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Willis Calls Industry to Action on Black Swan Risks

Posted on 14 Jun 2012 by Neilson

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WililsThe 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, 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.