anyone who is looking to live a happy life and in modern times many people can forget this.
What makes you unhappy?Injustice. When I see people abusing power or privilege, that makes me mad.
Who is your greatest hero?Albert Schweitzer, Martin Luther King and Mahatma Gandhi. I picked three as it was diffi cult to choose just one. These people had the strength and integrity to stand up to established institutions and challenge ideas. They all managed to do something that was extraordinary; they dared to go ahead when everything was against them. This is the spirit that I like. I fi nd it to be very inspirational.
What’s the biggest risk you’ve ever taken?I was on a plane travelling from São Paulo in Brazil to Miami. While we were fl ying over the middle of the Amazon, the pilot said: “Prepare for landing, we are in Manaus in the Amazon.” At that point I was really terrifi ed. All we could hear on the plane was the pilot saying “prepare for impact” and I really thought that was going to be my last day on Earth. The plane landed without any engine power at about 3 o’clock in the morning in the middle of a valley, in the middle
of the Amazon; it was really terrifying.
What is the worst job you’ve ever done?I don’t know if this was really a job, but it felt like it. When I was at university I used
to host parties at my apartment. I really enjoyed them but the problem was that afterwards
it was up to me to clean the place up. Washing all the dirty dishes and cleaning up the apartment by myself,
that felt like my worst job.
What is your greatest achievement?I’ve helped to create or to develop several risk management associations in various countries and those are probably my greatest achievements.
What is the most important lesson you’ve learned?You have two ears to listen and just one mouth to speak. This is a way of saying that you shouldn’t always try to impose your opinion on someone else and that it’s so
important to listen to what other people have to say as this is how you learn.
Tell us a secret?I say to students who are studying risk management: “Trust me, the risk
management profession will give you a lot of opportunities.” Years ago, students in this fi eld often considered risk management to
be their last option, or some thought these students weren’t doing well in banking or
fi nance. That’s simply not true. I really think our profession is in a time of progression and
development and that’s what people need to realise. SR
‘If you are rich but you don’t have love for your family and friends then you don’t have much at all’
Jorge Luzzi is group risk manager at Pirelli and a Ferma board member
Illustration by Richard Phipps
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