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Interview with Dirk Wegener About the probability of the improbable

Solutions: Mr Wegener, COVID-19 is on everyone's lips. Despite these difficult times, have there been any positive experiences or events for you in recent months?

Dirk Wegener: I must admit that with all this bad news, it is difficult to find a positive perspective. But for me personally, there was already a glimmer of hope. Many people - probably much more than expected - were able to continue working on a mobile basis. Of course, this varies from industry to industry. Nevertheless, for me this was the silver lining on the horizon.

Solutions: The metaphor of black swans is often chosen for such unpredictable events. Companies must be able to deal with unexpected risks or disasters quickly and flexibly. Do you believe that the current event will change the risk awareness of companies - maybe even permanently?

Dirk Wegener:

First of all, in my view, the concept of the Black Swan is not entirely appropriate for this event. Black Swans describe so-called unknown events. But a pandemic was one of our potential risk scenarios. But what came as a surprise to many was the global scale of the pandemic. Many scenarios had regional outbreaks - in other words, an epidemic - on the screen. So the almost simultaneous spread of a virus like COVID-19 is the shocking surprise, but it should not be called the black swan.

We are currently still in the middle of a pandemic. I therefore believe it is too early to talk about risk management opportunities. Nonetheless, the current situation offers an unfortunate opportunity for risk managers, as well as for the different risk management technologies and philosophies, to prove their value proposition to companies. How quickly companies were able to resume operations depends heavily on how well or how early risk management triggered business continuity management. With regard to the presence of risk management and risk managers within organisations, COVID-19 has raised awareness. So it was an opportunity to demonstrate the extent to which risk management is already well established in different organisations.

 

COVID-19 has raised awareness of risk management.

 

Solutions: With regard to insurance companies, we can see that they are under great pressure and that this pressure will not decrease in the coming years. Managers of business insurance companies speak of difficulties in renewal and rising prices when taking out insurance. Do you see alternative risk transfer solutions - not only for large, international companies, but also for SMEs?

Dirk Wegener: Even before COVID-19, we talked about a hardening insurance market. Many insurers indicate that the entire commercial insurance market is under-rated. The risk as well as the costs are far above the premium income. Consequently, the market is unbalanced.

Global Insurance Composite Pricing Change

To return to your question about alternatives to insurance, I agree with you that the situation for SMEs and global companies is different. In the European Risk 2020 survey, which FERMA conducted before COVID-19, a trend is emerging that includes a renewed interest in captives with 43% of risk managers considering this option compared to 15% in 2018. Nevertheless, I believe that it will be difficult to escape the insurawence market. Nevertheless, we will probably see lower insurance levels in the near future. This is partly due to the enormous cost pressure that companies are facing. This cost pressure can even be increased by COVID-19. On the other hand, the low limits set by insurers and the increased exclusion of risks such as pandemics play a role.

Solutions: As damage restoration specialists, we deal with major damage as well as mass damage to private households. In the case of mass losses in private households, we have seen an increase in digital solutions in recent years, such as dark processing, digital interfaces, standardised processing or communication between all parties. However, such solutions are not yet the order of the day in the area of industrial losses of large company insureres. What is FERMA's position on this point? Are you missing solutions in this area?

Dirk Wegener: The critical aspect here is the question of scalability. For large global companies, the difficulty lies in local regulations. Until now, these have made scalability on a global level difficult. The possibilities to build global programmes are therefore increasingly limited.

But it is a question of time, because it is also in the interest of global companies to develop digitalised standard processes. We see initiatives like the electronic placement platform at Lloyds. There, market digitisation is also available for global commercial insurance. There are also initiatives where Blockchain has been used to manage global insurance programmes. And there are certainly other examples. So the trend is clearly moving towards digital solutions.

There are also efforts towards digitalisation in the field of loss prevention. I am talking here, for example, about ways of connecting sensors to machines to act as a kind of early warning system. This is not necessarily linked to the size of the company. But I agree with you that the SME market is more advanced than global companies.

Solutions: In the field of mass claims we are among a quite large number of different solutions.  Every insurance company has its own digital solution. As a service provider you have to work on different platforms. This does not  lexactly accelerate the development of digital solutions. So could it be a field for FERMA to work on common solutions in the field of industrial insurance, so that everyone uses the same platform?

Dirk Wegener: I understand your position as a service provider. As a policyholder you have exactly the same problems. They are also confronted with the number of instruments offered by insurers or brokers. This is accompanied by the not insignificant question: who is actually the owner of the data? This unresolved question makes it difficult to be flexible and to switch from one provider to another.

Furthermore, there is the question of a global data standard and global data interfaces. The reality is that this golden standard has not yet been developed, at least for the time being. I share your view that this is not necessarily good for the market. Not necessarily as a member of FERMA, but as representatives of risk insurance managers we would of course like to see this golden standard. But it is not one of our goals to achieve this - especially not in our role as a European association. Nor are we close enough to the specific processes of national markets in this respect.

Solutions: FERMA issued a position paper on the resilience framework for the EU in May. What answers or reactions to it can you share with us?

Dirk Wegener: We have issued a position paper for a resilience framework. The aim: a public-private partnership that covers systemic risks, such as the current COVID 19 pandemic. Otherwise, the cumulative potential is so high that the private insurance sector will not be able to cover it.

But this does not mean that we are the counter-concept to insurance-based risk coverage. Insurance-based risk coverage allows risks to be assessed, priced and transferred to the professional risk carrier - i.e. the insurance companies - using established techniques. This creates incentives for appropriate risk management techniques, which essentially have to be established at the first line of defence and operational level of companies. The aim is to reduce, if not eliminate, risks before they translate into financial losses.

After we issued our position paper, we had interesting discussions initiated by EIOPA (European Insurance and Occupational Pensions Authority). EIOPA has now drafted a position paper. This paper covers the same points, so we are talking about a resilience framework based on insurance risk management. This paper will now be sent to the European institutions, with the aim of examining and testing in principle whether there is an interest at European level in setting up this type of public-private partnership.

We are also in contact with our member associations. We have set up an internal working group where all these national associations will have the opportunity to exchange their views and ideas on how to take forward a similar discussion at national level. FERMA has conducted a survey among risk managers on their experience of Covid19. We expect to publish the report shortly.

The old wisdom still applies:
Think the unthinkable, expect the unexpected.

Solutions: What is your key message to risk management?

Dirk Wegener: The COVID 19 crisis has once again shown that risk managers should be agile and flexible. The old wisdom still applies: think the unthinkable, expect the unexpected. In this sense, you ensure that your organisation is able to react agilely to numerous and completely new challenges. This of course requires a good positioning of your role within the organisation. This brings me back to the point that a risk manager should be a risk director within the organisation. A risk manager must be someone who has the network and the necessary understanding of what is going on in the company. At the same time, he must be able to communicate with board level. This is not about theoretical risks, but also about concrete measures that need to be taken, e.g. to be mobile again, to have backup sites available, in this sense a business continuity plan and so on and so forth. I think this is important.

Solutions: Mr Wegener, thank you very much for the interview!

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