The COVID-19 pandemic taught risk managers and business leaders valuable lessons as most were caught unprepared to tackle a once-in-a-lifetime challenge that devasted many businesses and economies. Of note:
- Prior to COVID-19 82% of businesses didn’t consider pandemics or other major health crises as top-10 risks.
- Nearly one-third of businesses had no pandemic plan in place.
- More than half of companies report that COVID-19 will continue to impact their business a year from now.
Taking an enterprise risk management approach to crisis management was a valuable lesson learned as organizations recognized the gaps in their risk readiness and the need for a heightened approach to evaluate their total cost of risk. Recovery will require a new approach to enterprise risk management – nearly 80% of organizations now say they will be more dependent on risk management to reduce volatility of performance in the future.
Learning from events of the past year, successful organizations are strengthening their decision-making to better react and respond, recover and reshape – and reprioritize enterprise risk management and resilience. Leaders must take a closer look at long-tail risks, including climate change, and should also be rethinking their distribution channels, their supplier networks, their products and services -- and ultimately their core business strategies, and putting a renewed focus on the core principles of risk management:
Recalibrate Your Risk Appetite
During the pandemic, 88% of businesses surveyed said they did not make a COVID-19-triggered claim on their insurance programs or through their captive. Other more larger risk mitigation options were needed for such a significant exposure, such as government response, but also a need for alternative risk transfer solutions to support corporate mitigation efforts.
Likewise, an organization’s financial and strategic objectives are key in determining its risk-averse or risk-seeking posture. As the landscape changes, it is likely that the amount of risk the organization is willing and able to take on will change as well. Companies that have a firm understanding of risk, and a grasp of how to navigate and leverage risk, are the ones that ultimately avoid pitfalls and find opportunity.
Some organizations are managing risk based on outdated assumptions and following program structures that have been in place for up to 20 years. Their coverages, limits and deductibles have stayed the same even as their balance sheets have changed dramatically in the wake of our current environment. But decisions can’t be made based on what was known yesterday. This is akin to leaving your car insurance with no deductible after your kids leave home. You don’t have the same risk, and you’re better prepared to handle the fluctuation of loss, so it’s time to consider raising the deductible.
Organizations should engage in a similar analysis. The combination of the pandemic and hard insurance market complicated the risk financing decision making process. This resulted in the need for organizations to take a thorough look at the impact of the pandemic and new economic realities on their balance sheet and risk profile.
As balance sheet metrics change, so too does risk-bearing capacity. By analyzing and modeling data in a meaningful way, and understanding an organization’s cost of risk, leaders can make fact-based decisions to better deploy funds and drive the value of insurance that they ultimately decide to purchase. Organizations are also better positioned to market their program to carriers and drive lower premiums when they utilize their data in these ways. Change can be the driver of opportunity.
Quantify the Financial Impact of New Risks
The current environment has introduced new risks and raised the importance of a risk management approach that is grounded in strong principles while also spurring the development of innovative ways to mitigate and transfer those exposures.
For example, supply chain has always been a key part of risk analysis, but managers may have previously assumed a supply chain was stable as long as there was more than one supplier. But having multiple suppliers may not help if they are all in the same geographic location or have similar dependencies that could ultimately impact production. With the help of diagnostics, risk leaders can gauge how well their supply chains are protected against a range of potential disruptions.
Similarly, as the economic consequences of the pandemic started to be felt, many employers began to review the costs associated with health care, retirement and pension, and compensation. When assessing options, leaders should utilize the data at hand and leverage analytics, so that they can identify areas where they can balance the impact of cost savings with the organization’s long-term needs and business strategy.
Risk Management as a Competitive Advantage
In today’s environment, yesterday’s risk management approach is not the optimal way to drive value for the organization.
Financial modeling, risk quantification and other analytical tools can help create a fundamentally sound risk posture that can be effectively marketed to reduce premiums and better optimize spend across the portfolio.
But risk management can have a larger impact. By looking at factors such as cash flow and liquidity and their alignment to a risk management strategy, organizations can take advantage of opportunities that emerge even in these challenging circumstances. If an organization can mitigate a risk that others cannot and figure out a way to create a business around it, you have differentiated risk management. The organization is positioned to come out of this stronger and poised for growth.
With a combination of data, analytics and technology, risk leaders have an opportunity to transform the risk department from a cost center to a value generator.