Insurance survey: Zurich pushes the boundaries

James J. Schiro, CEO, Zurich Financial Services

Riddell recalls the fashion in the early 1990s for some large corporations not to carry insurance on the basis that 25-year P&L studies suggested that they paid out more in premium than they ever recovered in claims. That’s not an analysis many companies hold to today because they understand the carrying cost of that risk in terms of risk-adjusted return on capital.

Companies may retain their predictable risks, but pass on their variable ones, on the basis that larger portfolios of these are inherently more manageable. And having an insurer consult on and analyse the strategic, operational, business, financial and external risks in a company’s balance sheet at the very least gives a valuable second opinion for corporate risk officers, CFOs and chief executives to check.

Article of faith

Product development is accelerating and this can sometimes lead insurance companies into uncharted territory. Riddell suggests that Zurich has spent four or five years looking at brand-value protection. One of the biggest fears for companies today is how a business interruption might damage the perception of its brand among customers and suppliers. In an extreme case, loss of brand value might drive a company out of business. "We could do brand-value protection," claims Riddell. "We know how to underwrite it, price it, loss adjust it." But he fears it will never become a big line of business. "Companies just won’t pay the price we feel it needs because they all think they are a better risk than anybody else. It’s almost as if they have to hold that belief in their own brand as an article of faith."

Similarly, Zurich has investigated insuring financial services companies against rogue trader risk. There have been so many rogue trader events, both big and small, that it is almost a modellable risk. However, banks are wary of paying the real price of taking cover because they protest that their risk monitoring and control standards are high and don’t want to admit any concern. Insurance companies, for their part, might not be able to provide insurance either. Many rogue trader type events occur without ever making the headlines and insurers fear a flood of claims if insurance was in place.

There are more pragmatic ways in which insurance companies seek to provide innovative services to large corporate clients. Zurich Financial Services has recently established an M&A practice to provide intense analysis of the risks and quality of risk mitigation in place when an acquirer is closing in on a target. "We can help take a lot of the uncertainty out of a deal," says Riddell. "What is the capacity of an industrial property, the risks of breakdown, the exposure to flood or other catastrophe, the likely supply chain issues? Is there a history of product liability, is there a potential environmental liability and what policies have already been taken out? These are issues not covered in the reps and warranties because those are designed to protect a purchaser against undisclosed risks. Often what we focus on are the known risks but they are no less complex for that. And once a deal is closed, it is important to get policies in place very quickly." He adds: "It may be possible to broker cover conventionally. But if a deal develops quickly, you need a lot of people working on it 24/7."

Zurich launched a team to do this kind of high-intensity work last summer after 18 months of discussions with customers, including many private equity groups that have been, until recently, serial acquirers. "Corporate customers sensed there was an issue," says Riddell. "But the private equity firms – and we speak to the heads of most of the biggest – saw the value of it in a hurry."