Two years of COVID-19 disruptions, supply chain issues, climate change events and more have sent strong messages to risk managers and their organizations as they continue to look ahead and prepare for the potential threats the future may hold.
Operational resilience is top of mind for many executives. That resilience needs to run through the supply chain to human capital and physical infrastructure. Risk managers have had tested their ability to respond to unexpected events. Now is the time to rethink risk management and build a more resolve reserve to face emerging risks.
Risk managers can use these three important steps to handle the increasing complexity and interdependency of enterprise-wide risk:
1. Control Your Risk Narrative
Organizations continue to face a harsh pricing environment , although there are some signs of rate moderation into 2022. With rate, capacity and retention continuing to be issues risk managers need to be able to articulate a compelling story to their C-suite, board of directors and insurance carriers about how they manage exposures for every line of coverage.
Risk managers need to be able to articulate a compelling story to their C-suite, board of directors and insurance carriers about how they manage exposures for every line of coverage.
A credible risk narrative requires both data and the expertise to analyze what the data exhibits about the enterprise. Data analytics have come so far, even in the past five years. Organizations that can derive insights from their data will have a competitive edge.
The process of collecting data and connecting it to company performance can help risk managers make better strategic and financial decisions. When risk managers have the proper tools, they can see their exposures as a risk portfolio rather than individual exposures. These insights can help them craft insurance programs that cost-effectively determine what risks to retain and what to transfer.
Existing relationships with carriers help, but will not spare organizations from rising rates. Risk managers will need to understand what drives their risk costs, especially in the risk transfer market. . If an organization lacks the granular knowledge of its threats, it still has time to build up those capabilities before renewal season begins.
2. Innovate to Contain Costs
A strong risk narrative and the data analytics to support it will not solely work to lower an organization's risk costs. Risk managers may need to rethink their risks and adjust their tactics to maintain financial flexibility in uncertain times. Fortunately, organizations have many levers to pull to contain costs, including strong risk control programs and alternative risk solutions:
- Optimize risk control programs to reduce overall risk. Well-designed programs powered by data insights can dramatically lower an organization's retained losses, enhancing financial performance and reducing risk costs. These steps can be as simple as upgrading a warehouse's sprinkler system as long as risk managers have the supporting evidence to demonstrate how their actions directly reduce harm.
- Adjust or bundle coverages to help lessen rate increases. A nuanced, data-based understanding better equips risk managers to make trade-offs in coverages that maintain or reduce costs while decreasing overall risk exposures.
- Use captive insurance to retain or transfer risks cost-effectively. Market volatility has caused more organizations to consider alternative risk solutions. Captive insurance, where the insurer is wholly owned by the insured, is a viable option among companies looking to rethink access to capital, enhance their risk management strategies, shield their organization from the volatility of the insurance marketplace and achieve some independence from insurers.
- Tap the catastrophe bond market to transfer the risk of natural disasters. This growing category of bonds transfers risk from organizations to investors and provides risk managers more capacity than otherwise available in the insurance market.
- Explore parametric insurance options to complement your existing coverages. These policies pay out based on a pre-negotiated formula and can cover uninsured or uninsurable exposures. Parametric insurance generally allows companies to access capital in a catastrophe quicker than it would by using traditional insurance.
For all these options to work as intended, risk managers need to have the data and insights to drive the discussions.
3. Apply Hard-Won Lessons Forward
The hard market and worldwide events over the past 24 months have reshaped many risk management strategies. Nimble risk managers have had to prepare for the unexpected as they dealt with existential threats to their enterprises. Those who have thrived and even those who have merely survived must take what they've learned and continue to improve. Ineffective risk management, meanwhile, has proven to be a threat for both the organization and the risk manager.
Risk management is an enterprise concern -- how people tackle risks on the ground level can ripple to the top of the organization and vice versa. Knowing the complex dynamics of how risks emerge and are mitigated will continue to challenge organizations next year and into the foreseeable future.
Risk management is not a one-off exercise. Controls can be tweaked, more data can be collected, and additional training can be offered. Organizations that have operationalized their risk management prowess and embedded it in their culture are better prepared to take control of their risk in the long term.