Buyers are already feeling the effects of the credit crunch outside the financial sector
Overall buyers are not seriously concerned about the liquidity of their insurance partners but many have doubts about the knock on effects of the credit crunch and it’s implications for risk management.
These were some of the things risk managers talked about at the FERMA Forum in Brussels.
Buyers doubted whether the crisis would stay in the financial sector, some believed it was already spreading to the industrial and commercial sectors. ‘I don’t think this is purely a credit crisis,’ commented Franck Baron, vice president of FERMA and vice president risk management and insurance for Firmenich, who was speaking at a StrategicRISK roundtable event sponsored by ACE.
‘We will start to see a slowdown in consumption,’ he said. ‘Unfortunately this cannot be a siloed crisis.’
Other risk managers participating in the roundtable were worried about the potential for critical suppliers to go bust because of the drying up of credit.
‘Clients are already being hit because they can’t get credit,’ said Marie-Gemma Dequae, president of FERMAand group risk and insurance manager of Bekaert.
“Unfortunately this cannot be a siloed crisis.
Franck Baron, vice president risk management and insurance for Firmenich
The $700bn ‘Paulson package’ was seen as a good thing, and something that the economy needed. ‘I think it will help alleviate some of the toxic assets,’ said Paul Taylor, head of risk management and insurance at Tetra Laval International, who was also at the Forum but didn’t take part in the roundtable event.
Several of the heads of the national risk management associations were keen to stress that buyers shouldn’t abandon AIG in a panicked rush. ‘AIG is a major insurance player, it is unfortunate that the diversification of its business has led to problems,’ said Dequae.
Others alluded to some fears that, forced to sell off several of its key assets, AIG may become vulnerable to a takeover. That would reduce the number of insurers that major buyers could reliably partner with to barely a handful, particularly those capable of administering global insurance programmes, said Peter Den Dekker, president of NARIM and corporate insurance and risk manager, Stork B.V.
Günter Schlicht, managing director of the German risk management association, DVS, said: ‘The immediate failure of AIG has fortunately not taken place but we have to watch what is going on carefully.’
Overall AIG’s insurance arm was still seen as ‘well capitalized’ and potentially even ‘a good business for the US government,’ according to Baron.
“Clients are already being hit because they canâ€™t get credit.
Marie-Gemma Dequae, group risk and insurance manager of Bekaert and president of FERMA
Several buyers also expressed alarm about the lack of warning from the rating agencies.
Den Dekker said: ‘I’m worried about the value of the rating agencies. Where is the value if an ‘A’ rated company can go bankrupt overnight with no warning from the rating agencies or the broker community?’
Baron joined Den Dekker in condemning the agencies, who receive fees from the companies they rate: ‘Who can say the information the rating agencies provide is any good?’
Rating agencies have proved themselves to be ‘worthless’ said Den Dekker.
Many buyers feared a knee-jerk response to the crisis in the form of more regulation. ‘My fear is that we get a grandson of SOX reaction that is very expensive and doesn’t solve anything,’ commented Taylor.
“Rating agencies have proved themselves to be â€˜worthlessâ€™
Peter Den Dekker, corporate insurance and risk manager, Stork B.V.
‘Sarbanes Oxley was a major distraction for risk management practitioners,’ he said.
The value of regulation as a safeguard against the crisis was also questioned. ‘This crisis is about the failure of all the compliance initiatives that have been put into place around the world,’ said Baron.
‘[The business community] spent a fortune on Sarbanes Oxley compliance, but all those compliance efforts that we put in were for nothing,’ he added.
Banks may have focused too much on internal controls, suggested Den Dekker.
Baron aired another concern about the negative effect of compensation, remuneration and incentives. ‘The way these have been designed has led to some very bad decisions,’ he said.
Risk managers accepted that serious challenges lay ahead for them. ‘I can foresee that this crisis is going to affect how our companies respond in terms of investment priorities and risk management initiatives,’ said Baron.