Scenario modelling can help corporates and their insurers better price their risks

Earlier this year, I was part of a virtual (of course!) roundtable discussion, titled “Insuring The Uninsurable,” which was organised and hosted by Russell Group.

Along with some of my more experienced colleagues were risk managers from leading FTSE 100 and Nikkei companies and (re)insurance representatives from the world’s largest (re) insurance companies.

What came across loud and clear to me was the message that there is a growing divergence between corporates’ risk requirements and insurers’ appetite to cover them. This issue is exacerbated by the fact that only 20% of corporate risk is currently insured. Alongside this lack of risk coverage, there is a failure to understand the interconnectivity and accumulation of risks – and how these risks can impact an organisation’s balance sheet.

For corporates, this manifests itself in one-dimensional corporate risk registers that examine risks in isolation and never takes account of risks holistically. For insurers, they view risk in a siloed fashion and rarely from a “multi-class” view.

Since that roundtable and in subsequent discussions throughout the year, there has been a host of key issues that keep coming up time and time again. In a year that will no doubt go down in history as one of the most unusual in living memory (a one in 200 event you might say!), these are the issues that I believe our industry will be talking about in 2021:

1.    First and central to success will be the importance of the risk manager speaking to the c-suite and getting their    message to the boardroom.

2.    The interconnectivity of risks need to be better understood across an organisation.

3.     How will the role of the risk manager change as a result of the pandemic?

4.     Post-COVID, regulation could be implemented to force companies to have greater awareness of certain risks.

5.     Risk registers need to become more dynamic to account for the correlation and interconnectivity of risks.

6.     Could COVID-19 be regarded as a political risk rather than a pure business interruption risk?

7.     There is conflict within the c-suite between sustainability versus short-term interests. In other words, short term benefit v long-term benefit.

8.      It seems there is a divergence between what is defined as a corporate risk and what is an insurance peril, as insurance is peril driven, while corporates are risk driven – there is a miss-match.

9.      Scenario-modelling working hand in hand with deterministic exposure modelling, can help to put a price on a risk that protects an organisation’s balance sheet

10.     Corporates want broader coverage and transfer more risk but insurers are limited by their solvency and ability to expand. Could captives and other forms of risk transfer play a role in this?

Finally, on the issue of risk quantification, this can only be achieved through a combination of good data and scenario modelling. Combining both scenario modelling and deterministic exposure modelling, corporates and insurers can put a price on an increasingly complex risk – which is the final price an organisation can pay to protect their balance sheet from the impact of that risk.

This would also help the c-suite understand the complexity of risk and the value that risk managers provide in helping to protect the organisation’s balance sheet.

What today’s real-time disruptions - whether caused by a climate change, a pandemic, cyber or geopolitical event - highlight is just how potent these disruptions can be for the wider inter-connected economy. If trade cannot enter in and out of ports, as is occurring right now for example, this creates ripple effects across the world of trade, ranging from supply chain disruption for organisations, higher prices to consumers to potential economic repercussions as exporting countries struggle to access key markets.

COVID-19 has forced many organisations to review their digital transformation plans and improve current risk management technique as part of a two-step process. Firstly, it requires an awareness of how the inter-connectivity of business is driving connected trading risk exposure and how this understanding and awareness is key to sustainable and successful operations. Secondly, it requires the foresight for both corporates and (re)insurers alike to use this knowledge to transform their trading portfolios to ensure future economic viability.

Data will be at the heart of this strategy, but it is the associated analysis and actions taken by risk management professionals working with their partners in insurance and risk that will help businesses to plan for the worst while exploiting any opportunities that may arise along the way.

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