European perspective

FERMA's new president, Thierry Van Santen, discusses the challenges facing risk managers.

FERMA, the Federation of European risk management associations, anticipates significant changes. President Thierry Van Santen predicts that over the next two years European risk managers will see a growing recognition that enterprise-wide risk management brings a competitive advantage to companies which implement a strong risk management policy. "Corporate governance is not the main issue, even if it does help to create a better understanding of risk management. The key issue is that risk management brings added value.

"Based on a better understanding of risks and opportunities, companies will be able to improve their financial performance. Risk management is rather like playing golf. You can be a good driver, but at the end the winner is the one who manages the small game. Risk management focuses on the 'small game' that brings the success. Corporations are becoming aware that they need to gain an extra few per cent of improvement in performance without any need for capital. This will give them a better return on investment and the increased confidence of the financial markets."

Apart from some special issues, such the adoption of the euro, Van Santen believes that there are no specific European risks. "The true issue is globalisation. The world is smaller in terms of litigation, information and communication. Reputation is becoming a worldwide issue."

Is insurance the solution? Definitely not, according to Van Santen. "Insurance can be a good response for some traditional risks, such as fire, which require large capital resources. But it is not adapted to the new emerging risks. The focus today is the real profit versus the forecast profit and the expected short/medium term profit. Insurance covers only a very small part of that.

"The big corporations do not need insurance to raise capital. They need to meet market expectations to get a good visibility and a good rating. With a good rating you can raise the money needed to refinance an asset. In other words, the 'new insurance' - yet to be invented - will provide a protection for a lack of performance, not for an asset. As I've said, this applies to major corporations. The situation remains slightly different for small and medium sized companies that might need to refinance their losses through traditional insurance mechanisms."

Van Santen reverts to his emphasis on enterprise-wide risk management. He believes that the new risks, involving issues such as reputation and communication, can only be managed by implementing an enterprise-wide risk management policy. He suggests that this involves a company making "its best efforts" to comply with stakeholders' expectations, associated with a good public relations and communications policy.

He admits that this is quite a challenge for risk managers, in many cases requiring a departure from their traditional role. "There are many risk managers who are closer to their companies' insurance needs rather than being part of the key management of their organisations. But risk management will become less and less connected to insurance. It will need to focus on the 'understanding' of the corporation and be much more closely involved in its strategy. Insurance will become only one tool, like treasury, to improve some parts of the organisation's financial performance. The true focus will be to improve the various processes within the organisation."

Corporate governance requiring reporting of perceived risks and management techniques is having considerable impact in the UK. Is this a feature that risk managers need to consider in other European countries? Van Santen regards it as a significant issue, but not the true challenge. "It helps many companies to understand the importance of risk management. But there is the risk that those who are focusing only on corporate governance will miss the main issue, which is to improve performance.

"There is considerable discussion in the UK regarding the frontier between risk management and internal audit. The companies who think that corporate governance means internal audit are on the wrong tack. Risk management is part of the strategy, audit is part of the control. To take an example, corporate finance is a function of the financial department, the auditors are part of the control. You cannot define a strategy and also control it.

"Corporate governance is spreading in Europe. Germany has a stronger system in place than the UK one, although other countries are still some way behind. But they will come. I wouldn't be surprised to see the EU issuing something in the coming years. One of our goals is to make our members aware of this change."

This raises the issue of how much progress FERMA has made in becoming part of the decision making process at the European level. Van Santen says that one of FERMA's missions will be to reinforce relationships with the EU. He sees this as being achieved by working closely with the other related associations like UNICE (the Union of Industrial and Employers' Confederations), the treasurer associations, and internal audit associations, bringing risk management views and expertise. "We have made some contribution on the environmental directive and provided advice on an alternative risk transfer study. Our role is mainly to act as an influence on key issues, of which corporate governance will be one."

A key part of FERMA's activities is its establishment of working groups, focusing on important issues. Van Santen explains that FERMA is taking a new approach, to make this easier. "We are just starting to organise our working groups through a private internet forum. We realised that it was too difficult to set up regular meetings with individuals from nine countries and that we needed to design an efficient communications tool. The first group using this forum is dealing with construction issues."

How does Van Santen envisage FERMA's role evolving in the future? "We are still pioneers," he says. "The ënew FERMAí which was founded three years ago has made progress, with a permanent office, a permanent staff, an internet site, seminars, a newsletter and a new constitution. The main goal will be to reinforce FERMA's presence with better communication and to implement a true dialogue between our 1,800 members.

"This is not so easy. Tradition, language, and the tendency to focus only on domestic problems, are the main obstacles. But my feeling is that you cannot be a good risk manager in this changing world if you are not fully aware of what is going on in other countries - and not just Europe. Our job is to provide the tool, to promote it, to make it work. Time will differentiate those who are the true risk managers from the others. I am convinced that in five to ten years FERMA will become like the US RIMS (Risk and Insurance Management Society, Inc), a global organisation with chapters in every country."

He concludes by saying that the new risk management is so challenging that many traditional insurance buyers will not be able to make the move. "I think that we shall see risk management becoming a full time job. Insurance buyers will remain in a separate role. There is no shame in being an insurance buyer. It's only terminology!"

Forum
FERMA's Risk Management Forum 2001 in Barcelona on 7-10 October, will focus on "New Economy-Social Impacts: the risk management response". It aims to examine some of the most challenging issues facing companies from a risk management perspective. These arise from the social and technological impacts of the new economy.

Key themes covered will include: