Q&A: Taking a Broader Risk Perspective
For Bret Ahnell, executive vice president at FM Global, research and assessment are a critical two-way street for insurers and risk professionals. To that end, FM Global has dedicated significant effort to delving into the details of risk, from mapping the world’s floodplains to indexing nations’ supply chain resiliency. Their findings make pricing easier, but they also demand further attention from risk professionals. “The more they can understand their exposures, obviously, the more capacity we can make available,” he said. “But it’s not just a matter of how much, say, contingent time element extended capacity you can buy. It’s also whether insurance is the right mitigation strategy.”
Ahnell recently shared his insight on taking a broader perspective on risk exposure, the proper role of insurance in a risk management program and the outlook for the overall market itself.
RM: FM Global has begun to emphasize the idea of resiliency as a key focus for supply chains. What exactly does that mean?
Ahnell: What is causing the increase of losses that we are seeing in different parts of the world? That question creates a bit of a controversy: Is it climate change, or is it urbanization? People immediately look to climate change to explain why we’re having more flooding, for example. They tend to forget that these events have always occurred in certain parts of the world. The thing that’s changed is urbanization: We are expanding the global footprint and putting more economic assets at risk in parts of the world that are exposed to natural catastrophes, and bad things happen. Take the big floods in Thailand in 2011. People tend to forget that, 50 years before, that same area flooded. Nobody cared because there was nothing there other than rice fields and paddies. Now they’ve built huge industrial parks that are home to a lot of the world’s suppliers of hard disk drives. People should not have been surprised because it had happened before.
RM: How do you overcome the challenges of urbanization and the increase in risk exposure?
Ahnell: It’s a combination of knowing where you have assets and, more importantly, where your critical facilities are. If you have 1,000 facilities all over the globe, not all 1,000 are going to be critical to your business; some are going to be redundant. You need to understand which are the most critical and then understand what risks they’re exposed to. From there, it’s just following the risk management process: identifying, assessing and then mitigating the risk.
RM: What do you advise for that mitigation strategy?
Ahnell: What we don’t advise is simply looking at insurance as your sole solution, because that should be, quite frankly, the no-brainer—it’s the last thing you should be looking at. It might absolutely be the right thing to do, but there are all kinds of approaches: you can avoid the risk, although that certainly may not always make sense; you can transfer the risk through the insurance component—although, if you don’t understand the risk, you have no real idea if are you buying the right amount of capacity and buying it in the right areas; and ultimately, you can look to improve the risk. In a permanent situation, your best solution may be to invest capital to improve a facility. The goal should be to prevent the losses from occurring to begin with and then use insurance as a backstop.
RM: We don’t often hear insurers saying not to buy insurance.
Ahnell: If you lose that facility, insurance isn’t going to make it up—it’s not going to get your customers back, it’s not going to save your market share, it’s not going to save your reputation if you have fatalities. The majority of all loss is preventable, but things happen and, if you need insurance as a backstop, it’s there. But if your starting and ending points are just buying insurance, the bottom line is that’s not a sustainable position to be in. The market’s going to turn eventually, and that will get very costly. Further, if that is all you’re doing, you’re probably looking at insurance as a commodity, and our view is that there has to be more to it.
RM: Taking a step back, what do you think of current market conditions?
Ahnell: It is really not a bad market: people are making money, disciplined buyers are getting good rates, and the capacity is there. If it continues as it currently is, it would not be a bad place to stay. We can sustain in a market like this.
RM: Do you think that will change much in the next year?
Ahnell: I don’t see the market hardening at all—there is too much capital out there. But there are very good signs. We’re now two years post-Sandy and still going strong when we could have had a free-for-all after a disaster like that. Right now, I think there is a greater chance of the market softening than hardening. A major global event could change that, though. What can happen has and will happen—it’s a matter of time. It’s important now to focus on making things more sustainable and putting the emphasis and resources on protecting and fortifying.
RM: Will these conditions have an impact on any specific areas?
Ahnell: The current market conditions will impact reinsurance and alternative capital a lot. In the period that it has been rising so dramatically, alternative capital has not yet faced a major catastrophe event. If one occurs, it will impact that industry tremendously and could trickle down to impact the rest of the market. If we do see a major catastrophe, a lot of that money may go elsewhere. It’s a difficult time for reinsurance. Alternative capital is not sustainable at the current level of interest. Some of it will remain, but some of it is very opportunistic—it will go where the best returns will be. There is no loyalty in the alternative capital field in the way the reinsurance industry has built long-term relationships and profit models.