Republished with the kind permission of Insurance Day. 

Organisations and their risk managers can model their previously unknown risks

The pandemic and the consequent realisation of how interconnected the world has become, threatens business from connected risk, which in turn exposes the balance sheet to a cocktail of volatile connected exposure, which ultimately threatens business viability. 

This has had a profound effect on the risk strategy of many large corporates. As boards become increasingly aware of the fragility to their business from external events, resilience management is emerging to quantify the viability of business. In some companies this new title brings together all stakeholders including asset risk management, horizon scanning, crisis management, and environmental risk management in addition to operational risk management departments and business continuity.

Resilience also naturally aligns itself with the marketing strategy of the enterprise, and consequently, it is at this decisive level that risk is increasingly being included when strategic decisions are being taken and plans being laid.

This provides a huge opportunity for the corporate risk manager astute enough to have aligned his or herself to c-suite planning. The challenge is, when viewing connected exposure at the macro-level, what can be seen as straightforward logic needs to be somehow interpreted into an effective operational risk control and mitigation program throughout the enterprise, and this includes risk transfer.

For those insurers insuring large corporate business this presents something of a dilemma. On the one hand the corporates are becoming more sophisticated in their assessment of risk, and on the other hand, most insurers are still offering large corporates traditional siloed insurance products which are becoming increasingly distanced from the actual risk transfer requirement. From the side-lines it is a little like watching the transformation taking place in the high street – the department stores are fast vanishing to be replaced by nimble outlets responding to dynamically changing needs with full on-line support. If the insurers are the department stores, they similarly need to change, and whilst new insuretech initiatives are being launched, these are clearly not aimed at the large corporates.

Completely fresh thinking is therefore required from insurers, and this presents an opportunity for those willing to embrace the changes required, and who either have the financial capacity to play in the new large corporate space, or are willing to work together in this space with their peers.

Feedback from corporate risk managers is that they are often viewed by insurers as having unique insurance needs, and more importantly, that insurers consistently fail to understand their business. In return, insurers complain that most large corporate initiatives they have come up with in the past have failed due to lack of traction. It seems obvious that the two sides need to have far more direct dialogue.

In discussion with a broad group of risk managers, we have confirmed that there is a common thread of connected exposure amongst the large corporates, whose entry and exit points for viability sit between risk appetite and risk tolerance, above the traditional product class towers. This high-level exposure is where the connected risks exist that can cripple an organisation and where the resilience focus is clearly being aimed. Such exposures include transformation, digitalisation, reputation, cyber, compliance, regulatory, pandemic, and the raft of exposure that is ESG and climate related. These risks, ‘systemic’ to an organisation, its trading network and the world at large, are what keep board members awake at night.

The best way to model the resilience of an organisation is therefore from an outcome perspective. Considering what really is the worst outcome that can happen to a company and then considering what events could bring about that outcome, either individually or collectively. Scenario modelling then helps determine the likely scale of the outcome, mitigation factors that could be applied to minimise the impact, and a risk transfer strategy identified where possible. Quantification of these exposures is possible given the data-rich world we live in, as is mapping the exposures against global trade and economic patterns to provide matrices for risk transfer partners to price and model against. In other words, solutions that meet the resilience management demands of the increasingly sophisticated corporates are possible given the will to change, the realisation that solutions have to be developed as a partnership, and the recognition that resilience is not unique to one corporate, but a fully connected issue that impacts every large corporate across the globe. It’s time for change on the high street.