Mactavish

After weeks of fevered speculation and hype Apple yesterday unveiled its latest piece of hi-tech wizardry: the iPad. Despite seeming to be just a large version of the now-ubiquitous iPhone, it will no doubt become the new must-have gadget for the masses. Technological advances like those conducted by Apple are now so commonplace that we risk overlooking how connectivity is changing the way we work. More dangerously, from an insurance standpoint, we often also neglect to truly think through the risks associated with new computing products and ways of working.


A new article by Searchsecurity.com argues that cloud computing is one of the main risk management challenges facing businesses in 2010. A move to cloud computing will present huge compliance challenges, as more and more data and applications are moved beyond existing network infrastructures. The FSA is particularly attuned to the risk of data breaches and have fined several banks and building societies for losing sensitive pieces of customer information.


Cyber-crime and non-material triggers of Business Interruption are two areas that cropped up as key concerns of insurance buyers in the Mactavish 2010 cross-sector risk research programme. One Head of Internal Audit at a large Financial Services firm told me just last week that her insurance company had failed to provide enough cover for cyber-liabilities: “we have a very traditional property policy and my insurers have been slow on the uptake when it comes to liabilities in this area”


As the world becomes more interconnected and more data is stored in cyber-space it will become critical for companies to ensure they have adequate insurance policies in place to cover the risk of losses from cyber-liabilities. Apple will continue to launch new products to innovate its way to growth, almost re-defining its own product segments. Perhaps it is time for insurers to take a similar tack?

So, Britain has staggered, bloodied and bruised, out of recession with “growth” of 0.1% in the last quarter of 2009. Let’s pop open the Champagne. On second thoughts, we better make that a bottle of Lambrini.


While the bods at the Office of National Statistics and the often optimistic economists in the City are right in stressing the technical end of recession, it feels like any recovery might be precariously short-lived. Figures released by the CBI today show that retail sales in January fell year-on-year, ending three consecutive months of sales growth.


Commentators are blaming the deep freeze, though the return of the VAT rate to 17.5% must bear at least some brunt of the blame. Other economic indicators are just as bad. The pound is down by around 20% compared with the period before the economy fell off the cliff, but exports are clearly not leading us back to growth.


Political speculation is rife that Labour is paving the way for a General Election on April 22. This is the last conceivable date the election could be held before the next round of GDP figures are released. Bookmakers rarely get these things wrong - and the money does seems to be down for a May poll. But Ministers and economists are clearly worried about a double-dip recession. With tax rises inevitable and further job cuts on the horizon, it might pay for the Labour vanguard to set the date in April. After all, the economic news is only going to get worse.


Now, where’s that spare fiver? I want to take advantage of the 12/1 for an April poll. Who cares if it’s a high-risk bet? More chance of me winning than the economy sprinting out of the blocks towards recovery.

The Yom Kippur war, 9/11, the Bay of Pigs fiasco and Operation Barbarossa all, at first glance, seem to have little connection to the world of insurance. But after reading an old New Yorker article by Tipping-Point author Malcolm Gladwell, I think companies can learn a lot from these seemingly random events and the intelligence failures associated with all of them.


Gladwell bases his fantastic article on the psychological trait known as Hindsight Bias. This is when humans show the propensity to conclude, post-hoc, that events were more predictable than they actually were. After the coordinated attack on Israel by Egypt & Syria in 1973, many were quick to blame failures in intelligence gathering for not anticipating the attack. AMAN, the Israeli Military Intelligence unit, apparently had ample evidence of Egyptian troops taking up positions along the Suez Canal but failed to ‘join the dots’ with other pieces of intelligence. The attack caught the Israeli Government and public by complete surprise.


This failure of intelligence has also been a charge applied to 9/11, the Bay of Pigs and Operation Barbarossa. In all three cases, there were sufficient individual pieces of data to point to attacks. But Gladwell argues it would be a mistake to instantly rush to condemn the Intelligence Services for negligence over 9/11 and other acts of war. He believes that critics often suffer from Hindsight Bias, looking back on events and concluding they were eminently predictable.


What does this have to do with commercial insurance? Well, when low-frequency / high-severity risks occur, such as an explosion at a manufacturing plant, companies will have often had the knowledge within their organisations to have foreseen the possibility of this catastrophic event. After all, this is why insurance is purchased. The key question here is did the operational managers within the business share their intelligence with the staff tasked with putting the right insurances in place?


Failure to gather intelligence at all about risks is not a charge Mactavish would level at many companies. But failure to share intelligence about risks internally & externally often is. We have conducted Due Diligence on complex risks for over ten years and have come across many examples of risks that were not even on the radar of the Board, let alone on the formal risk register. Operational staff in the business units were, however, usually aware of these risks and the controls in place to mitigate them.


I think Gladwell might accuse Mactavish of Hindsight Bias here, but I would swat aside his argument. ‘Black Swan‘ type events will always occur.  Also, any given company surprise is most likely to strike where management haven’t had direct prior experience of a particular type of loss. Businesses should use this very fact as a starting point for shining a brighter light on their operations, sharing information about risks and disclosing this with insurers. That way, if a catastrophic loss does hit your firm, you’ll be much better placed to resolve any uncertainties and get on with the business of recovering. Perhaps a little Hindsight Bias isn’t so bad when it comes to risk management?

2009 saw a 12% yearly increase in the number of UK manufacturing firms entering into administration, according to new figures released by Deloitte. The manufacturing sector represented 17% of all administrations last year, coming second only to construction which comprised 20% of the total.


Although things got better as the year wore on, with numbers of administrations in Q4 down on the previous quarter, the manufacturing recovery is thought to be uncertain. Ross James, manufacturing partner at Deloitte thinks the outcome may still be fairly bleak: “At this stage it is difficult to predict whether the total number of manufacturing administrations will increase in 2010,” he said. “Primarily it centres on whether there is a sustained recovery in demand.”


Governor of the Bank of England, Mervyn King, believes a weaker pound will boost net exports and enable the British economy to rebalance away from the obvious reliance on Financial Services.  In theory this is all well and good, but it is not yet being borne out in practice. Data released last week shows that the falling pound is having little effect, as November’s manufacturing output stagnated for the second successive month.


The withdrawal of the Government’s fiscal stimulus and widely anticipated budget cuts could nip the nascent recovery in the bud. Total corporate UK insolvencies through to the end of 2009 have already matched the full recessionary cycle of the early 1990’s, with more expected.


Insolvencies are bad for staff and owners of the businesses caught up in administration, but they also have knock-on effects in the supply chain. The 2010 Mactavish cross-sector risk research showed that withdrawal of credit insurance is a major concern of companies in the manufacturing, retail and construction sectors.


With more insolvency looming on the landscape the issue of suppliers going to the wall is only going to become more acute.

Standard Life has been fined £2.45 million by the Financial Services Authority (FSA) for inappropriately targeting a pension fund product at thousands of investors. Today’s ruling found there were “serious systems and controls failings” at the insurer, resulting in the production of misleading marketing materials for its Pension Sterling Fund.


98,000 retail consumers invested in the fund as of December 2008, some of whom were no doubt enticed by the insurer’s marketing stating the fund was 100 per cent invested in cash. Instead, the fund invested in more arcane financial instruments called floating rate notes.


Standard Life has apologised to its investors and vowed to learn harsh lessons from its acknowledged mistakes: “We have learned important lessons from this mistake and have made significant improvements to our marketing literature processes to prevent the same thing happening again.”


This is the first fine imposed by the FSA in 2010, but it seems likely it will be the first of many. FSA Director of Enforcement & Financial Crime, Margaret Cole, said: “The FSA takes the issue of misleading financial promotions very seriously and the fine announced today demonstrates our commitment to the principle of credible deterrence.”


So, along with the numerous claims and notifications in the insurance market relating to mis-selling investment products, you have a more avowedly-interventionist regulator. If I were an insurance buyer in an Investment Management firm today, I would make sure a meeting with my compliance team was set up post-haste. Understanding controls around the suitability of investment prospectuses is vital. Explaining these controls to contingent capital providers like insurers will become even more so in the current climate.

Bill Shankly once said that football is not a matter of life or death, it’s more important than that. These words should strike a particular chord with fans of Portsmouth, Notts County and Cardiff City football clubs today as all face asset seizures or winding-up orders after failing to defer payment of tax bills sent by Her Majesty’s Revenue & Customs’ (HMRC).


But this is not just a problem exclusive to overstretched football clubs. Football imitates business life - and a report released yesterday states that the end of the HMRC Time-To-Pay Scheme will lead to a significant rise in company failures from the third quarter of 2010 onwards.


The scheme, which allows cash-strapped firms to defer tax payments, has so far helped 250,000 companies defer tax payments totalling some £4.3 billion. But evidence in today’s Times suggests that HMRC is making it harder for firms to access the scheme. As the tax deadline of 31 January looms there is a real possibility that firms might miss out on access to the scheme - and could be forced to sell assets to pay tax debts.


Corporate Insolvency specialist Begbies Traynor believes that although the fiscal stimulus, VAT reduction and Car Scrappage Scheme have all helped businesses, in the longer-term repayment of debts is going to catch up with struggling firms. Executive Chairman of the Group, Ric Traynor states: “Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies have lagged behind technical recession by 1 to 2 years.  With tax and interest rates certain to rise, as well as increasing pressure on consumer spending, there is every reason to suggest that the insolvency peaks of this recession remain some way off.”


If this is true, it might be more than just a few football clubs going to the wall in 2010.

New research released by BDO shows that reported fraud broke the two billion pound barrier in 2009. Amounts lost to large frauds increased 76% during the recession – a statistic that seems to prove an old adage often expressed in insurance circles that fraud increases in times of economic hardship.


Simon Bevan, Head of Fraud at BDO LLP, expects reported fraud to treble over the next two years: “A large part of this will be a tidal wave of fraudulent borrowing that has only just started to appear, particularly through use of over-valued properties as security for loans, while the property market was booming. Currently many of these frauds are yet to be recognised by the banks, which still have them classified as non-performing loans.”


This study backs up several findings from our recent cross-sector risk research. One senior underwriter interviewed baldly stated that “companies always underestimate their fraud exposure: it is one of the broadest misconceptions when it comes to insurance”. This seemed particularly true in financial services – where only 15% of those interviewed flagged increased risk of fraud as a concern.


Notifications and claims relating to fraud are already out there in the insurance market. Buyers should be ready & willing to outline to insurers the controls in place to combat the increased risk of fraud. Even if the economy is technically coming out of recession, the ‘double-bubble’ of fraud has seemingly still yet to pop.