The Diversity Blog

The Maggi saga goes on and one does not know how far and wide could it be. Brand gurus and PR experts are at large prescribing what ought to have been done and what has so far not been done. My intent is not to just dole insurance solutions but take a holistic risk management perspective where brand and risk converge. Here is a wakeup call. All this while it was the errors and omissions of the IT enabled services catering to the off-shored or outsourced needs of overseas entities that were expected to be the only ones vulnerable, then came in the pharmaceuticals and more recently the auto component manufacturers. Off-shored FMCG brands, particularly the ones high on market share, tend to overlook the risks Emerging Markets pose howsoever successful a brand may seem in the present. Lost in their hubris? Are there lessons to be learnt from other segments? Let’s also not forget risks encountered by the Indian companies with multinational aspirations.

Risk transfer

Since the intent is not to dismiss insurance, I will touch upon this. It is a key component in the risk management value chain and the best known form of risk transfer. Unfortunately, we here are still obsessed with the asset class of coverages. Companies do not die due to the damage to its brick and mortar. They can however perish if there are law suits, consumer and reputational onslaughts. Some of you may remember Enron which even dragged its auditor along.

The early symptoms may include: Class action, Satyam Computers’ Indian retail share-holders could not but Maggi’s manufacturer is a sitting duck, now that the Companies Act 2013 has blessed it. There is already a call from the highest quarters suggesting action from consumers on these lines. This makes its Indian board susceptible.  Dipping stock price here may trigger suits against its directors and officers. The reputational issues in this market may have a drag effect on its globally traded stocks. A good D&O cover is also necessary for attracting and retaining quality independent directors.

While it is one thing to have a Product Liability cover in place with a product recall extension, most clients have no recall protocol. Just having a cover in place may not be good enough. Likewise, if you employ external technicians and professionals, they ought to have their respective Professional Indemnity insurance in place. So would be the case if you were to outsource manufacturing partially or fully to external parties. Buying any of these covers is a complex informed process. The customer must be upfront in disclosing all desired information. Do not be tempted by cheap pricing. Most of these covers are long-tail and call for underwriting expertise not abundantly available. The claims may present themselves several years later. Thus make sure your insurer has the expertise, balance sheet and longevity. Seek professional advice from specialist brokers.

Cultural diversity and uniqueness

Many multinationals have global risk management programmes but not all markets can be treated in the same breath. Each market will have its share of ups and downs which would neither be linear nor predictable. Disney’s success in Japan did not guarantee the same fate in France. The Euro Disney case, on the other hand, points to a situation whereby a business venture in which financial risk had been thoroughly assessed and controlled was seriously undermined by a failure to manage risks associated with national culture. It had previously taken the American theme park practice and successfully transplanted it to Japan where there appears to have been fewer, if any, problems than those that arose in France. It only goes on to show that even in a highly risk-conscious organisation, the strategic risk management framework in use did not cater for “soft” risks such as national culture, thereby endangering the brand.

Anticipating increases in global energy demands, Unocal started operations in Myanmar in 1992. The consortium of investors included the French oil company TOTAL and Burmese and Thai investors. The project consisted of a pipeline to transport natural gas from the offshore Yadana gas field into Myanmar and Thailand. Human rights and environmental groups were successful in mustering opposition to the company’s role in the country. This eventually led to sanctions imposed by Clinton Administration on new investments by US companies in Myanmar. The ‘Burma’ pipeline case illustrates the cost of ignoring ethics and supports the assertion that although ethical behavior for the firm can turn out to be costly, the risk of ignoring ethics may be costlier still. Pulling out of the whole deal in the end with attendant costs and loss of reputation was probably costlier. There seems to have been little awareness or identification of the risk impact of the company doing business with the regime.

According to an HBR report, successful European companies share one critical characteristic in addition to their reliance on alternative media: senior managers drive the brand building. They actively make brand building part of their strategic plans and, as a result, integrate their alternative approaches to brand building into their overall concept of the brand. In contrast, many US companies delegate the development of brand strategy to someone who lacks the clout and incentives to think strategically. Or they pass the task to an advertising agency. That creates a distance between senior managers and their key asset, the brand – the driver of future growth opportunities. That distance, it is believed, can make the coordination of communication efforts difficult, resulting in confusion for customers, loss of synergy and performance that falls short of potential. An interesting allusion could be the level at which the risk-management function in an organisation reports into. The higher it is, greater the commitment and the safer the organization. Did Nestle India miss out somewhere, could be a subject matter of another discussion?

In conclusion: But what is the big deal about risk management in brands and brand management of risks? In a complex world of insurance – other than deductibles, excess, cover limits, exclusions, et al – newer forms of catastrophe and interruptions keep rearing their heads. Increasingly, insurance covers less and less of more and more. Moreover, in a globalizing world, it is not the physical side of the risk, but the brand essence that is most vulnerable. A well-managed brand, with embedded risk management, can outlive any physical calamity and go well beyond known barriers of indemnity. A lesson Indian multinationals may wish to overlook only at their own peril.

Published in Autumn 2015 issue of INTdirector

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Stephen Rosling is Co-founder & Director of UK based  TCF Matters. Taking it beyond his interview of April 14, 2013 with this blog – he highlights the significance of conduct risk which tends to get lost in the dust and din of the marketplace. Conduct risk – a sum of systems, processes and most importantly people – will pose significant challenges to all markets notwithstanding whether or not they have a designated regulator in the market conduct space.

Q: Taking it from where we left it last, a poor consumer outcome amounts to poor delivery?

A: Yes, but poor delivery could be the result of poor product design, poor marketing, poor sales, poor claims handling. Poor delivery in just one of these areas can contribute towards a poor consumer outcome.

Q: Is the conduct merely about “consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products”?

A: Customers expect and deserve to get financial services and products that meet their needs from firms that they can trust. Meeting customers’ fair and reasonable expectations should be the responsibility of firms. If the culture across the financial services “industry” is one where the customer needs are not being met, then the detriment to society is considerable.

However, “access” to the right products is not just about the responsibilities of firms, it also plays into education. Society must educate its people to help them understand how different types of financial products work so they can approach negotiations and discussions from a position of knowledge and understanding and therefore reduce the risk of being manipulated by unscrupulous firms. Education is the responsibility of government.

Q: Is it more to do with the intermediaries and the carriers only vicariously?

A: No – both product manufacturers and distributors have an equal responsibility to customers. Similarly, product manufacturers and distributors have a responsibility towards each other to ensure that they can each provide evidence that customers’ interests are at the heart of their corporate cultures.

Q: Could dis-intermediation in any ways change this situation?

A: Yes and No. The only real way to address issues of poor conduct is to understand the root cause. The root cause may not be the behaviour of the intermediary. Instead, it may be a poorly designed product and literature, or poor product training provided by the product manufacturer, or poor training of claims handling staff. Getting to the root cause is the key.

Q: Could the internet transform this into a “Buyer beware” situation?

A: Yes and No. Distributors and providers remain responsible for ensuring the information they provide on-line is clear, simple to understand and not mis-leading. “Cooling off” periods also apply giving customers the opportunity to re-consider their purchase and cancel if it is not suitable for their needs.

Q: Is conduct risk really a quantum shift of the regulatory process into the qualitative zone or is it merely a justification for the creation of a market conduct supervisory process?

A: I think this is a bit of a “chicken and egg” question….what came first? The increased regulation or the poor conduct? I would argue that increased regulation and more robust market supervisory processes only come about due the uncovering of poor conduct on the part of firms. If firms were behaving in a manner consistent with the principles of fair customer treatment, then you could argue that conduct regulation may not be required. I think the underlying point here is that many observers suggest that the poor behaviour of the “large” few has resulted in more regulation for the small “many.”

Q: Does the conduct risk pose any serious governance and regulatory risk to intermediaries and risk carriers in the insurance industry?

A: This all depends on understanding what governance is already in place and assessing how effective it is. Conduct regulation has not mandated the introduction of new committees over and above those which already exist; however, the focus on conduct has raised the bar in terms of the effectiveness of Risk Committees, Boards, NED’s etc. A key part of effective governance is being able to provide strong, robust evidence to support good conduct – the days of “no news is good news” are long gone.

Q: Does all this overlap with the ethics?

A: Absolutely – ethics, integrity, transparency, are all at the heart of good conduct. Ultimately, the behaviour of a firm reflects on the behaviour of its employees which is why embedding the right culture throughout the organisation is so important – systems, processes, and most importantly, people.

The late editor salutes the rise of women in television journalism in his last book:

“Another half a cheer for current – affairs TV is due. Not so long ago, women journalists were confined to the ghetto of fashion shows, flower shows and filmi shows. In the last few decades things have improved and a few have managed to crawl out of the ghetto. However, the most spectacular rise and rise of the young woman journalist has occurred in the time of current-affairs television. A disproportionate amount of reporting, including the thankless chowkidar duty outside the minister’s house where they wait for a sound bite from dawn to dusk, is done by young female reporters in the age group of twenty-five to thirty. They do the job with great patience and good humour.

But it is not restricted to asking a neta after he has supplied the required sound bite, ‘Thank you sir, but who are you?’ The serious reporting and analysis of major events is also the domain of their seniors. If you go to the offices of TV channels you will have difficulty finding a man. It is full of women of all ages busy with their work and clearly enjoying it. I once asked a young, bright, attractive reporter if she had a boyfriend. She replied she had just broken off a relationship because it was interfering with her work. She had her priorities right. TV 24×7, happily, is an unequal opportunity employer. And for once that inequality needs to be applauded.”

I am sure Mr. Mehta would be even happier with the rise of women journalists from just monopolizing serious reporting and analysis to their dominance as anchors. May the glass ceiling go!

Mr. Ganesh K V, Chief Financial Officer, Global Head-Legal & Company Secretary, Subex Limited, Banglore, India, oversees the corporate finance, treasury, taxation and legal functions across the Globe. He has more than two decades experience of leading Finance function of conglomerates like Hewlett Packard, HSBC and HCL Technologies Limited.

“Something Else for J.K. Rowling to Feel Good About”

Quoting the HBR, “A study in two nations of students of various ages demonstrates that reading or listening to the Harry Potter novels and identifying with the main character increase tolerance of stigmatized groups, says a team led by Loris Vezzali of the University of Modena in Italy. For example, Italian elementary school children who listened to passages from the books over six weeks showed improved attitudes toward immigrants. In the books, which have sold more than 450 million copies worldwide, the hero is angered by discrimination, such as when Hermione Granger, who isn’t a pure-blood witch, is insulted as a “filthy little Mudblood.”

Possible lessons learnt:

• Critical role of appropriate role models during impressionable age
• Embedding story telling as a part of influencing diverse societies to be tolerant towards each other
• Influential leaders to consciously build on this mission

Terrorism into the mainstream of human consciousness

“Following the terror attacks in France, Western governments should avoid the temptation to see relations with MENA solely through the lens of counterterrorism, writes Jane Kinninmont. The attacks have prompted renewed denouncements of multiculturalism in some quarters, but the mood could ultimately support political parties that resist populism, writes Quentin Peel.” (Source: Chatham House).

Suddenly terrorism is neither just headline news nor flying into the face of common man but very much in the mainstream of human consciousness. Like a mutating virus defying mankind’s comprehension, its forms and spread seem at this moment to be challenging all of humanity. Just when it seems unstoppable, should insurers not re-visit their approach? Perhaps segment it to anticipate the evolving differentiation and rather just react also participate in prevention as well as mitigation. Revisit they must, as terrorism is a potential peril in any every form of cover across the non-life and life spectrums. In every which form it has a very high profile and strong socio-political ramifications both in the real and virtual space.

What next?

The first wake-up call by the ‘T’ factor in India goes back to the 1984 post Indira Gandhi assassination riots. Insurers expanded the Riot Strike Malicious Damage (RSMD) cover to an RSMTD. It took another 17 years for the next trigger in the form of 9/11 to create a Terrorism Pool in India. Just then the US created a TRIA (Terrorism Risk Insurance Act) as a means of a sovereign backing to its assets against terrorist acts. Terrorism cover predominantly remains coverage against lives and property. It needs to go beyond both in terms of scope, prevention and mitigation. Insurers ought to diversify their thought and action beyond the traditional realm.

Emerging segments

There is a growing demand world-wide for Cyber & Chemical/ Biological cover as a result of these types of terrorist attacks. There are a handful of select markets, particularly at the Lloyd’s, one of the pre-eminent hubs for specialist classes, who do offer this cover. However, coverages by most traditional carriers contain very robust & absolute exclusions regarding both Cyber, & Nuclear/ChemBio/ Radioactive coverages.

In relative terms to the wider market, say the experts in the field, this type of cover in the Terrorism sector specifically is still in its ‘infancy’ when it comes to fully understanding the exposures, implications & how to measure them in terms of safeguards, protections & aggregate management. The rest of the market continues to ponder and explore over recent years whether they ought to launch into this field, they do not seem to have got to the stage where they feel totally convinced about their readiness to justify such a big step that could have potentially ‘unquantifiable’ implications for them.

Insurers need to change the tack

Rather than just embark upon what is insurable and maintain a clear line of divide vis-à-vis all that is uninsurable, insurers need to accept terrorism as a fact of life. In the foreseeable future this will be one trigger that has the potential for generating significant ‘socio-economic’ losses. With the state slowly but steadily getting its upper hand over big events, terrorist acts will perhaps assume a low severity (in terms of asset class) but high implication (as in cyber or bio chem classes) and high frequency. Even in a traditional low severity scenario the non-financial implications could be high. Imagine the trauma caused to the sensitive segments of any society. Hence this allusion to ‘socio-economic’ rather than mere economic losses.

Some of the specialist markets do underwrite Terrorism Liability, but these usually contain the standard exclusion along the lines of “mental injury, anguish or shock where no bodily injury has occurred to the litigant”. It is interesting that not all specialist terrorism markets offer liability cover (it’s probably about 50/50, according to the experts). They believe that there is to date no sound case law for such cover (as it is a relatively new product in insurance terms which only really formally emerged quite a while after the 9/11 events). Interestingly, feel some observers that there is currently a case underway (not sure in which court jurisdiction) where a foreigner is apparently suing a prominent hotel as a result of him jumping out of a window during the 2008 Mumbai attacks, ‘but whether anything will ever come of this is hard to gauge’, says an expert. In his opinion “it can be extremely difficult to prove negligence or liability for ‘damage’ following such events, even if the defendant did not have effective security protections in place at the time.”

Insurers also need to participate in the distant early warning protocols which could alert not just them but society at large about future potential signals and triggers. Take for instance the excessive use of ground water to boost the cotton cultivation in Salamieh region of Syria. Followed by a drought and mass migration to urban areas, the unemployed economic refugees became a fodder for the socio-political uprising fuelling its own form of middle – east terrorism. A close cooperation between agriculture  and micro insurers could have set the alarm ringing for the terrorism underwriters whether or not it was about to precipitate something insurable in the present.

In the realm of SciFi

Picking a few of Ray Kurzweil’s predictions:

• 2030s: Virtual reality will begin to feel 100% real. We will be able to upload our mind/consciousness by the end of the decade
• 2040s: Non-biological intelligence will be a billion times more capable than biological intelligence. Nanotech foglets will be able to make food out of thin air and create any object in the physical world at whim
• 2045s: We will multiply our intelligence a billion fold by linking wirelessly from our neocortex to a synthetic neocortex in the cloud

We are not talking about too distant a future nor does it call for high imagination to figure out how an evil intent could terrorise such extra-ordinary capabilities.

In conclusion

While most insurers would stick to this as a generally acceptable global definition for a terrorist act:

“….. acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes”.

This in no way casts the current coverage and role of insurers in stone. In very many ways here could be an opportunity for insurers to play a more significant mainstream societal role in pre-empting and mitigating the scourge of terrorism. Whether or not they choose to underwrite it they could still warm up as risk managers, while it holds its sway now and in the predictable future.