Enterprise Risk Management by Mediaplanet UK&IE

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Q3 / 2020

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IN THIS ISSUE

“The risk management challenge for the next crisis starts now.” ~ Dr Matthew Connell Policy and Public Affairs Director, Chartered Insurance Institute

06 “The role of risk management is to help organisations achieve their objectives in an uncertain world.” ~ Iain Wright CFIRM Chair, Institute of Risk Management

08 “The importance of future-proofing your business” ~ Mike Cherry Chairman, Federation of Small Businesses

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Please recycle

COVID-19 stimulating a new era for the risk intelligent organisation Contrary to some commentators, COVID-19 is not a “black swan” event. A global pandemic was not only predictable, it was predicted: scientists and experts have warned for decades that a global pandemic like COVID-19 was a plausible scenario.

he pandemic is a high impact, low probability risk. This type of risk does make it onto risk registers at country or company level, but often fades into the background when risk severity is considered as a combination of impact and likelihood. These risks are also often hard to detect, difficult to assess, and easy to ignore. Leaders are more comfortable dealing with more obvious threats - it’s also much easier for risk professionals to ‘sell’ risk controls for more tangible and better understood risks. Leaders need the confidence to say they don’t understand – and work together to reach solutions. This all matters, because it affects how we judge the world’s response to the pandemic, and therefore what lessons we learn for the next phase of this pandemic – or other pandemics that may grip our world in a similar way. Managing risk cannot be a strategic afterthought We knew this before the pandemic, but COVID-19 has hammered the message home with brutal effect.1 As the World Economic Forum’s COVID-19 Risks Outlook report, published in May, makes clear, it is now vital to anticipate the emerging risks generated by the pandemic’s repercussions. In other words, we are still in a crisis phase. This pandemic has taught the value of strong leadership exercised with agility for governments and businesses. Clear and unambiguous

Too often, risk is managed in business silos, resulting in leaders playing down emerging risks until they arrive.

communication, with people front of mind, has long been considered important for effective crisis management – and it continues to be a differentiator between pandemic response winners and losers. A change in approach is required First, risk assessments and heat maps used for more conventional risks should be complemented by structured, creative discussions across business units that bring different and collaborative perspectives. This can help organisations to better identify emerging risks and understand potential risk trajectories, velocity and knock-on effects. Second, the frequency of risk assessments and analysis should be a function of how fast risks are emerging and the level of their materiality rather than determined by traditional institutional administrative cycles. A time lag can open up when events move faster than the organisation, creating a gap between reality and perception. Third, organisations should focus more on the interconnections between risks. An integrated enterprise-wide risk management framework can align risk-based decisions with corporate purpose and culture. Too often, risk is managed in business silos, resulting in leaders playing down emerging risks until they arrive. From any crisis come new risks and opportunities More than ever, organisations must focus on strategic ambitions and commercial priorities, and understand business dynamics. Risk professionals must step up and partner the business as ‘time-keepers’ helping to synchronise business reactions with external realities. Risk professionals who take a role supporting strategic decision-making can contribute to the creation of the risk-intelligent organisation. References 1. https://www.weforum.org/reports/covid-19-risks-outlook-a-preliminarymapping-and-its-implications

WRITTEN BY

Julia Graham Deputy CEO and Technical Director, Airmic

Airmic is the association for risk management and insurance professionals. Members include company secretaries, finance directors, internal auditors as well as risk and insurance managers. Airmic Fest is a three-day virtual festival offering learning, networking, an exhibition floor and knowledge centre. Airmic Fest takes place on 22-24 September. airmicfest.com

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Insurance valuations in a digital era, uncovering hidden insights

Paid for by Duff & Phelps

angible in nature, fixed asset valuation has historically relied upon physical site inspections to give the valuer a sense of the overall operations, a chance to view the condition and maintenance level of various assets, and an opportunity to hold in-depth discussions with finance and engineering personnel. Physical inspections can add tremendous value; nevertheless, we can make enormous efficiency gains and create new insights for our clients by working with modern technology. Even before COVID-19, there was a need for more flexible and scalable valuation solutions. Hence, we are exploring digital alternatives and delivering “smart valuations” for our clients.

One of the most tedious tasks – classing asset ledgers into valuation categories based on their descriptions – is done automatically, using machine learning, based on our valuation archives. From our first pass, we determine if it makes sense to look further and which areas to focus on. This initial review can help in leading discussions with finance or risk managers and their audit partners.

©CHAINARONG PRASERTTHAI

Amid the growing uncertainty caused by COVID-19, valuation professionals are faced with new challenges requiring them to adopt new ways of working, particularly relating to the valuation of fixed assets.

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Our smart valuation programme allows us to benchmark and provides a risk map highlighting areas of high insurable value deficit.

Digital visualisation helps map geolocations at higher-risk for insurance purposes For companies with extensive global portfolios, such as multinational insurance firms, property managers and large corporates, we utilise computer vision on satellite imagery to map every one of their properties based on an address. Our smart valuation programme allows us to benchmark and provides a risk map highlighting areas of high insurable value deficit. This has been a valuable resource for underwriters responsible for thousands of properties that they have little or no insight into. Far greater efficiency through digitalisation For companies with light balance sheets, where fixed assets are relevant but not of the most material concerns, a preliminary review can help them decide if it’s prudent to dig deeper. From a few lines of code, we can read a fixed asset register, identify common anomalies and generate preliminary values.

Virtual site visits allow the valuation team to explore remotely What separates a tangible asset valuation from an intangible asset valuation is the ability to see the tangible asset first-hand. The digital alternatives, such as modern video and streaming platforms, make it possible for site personnel to lead guided “virtual site visits.” The valuation team can see the condition of the assets, get a feel for the maintenance, the technology deployed, potential bottlenecks and ask relevant questions about assumptions and value drivers while exploring the plant remotely. Our developments are not limited to the data and analytics side, but we also use digital solutions to shift our reporting from a static to a dynamic form. Using business intelligence programmes, we can create custom, interactive dashboards with visualisations and tables that are more useful to the clients than a report, which is also still provided. By visualising the data and results transparently and intuitively for all parties to understand, we provide our clients with a detailed view of their portfolio, enabling cross-site analyses, comparison of results to industry benchmarks and identification of outliers to prioritise and budget for future reassessments.

WRITTEN BY

Rebecca Fuller Managing Director, Duff & Phelps

WRITTEN BY

Matthew Donahue Director, Duff & Phelps

The old-school world of fixed asset valuation is evolving as we explore the use of technology to help us uncover hidden insights. Smart valuation is being embraced industry-wide The shift to smart valuation is being embraced across multiple market segments of the insurance industry. The old-school world of fixed asset valuation is evolving as we explore the use of technology to help us uncover hidden insights. As the largest independent valuation firm in the world, we are using the plethora of data at our disposal to work more efficiently by eliminating repetitive tasks, resulting in us being more effective in protecting, restoring and maximising value for our clients.

Duff & Phelps is the world’s premier provider of governance, risk and transparency solutions. We have the largest independent valuation practice in the world which includes a strong team of data scientists. We work with clients across diverse sectors in the areas of valuation, corporate finance, disputes and investigations, cyber security, claims administration and regulatory compliance. Our firm has nearly 4,000 professionals in 25 countries around the world. For more information please contact rebecca.fuller@ duffandphelps.com or +44 7949231846

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Risky business in a post-COVID-19 world

The power of data James Harvey, partner in insurance risk and commercial law firm, BLM, says: “It has increased the power of structured data in managing risk. We code risk and claims data in fields agreed with clients and use it, for example, to identify particular claims activity or disproportionate issues at a given location. We pick out both non-compliance with existing systems of work and failures to implement appropriate systems.” Harvey adds that the aim is to “help businesses identify where change is needed and then to implement solutions.” The impact of digitisation on claims handling Digitisation has made a positive impact on claims and investigation. “Through being able to conduct investigations in a digital way, we can speed up the investigation time and achieve greater efficiencies,” says Harvey. “We can share key evidence in cases even when client contacts are in different locations, such as the operations lead being on site and the risk manager back at head office. We can all be in the same ‘room’ digitally without having to spend three hours in a car.” BLM’s Director of Policy & Government Affairs, Alistair Kinley, observes that the firm has ramped up digital working given the restrictions on meeting face-toface: “Using our systems to share claim documents securely online and in real time has been transformative.” “Digitisation has had a powerful impact, especially on fraud risk,” adds Harvey. “Smart data capture and using data from the past to inform the present means you can quickly evaluate your opponents’ behaviour to inform your own proactive strategies.” Kinley notes that the courts have also adapted since the start of the coronavirus crisis. “There has been clearer guidance about using electronic case bundles and remote hearings have been very positive for lawyer-to-lawyer meetings and procedural matters, although some subtleties can be lost in remote settings.” BLM can help your business mitigate risk, drive efficiencies and business improvements. To find out more, visit: blmlaw.com/blminnovations

©solar22

OVID-19 has forced businesses to accelerate their move into digital processes, increasing opportunities and efficiencies but also bringing new and different risks. With risk control and claims management also moving to digital and data-driven responses, what have been the consequences so far?

Expert opinion will always be useful, but experts can’t tell us how to prioritise the advice they give us against the advice other experts are giving.

WRITTEN BY

Dr Matthew Connell Policy and Public Affairs Director, Chartered Insurance Institute

CONTACT

James Harvey Partner, BLM james.harvey@blmlaw.com +44 121 633 6622 www.blmlaw.com

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henever faced with a complex problem, one tends to defer to the experts. However, in the face of a problem like COVID-19, where the issues are so broad, it can be difficult to discern which experts to engage. Of course, expert opinion will always be useful, but experts can’t tell us how to prioritise the advice they give us against the advice other experts are giving: health professionals, economists, psychologists, and many others. So, we must go from ‘following the science’ to ‘prioritising the science’. This is where the discipline of risk management comes in, helping us to develop plans for mitigating risks that we cannot prevent and setting up strong systems of governance that allow us to make and revise decisions based on imperfect and incomplete information. Managing the risks For businesses, this means weighing the safety of employees and customers with the need to deliver goods and services. Right across the economy, we have seen firms developing creative new ways to carry on delivering value. For knowledge-based sectors that had invested in technology like cloud computing, the foundations were already in place for a shift to virtual working. But, for many businesses, such as travel companies, these alternatives were not possible. However, even here, businesses that had a strong sense of their purpose, and how it contributed to society more widely, were better placed to argue for government aid in order to preserve their contribution for the future than businesses that had simply pursued short-term, purely commercial goals. So, we can see that risk management is not just about commercial planning, but about identifying and delivering to

a purpose that will win vital allies in even the most difficult conditions. And it is important that we not only think through this process for pandemics, but for other fundamental risks. The next crisis may make systems that survived the pandemic vulnerable in future. The risk management challenge for the next crisis starts now, not when a crisis happens. Facing the challenges This presents new challenges for insurers. This crisis has made it clear that there are some risks that cannot be insured, if only because the size of the impact is so great, that consumers and businesses would never be prepared to pay the premiums needed to cover them. Negotiating reinsurance arrangements with governments will help to expand the range of risks that can be covered and will help to provide clarity about what insurance policies cover and what they don’t cover – but there will always be uninsurable risks. The challenge for both insurance companies and brokers is to make certain that their guidance to business about how to identify, measure and mitigate those uninsurable risks is as much a part of the risk solution their offer to clients as the insurance policies that cover insurable risks. Like most other sectors of the economy, the insurance profession has to reinvent itself to become true to its purpose: protecting businesses and individuals from potentially catastrophic events.

Risk management is not just about commercial planning, but about identifying and delivering to a purpose that will win vital allies in even the most difficult conditions.

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Insurance can support you every step of the way

The value of business insurance Insurance is a critical component of business risk management. From the legal requirement of having employer’s liability insurance to professional indemnity insurance to protect businesses against mistakes, or commercial property insurance to protect your property and stock, having insurance for your business is a must. Every day, insurers pay claims totalling £22m to firms through business insurance policies, supporting millions of firms across the UK each year. We’d be the first to recognise that the industry has been put firmly in the spotlight over business interruption insurance policies in the context of a pandemic and the stress this caused some businesses during lockdown. The industry’s regulator, the Financial Conduct Authority and a number of insurers took a test case to the High Court in July to seek clarity on the wording of certain business interruption policies. This has led some to question the value of business insurance but it’s important to remember that its purpose centres on protecting business from the day to day risks. If an employee has an accident, there’s a fire, flood or theft at your premises, or you lose out on trading because damage means you can’t use the property, insurers will be there to help. No insurance market in the world can provide extensive cover for the effects of pandemics, and it may require a significant investment from the Government if something is to be

Organisations that don’t systematically horizon scan are at greater risk of disruption

WRITTEN BY James Dalton Director, General Insurance Policy, Association of British Insurers

In an increasingly disrupted, complex and interconnected world, organisations need risk managers to lead horizon scanning to prepare for future disruption.

developed that provides such cover. The ABI is engaged in constructive conversations across the industry, and more widely, to see how we can play our part in helping businesses recover from the challenges of the present day and of the future.

o, what is horizon scanning? Horizon scanning supports strategic decision makers by systematically identifying and managing emerging risks. Traditionally, enterprise risk management (ERM) efforts focus on identifying, controlling and reporting risks that are short term, understood, or quantifiable. This is useful, but significant, disruptive, strategic risks tend to be medium- to long-term, not well understood, and difficult to quantify. They also appear obvious with hindsight – like the disappearance of various high street names and the 2008 financial crisis. Horizon scanning is a discipline to assess these types of emerging or changing risks and provide insight to decision makers.

Managing online risks It’s likely that a business of any size will rely on some form of online presence. If systems are damaged, fail or fall victim to a cyber breach, companies could be exposed to the risk of significant losses, the cost of repairs or the loss of trade while the problem is fixed. Businesses are increasingly turning to insurance to protect themselves against the threat of cyber risk, and if the pandemic has taught us anything it is the need for companies to be prepared for events that mean businesses may be out of operation for an extended period of time.

Every day, insurers pay claims totalling £22m to firms through business insurance policies, supporting millions of firms across the UK each year.

But we operate in a world that is difficult to predict, increasingly complex, and interconnected.

Your most important asset Insurance can support companies in looking after the most important part of your business: your people. Looking after our health is paramount and private medical insurance can keep your team fit, well and ready for work. It can provide a speedier diagnosis, reduced waiting times, remote GP appointments and support your team’s mental health through employee assistance programmes. Ultimately, whatever your line of business, insurance provides peace of mind. And good risk management by businesses will mean a greater range of insurance products are available. It is essential that everyone thinks carefully about the wide range of risks that a company might face on a day-to-day basis and how insurance can play a part in helping and supporting businesses to manage those risks and be as successful as they can be.

Why is horizon scanning so important? The impact of emerging risks in the future – fiscal crises, political change, pandemics, climate change, AI and the Internet of Things – will occur at speed, and will likely seem obvious in hindsight. But we operate in a world that is difficult to predict, increasingly complex, and interconnected. Organisations that are successful today may not even exist in 10 years. The frequency at which organisations are entering and exiting market indexes continues to increase. The FTSE or Dow Jones of 2040 will look significantly different to that of 2020. By the time significant emerging disruptive risks are known, quantifiable and recorded on a risk register, it may be too late to respond effectively. Paid for by Zurich

©BUSINESS

t’s never been more important to ensure risk management is a core part of a business plan. Whether it’s protection for property, workforce or customers, insurance has a vital role to play every step of the way.

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WRITTEN BY Alan Ross Senior Risk Management Consultant, Zurich

Resilient organisations anticipate and respond to emerging risks quickly and effectively. Horizon scanning is a tool that creates resilience by helping strategic decision makers to anticipate and respond to uncertainty. How do we implement it? Horizon scanning is an often-neglected element of an effective ERM framework. Key questions to consider include:

• Do we systematically identify and record emerging risks and uncertainty that could affect our organisation in the next five or more years? • Do we engage with strategic managers and the Board to understand their views of emerging risks? How do we adjust for optimism bias and blind spots in our research? • Do we research and gather data on emerging risks to better understand them? This should include monitoring activity such as regulatory changes, socioeconomic and market trends. • Do we use this research to inform other ERM activities, such as stress testing strategic plans or scenario planning exercises, insurance coverage? • Do we review strategic plans in light of emerging risk and research we have created? A systemic approach will mean identifying risks sooner, giving your organisation more time to understand and then plan for the risk. Horizon scanning will become increasingly important to organisations that aspire to thrive in the longer term and avoid being disrupted by newer organisations or changing customer behaviour. For the risk manager, it is an opportunity to add real value to decision makers and the strategic planning cycle of their organisations.

Our expert Zurich Risk Engineers have a range of industry risk specialisms, so we understand customers’ challenges. A data led approach ensures we provide risk insights, global benchmarking and claims analysis so our recommended actions and effective solutions are specific to your needs. For further information contact alan.ross@uk.zurich.com www.zurich.co.uk

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Financial institutions intensify focus on climate change risk

©fizkes

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Banks and other financial institutions are intensifying their focus on climate risk management according to a new global survey conducted by the Global Association of Risk Professionals (GARP).

ARP found that 90% of firms have board-level governance of climate-related risks and opportunities, up from 81% in 2019, but only 30% feel their firm’s strategies are resilient against climate change beyond five years. GARP conducted its second annual Global Benchmarking Survey, featuring participation from 71 leading financial institutions around the world – almost triple the number in 2019 – including banks, asset managers, insurers, and other firms, with a total market capitalisation of $3.8 trillion. The survey found that several barriers and challenges exist to addressing climate risk within financial services. In the short term, the biggest concern for most firms is the lack of reliable models for climate risk, followed by regulatory uncertainty, as regulators have begun to set formal expectations for firms’ practices in this area. Scenario analysis is an important and valuable tool firms can utilise in developing climate-change strategies, but only a small fraction (14%) of the firms surveyed are using scenario analysis regularly, and of those who have used it at all, only 54% have acted based on the results of the analysis. “Banks and other financial institutions are recognising the potential impact of climate change on their balance sheets and operations, which will lead to both risks and opportunities,” said Jo Paisley, Co-President of the GARP Risk Institute. “Firms are evolving their climate risk management capabilities as they are concerned about the long-term resilience of their business strategies to climate change.”

Robust risk management has never been more important for the economic recovery of organisations globally The role of risk management is to help organisations achieve their objectives in an uncertain world. In 2020 that world was turned upside down as a long observed, although perhaps not sufficiently managed, risk – the global pandemic – became a live issue.

WRITTEN BY

Iain Wright CFIRM Chair, Institute of Risk Management

Jo Paisley Co-President, Global Association of Risk Professionals Risk Institute

WRITTEN BY

Maxine Nelson Senior Vice President Global Association of Risk Professionals Risk Institute

Technology, communication and leadership Good technology, good communications and good leadership have been rightly highlighted as the key positive factors in maintaining operations. Many respondents reported how their personal and organisational investment in risk management expertise has paid off. For the future, we expect to see a sharper focus on resilience and on operational risk management. These topics have been around for some time, but this period of crisis will focus attention on ensuring organisations have the people and skills to raise their game to what will be required in ‘the new normal’. We mustn’t allow the magnitude of the current crisis to obscure the other major (and

interconnected) risks that we all face. We still need to manage the risks arising from climate change, cyber risk, supply chain disruption, economic and geo-political volatility, to mention just a few. While we are seeing businesses closing and others making staff redundant across the UK, others are booming. Those that have been nimble and adjusted their offering to online delivery or diversified their portfolios have fared well. The pandemic and its impact are exceptional and are a test of how many organisations’ risk plans were, overall, adequate to deal with it. How do you plan, for example, for many of your customers to close down over the course of a few weeks? Empty high streets and shops? Lockdown and lack of certainty in the markets? Business interruption, continuity and resilience have never been tested quite so rigorously across all sectors globally. The IRM and the Institute of Operational Risk (which is part of the IRM Group) and our wider global risk management community stand ready and confident to lead the response. There’s never been a better time to become qualified.

For the future, we expect to see a sharper focus on resilience and on operational risk management.

Find out about other findings online at businessandindustry.co.uk WRITTEN BY

e were pleased that nearly one thousand of IRM’s ten thousand members and contacts around the world were able at such a busy time to contribute to our survey.1 Our aims were to find out how risk management functions were responding to the crisis, whether their plans were working, what has proved helpful to their response and what has not, how this situation might affect the development of the profession and what we should be learning from it. It appears that our community is fully engaged with the pandemic response.