Bryan’s Blog: Insurable vs Uninsurable Risks

The Marsh Business Breakfast Briefing at the RMIA National Conference brought together some big names in the business for a panel discussion hosted by Scott Leney from Marsh. The panellists were Eamonn Cunningham from Westfield, Matthew Frost from BHP Billiton, Chris Townsend from Chartis and Mike Mitchell from Swiss Re.

One of the topics raised was the concept of insurable vs uninsurable risk and what this means for a corporate risk manager. Here are a few points raised and my take on why they may be important to you as an insurance professional.

1. 40% of risk is insurable – Eamonn Cunningham indicated he felt that about 40% of Westfield’s corporate risk is insurable. Whether it is 10, 20, 50 or 60% for an organisation is not the point, the point is that much of the focus of corporate risk professionals today is not on insurance. This provides both a challenge and an opportunity for insurance professionals. The challenge is to get into the mindset of the enterprise risk manager so you can speak his or her language when discussing your offerings. The opportunity is of course to extend the envelope to insure more of a corporation’s risks.

2. Really big risks – An interesting example of uninsurable risk was provided by Matthew Frost who indicated they have identified very large and rare natural hazard events that are perhaps five or six times greater than insurance market capacity. Therefore the corporate balance sheet needs to carry these risks. Let’s take a quick look at relativities of insurance capacity to balance sheet risk.

The Coca-Cola Company has assets of around $50bn including intangible assets (trademarks, goodwill etc) around $13bn. Munich Re’s entire gross written premium is about the size of Coca-Cola’s asset base. Even if Coca-Cola could insure its main intangible risks, a PML size loss would wipe out all its profits for the year and then some. So on some occasions the insurance industry does not have enough capacity and worse still, sometimes a corporation’s biggest risk is both “generally uninsurable” and too big a risk for the market as is the case for The Coca-Cola Company and its key trademarks. This is another example of how insurance professionals need to be thinking when engaging large corporate risk professionals and of how hard it may be to take on more of the risk of larger corporations.

3. The really, really, really big risks – Mike Mitchell raised the perspective of risks that are incredibly big on impact but so incredibly rare. I was reading “A Short History of Nearly Everything” by Bill Bryson recently. He discusses the consequences of a meteorite that hit the mid-west of the what is now the USA about 7 million years ago. Today, he surmised the event would result in 1 billion deaths in the first 24hrs after the event. Can you imagine! So Mike’s question was “At what point is the risk level so low it is irrelevant”? A fine point and another one that needs to be considered by corporate risk managers.

4. Some good news – Chris Townsend pointed out that the industry is now well capitalised and well regulated and hence for corporate risk managers, the risks that they choose to ensure are in safe hands. He also emphasised the industry’s willingness to try and accommodate corporations looking to transfer risk. Certainly, having claims paid is front of mind for corporate risk managers.