Insurance should be a company's last line of defence. However, many risk managers follow the opposite reasoning. They sign a policy and think that is the end of the story. Bart Cuypers of Aon advises caution and advocates a structured approach.

Many companies act like families in relation to insurance. They insure themselves against standard risks, such as fire, occupational accidents, and liability. There is nothing wrong with this per se. After all, the material damage after an incident is compensated. But as Bart Cuypers of Aon points out, the risk does not stop there:

“If your family home goes up in flames, you live in a hotel temporarily or move in with friends. But what happens if your factory is reduced to ashes? Or if your most important machines break down? Where and how are you going to carry on production? Companies think everything is under control once they sign an insurance policy. But they overlook what is known as consequential damage.”

Expect the unexpected

According to Bart Cuypers, companies all too often cover themselves against low-impact risks, leaving themselves uninsured against larger risks:

“Companies in the food sector, for example, forget that a production error can have serious consequences. They must organise an expensive recall action, there is marketing and reputational damage. Briefly put, an error can cost you a lot of money. Yet the directors' cars all have full comprehensive insurance, even though an accident will only set you back about EUR 40,000. Companies often fixate on minor damage, while you should be considering what can really go wrong if the impossible happens.”

Do not opt for an easy solution

Bart Cuypers also warns against standard insurance policies. While these are excellent for families, they are inadequate for companies because they exclude the real risks of doing business. According to Cuypers, companies frequently opt for an easy solution. They hand over their risk management to an external partner that is then given carte blanche. Not a good idea, it turns out: 

“Many SMEs operate in a specific niche or certain countries. That implies certain risks are not obvious. It is not easy for an outsider to identify those risks. The company must take the lead itself and establish its own weaknesses. It can only do that exercise itself.”

Last life buoy

Is a company's only option then to take out a large and expensive insurance package? Bart Cuypers does not think so. On the contrary:

“Insurance is actually a company's last resort. Companies are well-advised to rather work on prevention. By creating procedures, putting alternative plans on paper. You can spend a fortune insuring yourself against cyber fraud, but you can also take preventive measures. Or you can already plan today where you are going to produce if your factory burns down. As an entrepreneur, you need to be forward-thinking, including with regard to any setbacks. But most companies hardly free up any time for this, which is logical because it is unlikely to occur and you still have your routine tasks to complete.”

Step-by-step plan

Risk management is customised by definition. It is practically impossible to use a step-by-step plan that can be applied to every company. Nevertheless, Bart Cuypers gives some good general advice:

“Companies can start by identifying their risks as best as possible. That is a long-term exercise involving many parties. People on the shop floor, for example, can provide valuable information. Then check how likely it is that the risks will actually occur, and estimate the financial impact of each risk. The company can then decide whether and which action is necessary. Focusing on prevention, or taking out more insurance. It may also opt to do nothing. That is a legitimate choice, certainly if it has sufficient reserves and the impact is low.”

Central banks worldwide are stimulating the economy with cheap money. This leads to a false sense of security in the financial markets.

After all, any news - positive or negative - can trigger severe market fluctuations. Companies run substantial interest rate and exchange rate risks as a result, even though they are not always aware of this. Fortunately, there are financial techniques to hedge these risks. 

A recent study by BNP Paribas Fortis and ATEB, the association of corporate treasurers in Belgium, speaks volumes. Barely 51% of the 402 companies interviewed have the same risk tolerance today as in 2008. This is a surprising finding because risk managers are dealing with a complex and therefore more unpredictable economic context in 2015.

“Today, financial risks, especially systemic risks, are more difficult to manage than five years ago,” says Eric Charléty, head of the Business Development department of the dealing room. “What if the interest rates suddenly start to rise? Many companies have taken out loans with a variable interest rate, because they assume that interest rates will remain low. But that choice exposes them to a substantial risk. As soon as rates rise, you have a problem.”

Exchange rate risk is often underestimated

Besides the interest rate risk, most companies are also exposed to a significant exchange rate risk, because they import and export goods or have partnerships with companies outside the Eurozone. According to Eric Charléty, Belgian entrepreneurs often take a very narrow view of financial risks:

“Sometimes they do not look further than what is on paper, for example that their invoice must be paid within 30 days. But if the payment is in Pound Sterling, the profitability of the transaction will largely depend on the conversion into euros. In this case, it is certainly a good idea to hedge yourself against the exchange rate risk in advance.

Even so, very few companies manage to successfully link their risk management to their strategy. They assume all too often that they only run risks if they do business outside the Eurozone. This is incorrect; a broader perspective that takes due account of the competition is needed. Even a company that only does business in the Eurozone has to deal with competition from outside it. Due to fluctuations in foreign exchange markets, a British or Japanese competitor may suddenly be cheaper.

That makes risk management a key factor of the business strategy, on par with target markets, products, and value chains. Good knowledge of the competition, their exposure to risks, and how they manage them is just as essential to the success of the company.”

Hedging = avoiding risks

The good news is that companies can hedge or cover the interest or exchange rate risk of a particular transaction by entering into a separate contract with a third party. In practice, this third party is usually a bank and the contract itself is called a ‘derivative’. Certain risks are placed with the bank through such a contract. Eric Charléty sees two major advantages in this:

“Banks are better informed about exchange rates and interest rate developments than companies. It is their core business. Banks are moreover able to spread the risk better. An individual company cannot beat the law of large numbers.”

Companies have different options for hedging their risks. They can agree in advance on a fixed exchange rate with the bank.  By way of example: Company A sells goods for USD 100,000 to company B. A receives payment a month later. The US dollar can fluctuate greatly in the meantime. A can play things safely and agree on a fixed dollar rate with its bank today. A then knows exactly how many euros it will receive.  The risk of a fall in the exchange rate then lies fully with the bank. The bank charges a premium for this. Although this sounds attractive, Eric Charléty warns against a possible competitive disadvantage:

“If you fix exchange or interest rates, you are less flexible. You can no longer profit from positive market developments.  If your competitors follow the same strategy, there is no problem. However, if they do not fix their exchange rate, they can enjoy and benefit from exchange rate fluctuations.”

Customisation

Instead of fixing the exchange rate (and thus limiting its flexibility), A may choose to ‘cap’ the rate. A can then profit from any depreciation of the dollar, while any increase is capped. Just as in the case of insurance, you have to pay a premium for such protection. However, this is not necessary. A can also avoid paying a premium by choosing a third option. In that case, you allow the rate to fluctuate between a predetermined lower and upper threshold.

“Every situation is different and so the most appropriate solution is not always the most obvious. You can combine different building blocks with each other. Choosing a derivative is customised by definition,” concludes Eric Charléty.

SMEs mainly focus on risks that are obvious but unlikely, such as fire. Some risks are less obvious but may have serious consequences.

Empowered employees

People are far more empowered today than before. The relationship between employees and employers has changed considerably as a result. Employees are far more prone to fight their dismissal or to lodge a complaint against their managers than before. This new empowerment comes with a price tag. It implies additional legal costs and possibly even penalties. 

Internal fraud

Companies conveniently assume that fraud is an external threat, but the enemy sometimes comes from within. Moreover, internal fraud is a typical risk for small and medium-sized enterprises, precisely because of the focus on trust. Some employees dare to betray this trust. They have their hands in the till, sell machine parts, or pass on sensitive data to the competition for payment. There are various reasons for susceptibility to fraud. First of all, people today are not as loyal as before. SMEs also have fewer rules and procedures. That freedom opens the door to abuse.

Insolvency among customers and suppliers

Insolvency is and remains a substantial risk, especially after the crisis. Companies do not dwell nearly enough on the fact that customers can go insolvent. Insolvency has dramatic consequences for your profit margin. Suppliers may also be affected, which can seriously threaten your production process. After all, it is not an easy task to quickly find a new raw materials supplier. Companies are well advised to purchase external data about their partners, especially if you do business abroad.

Interdependencies

Companies depend on other partners in order to operate. Problems with suppliers may thus impact on their internal functioning. Imagine if an important supplier's machine breaks down, and you are left without raw materials. Companies must assess their full value chain in order to detect possible risks. Bear in mind that your customers may also have problems. For example, a fire at your most important partner can prove to be a major spanner in the works. You can include an additional clause in your business interruption loss policy so as to receive compensation if your supplier is affected by fire.

Professional liability

Like people, companies are fallible and thus occasionally make errors. These errors can cause damage to third parties. The resultant claims can range from several thousand to possibly millions of euros. For example, an engineer could have made a calculation error in the design of a new production line.  Apart from material damage to the assembly line itself, there may also be financial losses due to production stoppages.

Caution with contracts

Nearly every contract that companies enter into has a clause on liability. This describes each party's responsibilities. Companies pay scant attention to this, even though the contractual consequences may be significant. An excellent example is a lease for a crane. The lessee is usually responsible for any damage to the crane, which can be very costly. Study the liability clauses thoroughly as they can have a serious effect on your company's financial health.

Political risk

By political risk, we mean all events that may prevent your foreign customers from being able to pay or your foreign partners from being able to produce. These may be purely political events such as a war or revolution, but may also be natural disasters, economic difficulties, or government decisions that complicate trade. For instance, import permits may suddenly be withdrawn. Belgian companies have a strong international orientation and are thus well-advised to have insurance against political risk.

Environmental damage

“The polluter pays” is a well-known principle. Restoring the environment to its original state is a costly business. A few dozen litres of oil can cause hundreds of thousands of euros of damage.

(Source: www.Aon.com)

Fraudsters are becoming ever more inventive in their attempts to con private individuals and entrepreneurs. A healthy dose of vigilance can prevent a lot of distress.

Six most common fraud techniques

• Fake transfers
  Fraudsters send fake transfers to the bank in the name of an organisation.  Signatures on payment orders are perfectly forged and can scarcely be distinguished from the original.
• Forged invoices
  Fraudsters intercept outgoing invoices from a company. They change the account number of the beneficiary and send the 'adapted' invoice to the customer or bank, which then pays into the fraudulent number.
• Social engineering
  This fraud technique is based on manipulation and breach of confidence. Fraudsters firstly gather personal information about their victim on social media or Google. They then contact the victim, posing as a help desk worker, for example, and try to get the victim to reveal sensitive information such as passwords or account numbers.
• Phishing
  A specific form of social engineering used by criminals to "fish" for personal data, mainly by e-mail, that enables them to steal money from a bank account at a later stage. The fraudsters often play on the feeling of fear of their victims: they warn them, for example, that there is a threat of their account being closed. 
• Hacking
  Hackers install a virus on your computer. That program observes what you do and collects all types of data. During an online banking session, the hacker can display a pop-up in which you are asked to insert your PIN code for example.
• Infiltration
  A new fraud technique by which a fraudster arranges to be hired by a company in order to learn its payment and monitoring procedures. After a few months, the fraudster makes large payments to his own account and then disappears from the scene. 

How to teach fraudsters a lesson

Fraud prevention does not have to be expensive or high-tech. Being alert and responding decisively is key.

• Raise your employees' awareness: The best form of fraud prevention is to raise awareness among potential victims. Make your employees aware of the real risk of fraud. Convince them of the need to regard business data as company property. Also encourage your employees to be critical towards everything that differs from the normal state of affairs.
• Be vigilant for suspicious behaviour: Look out for sudden changes among your customers or suppliers. Focus particularly on deviations from payment details. Example: if a supplier asks you to pay into a foreign account. Contact your customer or supplier, preferably people whom you have known for years and trust.
• Do not allow any phishing of your data: Banks never ask your for personal details by e-mail or telephone. You can assume such questions come from fraudsters. Other indications are poor language, an incorrect form of address, or the fact that the e-mail ended up in your spam folder. Mark these as unwanted messages in your e-mail program. Report the misuse to your internet provider, so the sender can be blocked.

Protect your IT systems

• Install an anti-virus program and firewall on your computer(s) and update these systematically.
• Never respond to any questions by telephone. Again: your bank will never ask you by telephone for a code or any confidential information.
• Going to do online banking? Only open the program concerned. Close all other sites. 
• Never click on links that refer to the website of a bank, especially if they have been sent by e-mail.

Laurent Mélignon, Corporate Sales Director of Arval, the market leader in full-service car leasing and new mobility solutions, looks ahead to 2025. What does the future hold for the industry and mobility?

Arval is part of the Commercial, Personal Banking & Services division of the BNP Paribas Group. As the market leader, it plays a key role in offering full-service car leasing and new mobility solutions. Laurent Mélignon, Corporate Sales Director of Arval, is thus ideally placed to share his thoughts on what's in store for Arval in 2025.

Arval is the market leader in a sector in flux: how companies and private individuals see and approach mobility has changed significantly. Mélignon sees several reasons for this: "In our country, taxation is the primary driver of many change processes. This taxation is linked to wage costs: many companies see company cars as a tax-friendly alternative for maximising the remuneration they want to pay their staff. Employees, meanwhile, see company cars as a way to be compensated with tangible benefits, without the tax authorities targeting them. In the coming year, the tax framework will continue to evolve in line with this social evolution. The federal mobility budget and the bicycle allowance, for example, or options such as the cafeteria plan or the flex income plan: these are just some of the ways in which companies can use their salary package to motivate their workers."

But Arval's Corporate Sales Director sees even more drivers of change for mobility. Mélignon: "Our entire mobility culture is also changing, a trend that is set to continue in 2025. The younger generation is much less attached to the status that company cars have been associated with for so many years. They are just as happy to hop on a bicycle, take the bus or use car sharing, depending on the company's location, of course. Finally, there are also several macroeconomic factors driving this change. These include the growing traffic crisis many cities are facing, as well as the increasing awareness of people and economic players regarding the energy transition. We are all gradually seeing the need for change and alternative mobility choices. This has been clear for quite some time."

Flexible complexity

The mobility mix will only become stronger in the future. Mélignon: "That is a big part of our mission: to be and remain a one-stop shop, offering companies the opportunity to think in terms of flexible remuneration. A new employee, for example, someone who is single and without a family, has different mobility needs than their colleague, who is married with two children and has their own home in the countryside or in the city. Now that this need is becoming stronger and more established, Arval is the ideal partner to provide companies with knowledge about mobility and take the burden off their hands. We enable employers to offer flexibility by taking care of the complexity associated with it."

Positive mindset

Mélignon expects the transition to electric mobility to continue in 2025: "When I look at corporate customers, I see that 80% of all new orders are electric. This is quite different from the private market, where we barely reach 20%. The electrification of the Belgian fleet is therefore mainly driven by companies. I see that the government has recently made some announcements and initiatives to slightly adjust and refine the federal mobility budget. In the coming months, more and more people may thus give up their company cars and opt for this adjusted budget instead. Arval can also be of service there, with a positive mindset and a lot of know-how, in our role as a 'full mobility provider'."

Tipping point

According to Mélignon, the shift to electric mobility, which the market has been anticipating for so long, will also have consequences for companies. Mélignon: "We expect to see many more affordable models in 2025. Electric vehicles will no longer be just for the lucky few. This benefits the private market, but it also gives companies more opportunities. In addition, I expect the price of cars with combustion engines to rise. We often receive this feedback from manufacturers. As a result of the Corporate Average Fuel Economy (CAFE) standards, which regulate their CO2 emissions, they will soon have to pay huge fines if they fail to meet these standards. It is therefore in their interest to steer the market towards electric cars. They will also adjust their production capacity accordingly: 'made to order' instead of holding large stocks will become the industry standard from next year."

The road ahead

On a final note, Arval expects the market to open up to smaller and medium-sized enterprises and individual clients in the near future. Mélignon: "We believe that the change in the market will mean that many companies, which currently still favour purchasing company cars or financial leasing, will switch to operational leasing. They will outsource the risk related to, for example, residual value to us. And that is where we can make a difference as the market leader: we see this as a scenario for the near future, for which we are already preparing."