Willis Calls Industry to Action on Black Swan Risks
London, United Kingdom, June 13, 2012 -The insurance
industry should move beyond traditional insurance solutions
and start thinking of new ways to protect companies against
the consequences of so-called Black Swan events, such as
the Gulf oil spill or last year's Japanese tsunami, said
Phil Ellis, CEO of Willis' Global Solutions Consulting
Group, part of Willis Group Holdings plc (NYSE: WSH), the
global insurance broker.
Speaking at a workshop at the Association of Insurance and
Risk Managers in Industry and Commerce (AIRMIC) conference
in Liverpool on Tuesday June 12, Ellis proposed several
innovative types of risk transfer solutions to help
companies recover from severe reversals of fortune.
Ninety-five percent of major companies have suffered at
least one extreme reversal of fortune in the last twenty
years, said Ellis. However, over a third of companies (36
percent) anonymously surveyed by Willis at AIRMIC said they
have no explicit protection, such as a cash cushion on
their balance sheets or insurance, against these events.
"Nineteen out of twenty companies have seen their specific
company reputation with investors plummet within a brief
period," continued Ellis, who hosted the workshop entitled
Corporate Catastrophes: Moving Risk and Insurance to a
Leadership Position with the Board. "For smaller companies,
the frequency is even higher."
Unfortunately, since most of the risks causing these
problems are so far uninsurable, risk managers are
increasingly being challenged by board-level management
about the value of insurance.
At times of crisis companies typically face a series of
problems, said Ellis. Firstly, liquidity becomes very
expensive and can dry up. "Banks tend to leave the arena
when they believe a company may be on the ropes."
Secondly, management can be placed in an unwanted
spotlight, which means many of these events initiate
management changes. Finally, corporate reputation tends to
suffer for two years on average after these shock events.
Ellis commented: "To meet these challenges a suitable
product would firstly have to pay immediately. Secondly,
the perils and root causes can't be predicted, so the
product should cover all risks - it must have no (or few)
exclusions. Third, protection has to be below a company's
cost of capital. It has to be inexpensive versus
alternatives. Fourth, very high limits are required ($1
billion or more). We believe products that have these
features are possible, based on our modelling of the
risks."
Other findings from the anonymous Willis survey included:
-
Boards consider Black Swan risks to be a low priority
with only five percent of respondents saying Boards pay
significant attention to them.
-
Thirty one percent of the respondents said their company
was vulnerable to a severe reversal of fortune.
-
Forty four percent said uninsurable perils are the
biggest cause of a severe reversal of fortune. Thirty
four percent said multiple causes or unexplained events
are the main cause.
-
By and large the survey respondents, more than half of
whom were risk managers, do not have a lot of faith in
existing risk transfer solutions. A majority (64 percent)
said that existing solutions provide inadequate
protection.
-
Nearly three quarters of the respondents (71 percent)
strongly agree that the insurance industry should provide
protection against these risks.
Willis Group Holdings plc is a leading global insurance
broker. Through its subsidiaries, Willis develops and
delivers professional insurance, reinsurance, risk
management, financial and human resource consulting and
actuarial services to corporations, public entities and
institutions around the world. Willis has more than 400
offices in nearly 120 countries, with a global team of
approximately 17,000 employees serving clients in virtually
every part of the world.www.willis.com.
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