Five Big Things for Risk Leaders

Introduction

The risk management discipline is making its way toward being a true profession with some practitioners and leading, progressive trade associations among others, leading the way. As the VUCA world (Volatile, Uncertain, Chaotic, and Ambiguous) becomes more and more pervasive for everyone, it is critical that the discipline stakeholders up their commitment to enhancing its capabilities. Accordingly, here are “five big things” that all stakeholders should take account of moving forward.

First, the risk discipline is striving for greater acceptance among decision-makers with a long-term goal of achieving “profession” status. This goes beyond effectiveness to strategic influence. Regrettably, most colleagues of my generation and even the follow-on (Gen X) generation, are still too often perceived to be “insurance” managers. Needed, but not strategic players with influence. Some achieving CRO status are climbing this hill, but even many CROs are “chief” in title only. RIMS is working on this issue. For example, I’ve advised them on the development of an upskilling program to prepare their members to advise their boards more effectively and long term, to prepare them to take board seats as risk experts.

Second, the increasing unpredictability of events that can produce major losses continues to perplex the risk discipline. Emerging risk process has been the key tool/method for getting ahead of low frequency, high severity loss exposures that some consider “black swans” (e.g., Covid) but, it more often involves the “grey swans” and “white elephants” (coined by James Lam) that represent events that are a bit more likely but still highly destructive. Advanced risk systems generally and other insurtech oriented solutions/tools are adding to predictive capabilities that will mitigate this going forward. Clearly, in the case of Covid, the mark was missed.

Third, operational resilience is a fast-rising critical issue especially in the wake of the Covid-19 pandemic. Banks, in particular, have upped their game in this area after experiencing significant disruptive impacts from Covid-19. While strategic risks continue to be the most destructive of value according to the research, operational risks (risks associated with people, process, and technology) can drive “death by a thousand cuts” especially when the events directly relate to serving the customer. Consistently delivering quality customer service, both directly and indirectly, through even substantial disruptive events, is the objective. In order to build and maintain operational resilience to sufficient levels, it is critical to consider among other things, the following: ensure an effective business continuity strategy and plan is in place and regularly tested and updated; understand and track the interdependencies and interconnectedness among and between operational risks; ensure there is a robust third-party risk management process in place; and, have a risk technology capability that can track, assess and manage incidents, extract relevant exposure information from across all segments of the organization and use targeted, refined and actionable risk information reporting to the right risk stakeholders at the right times.

Fourth, the accelerating and more frequent instances of disruptive innovation, technologies, and events are morphing the risk profiles of organizations, especially multinationals. I’ve written about digital risk management as an emerging subset of the risk management discipline that to clearly indicates that those risk profiles of the future are likely to be nearly all digital. In other words, as most new exposures have digital profiles themselves, risk leaders will be increasingly unable to understand the risk, let alone understanding how to manage these risks effectively. Sedgwick can help its customers get ahead of this curve, which will ultimately render them obsolete if not dealt with.

Fifth and finally, as disruption risk rises for all organizations, the business of risk and risk management is continuing to rapidly evolve its capabilities to mitigate disruptors especially through technology-based solutions to risk challenges. The return on these innovation-related investments is driving record amounts of venture capital ($7B in insurtech alone in 2020) to risk-related start-ups and incremental investments in aging solutions. All risk stakeholders stand to benefit from this trend as the destructive effects of disruption find more effective mitigation in the balance. The traditional ways so much of risk management has been done, will not persist much longer as the coming disruptions that will inevitably occur, will be increasingly leveraged for value creation (the upside of risk) and less distracted by loss events (the downside of risk) as in the past.

Chris Mandel will be speaking at the MetricStream webinar, “Strengthening Operational Resilience for Banks and Financial Institutions”, on June 29, 2021. To register, click here.