Successful risk managers are taking a hard look at the past 18 months and learning valuable lessons 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 capacity to respond to unexpected events. Now is the time to build a more robust 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. 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 may not spare organizations from the rising price of coverage. Risk managers will need to understand what drives their total cost of risk (TCOR) to lower the price of their risk transfers. 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 TCOR. Risk managers may have to change their strategies and adjust their tactics to maintain financial flexibility in uncertain times. Fortunately, organizations have many levers to pull to contain costs:
- Optimize your loss-prevention 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 TCOR. 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 keep premiums stable. 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 financing. Captive insurance, where the insurer is wholly owned by the insured, will likely increase among companies across sizes looking to enhance their risk management strategies, shield their organization from the volatility of the insurance marketplace, reduce cost of capital 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 pandemic and hard market 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.
Decisions big and small can impact an organization's TCOR. Risk management is not solely the domain of one person or one team or one department. 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 through the balance of 2021 and beyond.