The Elephant in the Auditorium

Risk managers meeting in the United Kingdom talk more about the inadequacies of bank risk management and British insurance law and not so much about the BP gusher in the Gulf.

By GRAHAM BUCK, who covers European risk management issues

MANCHESTER, UNITED KINGDOM---You would suppose that the fate of the business first established in 1903 as the First Exploitation Company would be much on the minds of British risk managers at the moment. When members of the Association of Insurance and Risk Managers (AIRMIC) met in the city of Manchester this week, the potential bill faced by the company now known as BP for the Gulf of Mexico oil spill had been ratcheted up to $34 billion. President Barack Obama had similarly escalated the rhetoric by comparing the impact of the ecological disaster to be on the magnitude of Sept. 11, 2001.

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However BP's woes, or specifically its risk management failings, have proved to be the proverbial "elephant in the room" in Manchester. Sure it has been mentioned--but only in passing, while AIRMIC delegates read in their morning papers that "in the aftermath of the Deepwater Horizon disaster, BP is being freely compared in the United States to those poster boys of corporate malfeasance, Enron and WorldCom."

With the repercussions of the disaster still unfolding, there was a notable reluctance to address the risk and responsibility issues of the oil spill in greater detail. There will no doubt be sessions and casebook studies in due course, but more likely these will be on next year's AIRMIC agenda.

BANKING RISK MANAGEMENT FAILURE IN FOCUS

In the meantime, the audience was addressed by Paul Moore, former head of regulatory risk at HBOS plc, the holding company for the Bank of Scotland, one of the U.K.'s main banks.

HBOS was only saved from collapse in 2008 by the intervention of the government. A subsequent inquiry revealed that Moore had raised concerns that the bank's focus on sales was creating unduly risk business strategies.

Having waved the red flag, Moore said, "I felt a bit like a man in a rowing boat trying to flag down an oil tanker."

Indeed, the bank's response was to shoot the messenger, and Moore was summarily dismissed from the bank soon after. A subsequent inquiry revealed the sacking, and in February 2009, the head of HBOS, Sir James Crosby, who also served as deputy chairman of U.K. watchdog the Financial Services Authority, stepped down following allegations that he was responsible for Moore's departure.

As Moore observed: "Even nonbankers with no 'credit risk management' experience would have known that there must have been a very high risk in lending money to people with no jobs and no provable income."

The bank was moving too fast and possessed a "cultural indisposition to challenge" its aggressive sales-led culture. Moreover, Moore sees little sign that much has changed in the U.K.'s finance sector since HBOS and its peers had to be rescued by the government.

As he noted: "Sweden had a banking crisis in the '90s and responded by removing the top three layers of management. We've basically done nothing."

THE ANNUAL AIRMIC INITIATIVE

AIRMIC's annual conference traditionally serves as the launch for an initiative. This year it is pressing for reform of a 104-year old insurance act that it claims is "loaded in favor of insurers against the insured."

Despite its title, the Marine Insurance Act of 1906 forms the basis of the majority of U.K. insurance policies and, as AIRMIC's chief executive John Hurrell observed, needs updating as it was drafted in an era before the rise of the multinational. As a result, a significant number of member companies report that they have recently had claims rejected on the basis of nondisclosure.

As organizations have grown in size, so the potential for risk managers to inadvertently fall foul of the 1906 Act, which requires proposers for insurance to give 'material information' relevant to the underwriter in deciding whether to accept the risk, has increased. The Law Commission is working on addressing these deficiencies, but progress is slow and AIRMIC is keen to accelerate the pace of change. As Hurrell commented, AIRMC is "looking for understanding" from insurers on innocent nondisclosure, which he feels should not be used as the basis for rejecting a claim in its entirety.

Another AIRMIC tradition--its biannual survey of the top issues keeping risk managers awake at night--again shows reputational risk heading the list. The association is to carry out further research on the issue, examining high-profile cases over the period 2000 to 2006 that involved reputational damage to organizations and its long-term effects.

As one of the events from this period includes the fatal explosion at BP's Texas City oil refinery in March 2005, this research paper should make for interesting reading on both sides of the Atlantic.

June 17, 2010

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