Understanding Systemic PESTLE risks: Learning from the Asset Managers

Risk averse Businessman

The pandemic has fueled underwriter concerns about liquidity, uncertainty and systemic risks.

Today’s pandemic-impacted economic environment is impacting a profitability-challenged Directors and Officers Liability (D&O) market, fuelling underwriter concerns about liquidity, uncertainty and systemic risks, and keeping capacity on the side-lines. A Willis report asks what drives underwriting concerns today? Financial pressure, economic shifts, such as lower demand and falling oil prices, and recalibrated pandemic lifestyles and ways of working — these factors mean that old business models may not fit any more.

Concerns over systemic exposures from pandemic-related risk have further narrowed willing capacity, as we discuss in this report.

The Willis report from the start of the year outlined how an unprecedented, pandemic-impacted economic environment hangs over a profitability-challenged Directors and Officers Liability (D&O) market, fuelling underwriter concerns about liquidity, uncertainty, and systemic risks, while keeping capacity on the sidelines. 

According to the global broker, liquidity and restructuring is driving underwriting concerns today. Financial pressure heightened by the pandemic, economic shifts, such as lower demand, unstable oil prices, and recalibrated pandemic lifestyles and ways of working mean that old business models may not fit any more. These all contribute to systemic exposure concerns.

Systemic Risk Pulse Check

The DTCC Systemic Risk Barometer Survey - an annual pulse check to monitor existing and emerging risks of the global financial system – has identified the top five risks for 2022.  According to DTCC, an asset management consultant, cyber risk, infectious disease/pandemic (COVID-19) and geopolitical tensions continue to occupy the top three spots as the greatest threat to the global financial markets. Climate change and inflation both advanced significantly and grabbed the fourth and fifth spot in the rankings.

Survey respondents cited key reasons behind the top rankings.

  • Cyber: Increasing use of emerging technologies growing sophistication of cyberattacks and use of ransomware; and interconnectedness of financial system (one attack – multiple impacts).
  • Infectious disease/pandemic (COVID-19): Market volatility; continues to be a drag on recovery and economic growth; and workplace and workforce disruptions.
  • Geopolitical and trade tensions: Strained U.S./China relations; COVID disruptions to supply chains; high inflation and increasing public debt.

U.S. Federal Reserve Monetary Policy and Fintech/Crypto assets were among the largest percentage advancers for the 2022 forecast. U.S. Federal Reserve Monetary Policy and FinTech/Crypto Assets were cited by 28% and 25% of respondents as a top 5 risk, an increase from 10% and 7% in last year’s survey, respectively.

Economic slowdown concerns

U.S. and European economic slowdown as a risk to the broader economy dropped by 14% and 8%, respectively, from the 2021 forecast.


Building Intelligent Resilience

Andrew Gray, DTCC Managing Director, Group Chief Risk Officer says: “Looking forward to 2022, risk managers face a set of challenges that is unprecedented both in terms of complexity and breadth. The interplay between macroeconomic risks, continued cyber threats, the rise of crypto assets and the impact of climate change - just to name a few areas - creates a dauntingly difficult terrain to navigate. In such an environment, continued vigilance and a cross-disciplinary approach to risk management are more important than ever.”

DTCC has conducted a lot of good work on recent market volatility associated with meme stocks, the implosion of the asset manager Archegos, and the Colonial Pipeline ransomware attack, which have shown how tail events can have a sudden and significant impact on markets.

At its eighth annual Client Risk Forum, a panel discussed recent extreme market events and how data partnerships are key.

Threat Intelligence

Joanne Rowe, Corporate Risk Officer of Intercontinental Exchange, Inc. (ICE), spoke of how recent events have highlighted the necessity of strong threat intelligence, robust connections with regulators throughout the world, importance of sound risk management and stress testing. In particular, Russell Group notes her comments that risks are interconnected and in a world of extreme tail events, market leaders need to manage expectations and challenge standard practices and conventional thinking about risk management.

The pandemic provided corporates with the ultimate business continuity planning test, as it impacted every area of every firm. The work from home situation has increased cyber-attacks. On the regulatory side, FinCen recently published a new report on ransomware following President Biden’s executive order.

Ransomware attacks doubled in 2020 from the prior year and have become a global phenomenon, making cooperation critical across industry and regulators. The attacks on JBS and Colonial Pipeline are examples of how attacks can disrupt critical infrastructure and financial systems.

Understanding Extreme Events

Dan Thieke, DTCC Managing Director, Business Risk and Resilience Management, spoke of how the firm has been actively discussing business resilience since 2019, and in response to the extreme events the market has witnessed. “Clients are looking for solutions that are built to be resilient by design, looking at extreme but plausible scenarios, to maintain and continue offering our services,” he said.

From an asset management perspective, the goal is to increase transparency around margin calculations, so DTCC, for example, offers Risk Management as a Service. Available through both a portal and API, it allows clients to do intra intraday risk monitoring, manage intraday margin calls and cash positions, as well as VaR calculators to submit hypothetical portfolios. DTCC is also building a stress test calculator, which will let members simulate extreme market events.

Connected Systemic Risk

Chief Executives of global corporations have two primary motivations: maximising their enterprises profitability/share value and managing corporate risk. However, these two motivations are under threat connected systemic risk and the way extreme connectivity affects corporations in today’s joined up risk landscape. As a result, emerging and potentially systemic risk poses a real threat to the C-suite of global corporations and suppliers, corporate risk managers, and their insurers. The failure of a large firm from connected risk can have a disproportionate effect on both the firms connected to it in that vertical sector – financial institutions, for example – and the wider (re)insurance industry as well as other connected verticals.

In a white paper from a few years ago, UBS referred to extreme connectivity as the growth in the number of companies which are increasingly integrating across industrial sectors and geographies, and creating greater levels of risk This exposes corporates to a network of connected risk as each company becomes more related to the next. In this context is vital that all businesses start to invest in the risk modelling tools and data to help them know and better understand their connected exposures. 


Post Date: 27/12/2021

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