The Business of Risk

by
Rick Hudson
Group Director, Underwriting & Claims
Royal & SunAlliance

Insurance and the insurance industry are very much in the spotlight following the tragic events of 11 September in the USA. Unfortunately, insurance can never hope to take away the pain and suffering caused by such awful human tragedies, but it can at least lessen the financial impact on families and businesses, providing liquidity and confidence from which to rebuild businesses and provide financial assistance to the victims' families.

In the corporate world, insurance has a history going back four millennia. Although modern contracts of insurance bear little resemblance to versions that existed at the birth of the modern insurance industry in the 18th century, they still end up with the same objective. They enable companies to go about their business, safe in the knowledge that they have transferred some of the larger risks of doing business to the insurance companies.

Insurance is about spreading risk, and for insurance companies there are three major components of this - money, probabilities and consequences. Money backs the insurance companies in the form of their capital base, and money is the ebb and flow of premiums and claims that arise out of the insurance of contracts of indemnity. Probability underlines the pricing of these contracts from an insurer's point of view and also influences the customer on whether they choose to buy certain insurances or not. However, following the events of 11 September, it is the "consequences" component that requires more detailed consideration.

When customers fail to insure against risks that are considered remote or unimaginable - even in the wildest fictional probability - then the financial consequences can be devastating.

For large corporations, the requirement to review all the risks of running a modern enterprise is embedded in corporate governance and good risk management theory. They will decide how and when to buy risk transfer coverage from the insurance industry, and progressively from the wider financial community as different forms of protection can be purchased from the capital markets.

In some respects, insurance can be seen as simply another instrument within the capital markets product range. There are those who consider it an ineffective and out dated mechanism for risk transfer, however, insurance continues to stand the test of time. Insurance is also well understood by management, directors and business - even if it is not always liked by Finance Directors and Risk Managers. It is at times of crisis though that, hopefully, the best face of this old and traditional sector can be seen.

Royal & SunAlliance, an organisation that has been serving the commercial community for nearly 300 years, continues to reinvent and readapt itself to meet the changing needs of its customers. The essence of good risk management is for companies to understand and appreciate the entire risk profile of their businesses. However, the compliance revolution during the last decade has placed an onerous burden on directors and their appointed managers to undertake such risk profiling. Companies like Royal & SunAlliance can play their role not only in risk analysis, but also, and more important, in reviewing what options businesses have to retain or transfer risks out. Indeed Royal & SunAlliance's experience is that many risks can be transformed or even negated following action in a full risk review.

The insurance industry may still be considered old fashioned by many, but it is changing. Traditionally insurance companies have offered a series of products on an annual, hence contractually discontinuous basis, and have used contracts which, whilst clearly necessary, are often over complicated or preclude the customers' needs.

However, insurance carriers like Royal & SunAlliance are becoming genuinely customer focused, offering customers advice on and solutions to their increasing business risks. The company works closely with its customers to evaluate and reduce their exposure to risk through a global team of professional underwriters, claims handlers and risk engineers.

The capital base and risk protection offered by insurers provides client companies with additional financial security and peace of mind to conduct their business. The need for and importance of such protection has never been in doubt - even if insurance may have been under estimated both as a service and financial instrument. However, it is likely that the tragic events in the US and the industry's response to its customers will present insurance in a different light within the business and financial community and cause the doubters to put a higher value on the role of insurance.

Royal & SunAlliance is one of the world's largest international insurance groups, writing business in over 130 countries and providing service to more than 20 million customers.

Royal & SunAlliance
Group Communications
30 Berkeley Square
London W1J 6EW

Tel: 0207 636 3450
Fax:0207 569 6288
www.royalsunalliance.com