There are many unknowns when a new administration takes office in the US. But tackling a few key areas of your risk strategy can help prepare for coming changes.
Every new United States presidential administration brings a certain amount of uncertainty, no matter if you’re a US-based firm, or a multinational company that transacts business or has operations in the US.
And since companies don’t exactly know how their risk will be affected when a new president is inaugurated, an enterprise risk management program can help you prep for emerging risks that may affect you in the future.
Sources to investigate include:
- Internal data on your lines of business
- Internal perspectives from multiple leaders
- Trade bodies in your industry and industries you do business with
- Regulatory papers to understand the regulatory history and changes
- Research in the risk area, such as environmental research
- Other external data sources, including news coverage
Here’s what you should consider when operating in the environment of a new administration.
Watch the first moves made by an administration
To better understand the areas where your risk may be changing, it’s wise to look at the first actions of an administration. The executive orders President Biden signed in his first 16 days, for example, affected oil and gas, healthcare, manufacturing and financial services industries, among others. Beyond those major categories, there have been 20 other actions covering gender and racial equality, the economy, trade, national security, and ethics in government.
Of course, it’s also important to look deeper than sheer numbers. There were only two environmental actions, which might seem insignificant, but one of them revoked much of the environmental deregulation introduced by Trump during his entire term. Biden’s policy also refers to climate change as a “crisis,” a major contrast to the previous administration’s terminology.
What this means for risk managers is that you should go back to your top 20-25 risk scenarios and make sure they’re aligned to your most critical business objectives. If you use a strong enterprise risk management framework to think about these policy changes, you may realize that you’re not even affected by some of them. For areas that may affect you, sit down with your stakeholders, overlay the areas of change coming from the administration with your top scenarios, and look at what’s shifting. For example, plans for the Keystone XL oil pipeline have been stopped, and there’s a new moratorium on oil drilling on federal land. US and Canadian companies in the oil and gas industry, therefore, may need to consider the implications that will have on their supply and demand, cost and price risks.
Once you’ve done that, you can quantify the mitigations you’d take in managing those risks. The risk modeling tools and frameworks available to you are more sophisticated than ever, and they can synthesize complex data and project your possible liability so you know what you need to cover.
Access stakeholder sentiment and priorities
One area that can help you access risk is what’s on the agendas of consumers. In the past, basic references to environmental protection, for example, would satisfy consumers. Today, they’re savvy and informed, and more likely to give their business to an environmentally conscious company; almost 70% of consumers in North America say it is important that a brand is sustainable or eco-friendly, and almost 80% say they want to know the origin of the products they buy.
Aside from consumer sentiment, North American companies must now have an environmental, social and governance (ESG) statement to acquire many kinds of financing and insurance. But it goes further than that: you also need to have realistic strategies and capital investment to make ESG part of how you do business. You’ll be evaluated on factors such as energy use, treatment of animals, political contributions and more. Banks and insurers are looking for evidence that companies are doing everything in their power to address ESG factors appropriately so they don’t escalate into major risks.
There’s also a compliance component that companies should start planning for now. Early Biden environmental policy suggests that increased regulation in the ESG space may be coming.
Prep for potential bigger storms, both literal and figurative
Pandemic insurance played a role in helping companies survive 2020, but the hard insurance market has already begun restricting pandemic coverage going forward. The pandemic isn’t the only large-scale threat, though. Last year also brought many devastating natural disasters, from wildfires and severe convective storms in the summer to record low temperatures in the winter.
The increase in natural disasters isn’t new, nor is it slowing down; there has been a spike in the number of recorded global natural disasters in the past two decades, and companies need to be prepared to weather bigger and more frequent storms.
While there’s no way to predict when an event like this will strike, the pandemic has reminded risk managers to consider bigger risks with a longer tail—things that could happen in the next 20 years as opposed to the next five. The key is for risk managers to look further into the future and adjust the organization’s coverage priorities.
Because of the hard insurance market, and the increasing rates and tightening underwriting criteria it typically brings, companies are being forced to innovate and look beyond traditional insurance when planning for uncertainty. One way to do this is to explore alternative risk strategies, including parametric insurance, captives, coinsurance and alternative reinsurance capital.
Double down on government relationships
In this era of increased political polarization, relationships between corporate leaders and the government take on a more crucial role. That’s why it’s important to keep lines of communication open with Capitol Hill and relevant lobbyist groups so you can stay apprised of potential changes in policy. Even before a new regulatory change hits, if you understand the conversations happening in Washington, you can prepare potential risk scenarios.
Proactivity is key in enterprise risk management, so taking the time to nurture relationships in government can be the difference between reacting on the fly to a policy change and coming prepared with a considered, strategic response.