Articles - Do insurers need a connected view of the world of risk

There is a growing divergence between corporates’ risk requirements and insurers’ appetite to cover them. This problem has been exacerbated by the fact that only 20% of corporate risk is currently insured. Alongside this lack of risk coverage, there is a failure to understand the interconnectivity and accumulation of risks – and how these risks can impact an organisation’s balance sheet.

 By Suki Basi, Managing Director of Russell Group

  For corporates, this lack of awareness manifests itself in one-dimensional corporate risk registers that examines risks in isolation and never takes account of risks holistically. For insurers, they view risk in a siloed fashion and rarely from a “multi-class” view.

 This divergence, which has been transposed onto insurance language when insurers talk about “perils” and corporates talk about “risks,” needs to join up if corporate coverage is to be increased.

 It is a sad reality today that many corporate risk managers struggle for c-suite recognition. Consequently, this means that risk becomes absent from corporate decision-making, which potentially exposes the organisation’s balance sheet to future longer-term shocks.

 All these issues have to be addressed if the traditional transfer of risk between corporates and insurers are to continue. Otherwise, many corporates could be forced to seek alternative forms of risk transfer.

 There is no simple solution to this problem as it is multi-faceted. The first step to tackling the issue has to build a wider understanding among corporates and insurers of the interconnectivity of risks across organisations. Without these foundations any possible construction of more robust risk covers will be unsustainable.

 Furthermore, corporate and insurance language needs to be aligned in order to ‘cover the loss rather than discuss the cause of the loss’, as one risk manager explained to me recently when he shared his mounting frustration with insurance companies. Corporate risk managers can take leadership in creating more robust and dynamic risk registers that move beyond “tick-boxing” and incorporate the correlations of risks across the organisation.

 By doing this, the decision-makers in an organisation will have a unique tool that will help them understand how their decisions can impact the organisation, both positively and negatively. Finally, on the issue of risk quantification, this can only be achieved through a combination of good data and scenario modelling.

 My recent conversations with the heads of risk at some of the world’s largest companies has highlighted to me the problems that risk managers encounter getting their message heard loud and clear across boardrooms that are still curiously disengaged from today’s new world of connected risk.

 Will the future role of the risk manager change as a result of the pandemic? The almost unanimous response I receive is that the nature of risk surely will evolve and that interconnectivity of risks needs to be better understood across an organisation. There is an enormous opportunity out there for creative and imaginative InsureTech partners to work hand in hand with risk-managers post-COVID, to align their organisations with regulation, for example.

 There is, meanwhile, certainly an argument to be had that COVID-19 could be regarded as a political risk rather than a pure business interruption risk. All sorts of exposures have been thrown up in the wake of this pandemic including countries' economic and currency risks, contractual agreements, repudiation risks as well as sovereign credit exposures.

 As a result, risk registers will need to become more dynamic to account for the correlation and interconnectivity of modern-day exposures. There is conflict within the c-suite between sustainability versus short-term interests (short term benefit v long-term benefit).

 To conclude, we are seeing a divergence from what is defined as a corporate risk and what is an insurance peril, as insurance is peril driven, while corporates are risk driven. The left hand of insurance is not talking to the right hand of corporate risk management so there is a miss-match here.

 I believe most strongly, however that scenario-modelling working hand in hand with deterministic exposure modelling, can help to put a price on a risk that protects an organisation’s balance sheet. Corporates want to have broader coverage and transfer more risk but insurers are limited by existential threats to their solvency, which challenge their ability to expand. With new data insights and our deeper understanding of enterprise wide risk I see no reason why captives and other forms of risk transfer could also not play a more efficient role in the new normal environment we find ourselves in.

 Combining both scenario modelling and deterministic exposure modelling, corporates and insurers can put a price on an increasingly complex risk, which is the final price an organisation can pay to protect their balance sheet from the impact of that risk.

 This would also help the c-suite understand the complexity of connectivity and the value that risk managers provide in helping to protect the organisation’s balance sheet.

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