Why effective risk management is essential for resilience

The events of the past 18 months have highlighted the importance of risk managers within their organisations, gaining them a seat at the table in key discussions from which they might previously have been excluded.

The Federation of European Risk Management Associations (FERMA) is using this momentum to help risk managers step up, equipped with Rimap certification, FERMA’s formalised risk management qualification, which aims to provide them with the skills, recognition and confidence they need to help steer key decisions at an organisational level.

“The pandemic has increased the importance of the risk management functions throughout organisations because the risk managers were clearly able to show the added value of this function, be it in the immediate response to the crisis in terms of health and safety measures, business continuity and so on, but also from a longer perspective, going forward,” says FERMA president Dirk Wegener.

“The disruption of supply chains, for example, clearly demonstrates the value of risk management as a strategic function to analyse long-term impacts of events like this.

“Whether it is from natural catastrophes, from more systemic risks such as global pandemic or other exposures such as cyber attacks, companies have an increased awareness of the risks and exposures that have heavily disruptive potential.”

He adds that the complexity of the pandemic’s effect has particularly demonstrated the multiple levels on which organisations can be affected.

“It clearly shows that there is no natural boundary in terms of the reach of the risk management function within the organisation. It has also become crystal clear that risk managers are not limited to finance or audit or compliance. Their importance runs horizontally throughout the entire firm.”

Wegener believes this has increased the importance of Rimap, a programme that began in 2017 and that now has certified 327 risk managers throughout Europe.

“Given the increased importance of risk management, the qualification of risk manager needs to be formalised; the certification of the profession is an investment in the future,” he says.

“My vision for the profession is that in the future we will have more formally educated and certified risk managers.”

A focus on data

Wegener predicts an increased focus on data in risk management: to analyse and model exposures, and also to predict potential losses.

“Big data and risk management will certainly be a theme, including the use of artificial intelligence. The risk manager as a co-pilot to the senior management and decision-makers will be the natural setup.”

Climate change is another clear area in which risk managers have a growing role to play. On one hand there is the higher frequency and severity of certain existing risks and exposures, but there is also now high demand for the transformation of current production processes to become, ideally, carbon-neutral.

“This then drives a transformation process within the companies. That is, of course, a challenge, but also an opportunity that the risk management function has to address,” he says. “It’s another form of complexity, another driver of change, but again I think our profession is well equipped and well qualified to manage this.”

Insurance challenges

Amid all these changes there is a feeling among risk managers that insurers are not keeping pace. Wegener highlights the sense of disappointment in the insurance market’s response to the pandemic, particularly around business interruption claims.

“Only a very few insurance policies that were purchased before the pandemic were responding. In the FERMA COVID-19 Survey in 2020, only 5 percent of the respondents said insurance had provided cover for business interruption resulting from the pandemic. This situation is ongoing, and there is a discussion, triggered after the start of the pandemic, as to what extent the private insurance sector can, or should, provide risk mitigation—ie, insurance cover—for an event like this,” he says.

FERMA took an active role in this discussion very early on and decided to push for two things. The first was that policies in place when the pandemic struck needed to be honoured. Second, FERMA strongly believes the private insurance sector should play a part in defending and protecting economies and societies from the financial impact of future pandemics and other systemic risks.

“We have tried to initiate a process in which public-private partnership and models, which have already been developed in some countries for terrorism, for example, can be used to enable the private insurance sector to participate in providing cover for the financial impact of systemic risks such as a pandemic.

“These discussions went very well, so we teamed up with the European Insurance and Occupational Pensions Authority (EIOPA), as one of the major stakeholders, to look into the opportunities, and EIOPA also developed papers on the subject,” Wegener explains.

“We have set out how we think this should be quickly achieved. We are convinced that the private insurance sector should be part of a solution and should really see this as an opportunity.

“This ultimately needs the support of the governments and they need to spend taxpayers’ money. But there is a huge difference compared to stimulus packages and other things which we have seen, which were highly appreciated and needed to overcome the economic impact of the pandemic,” he adds.

“If you go via the private insurance sector, you have a partner that is used to assessing and calculating risks as the basis of premiums for risk transfer. Thereby there is the link with risk management, which, of course, has to be assessed in this underwriting process.”

Here lies an opportunity to reduce risk by rewarding good risk management, thus averting a situation in which insureds may think they don’t have to prepare themselves for an event because the government will pay for their losses.

“In the current system, there is no incentive for individuals or for corporates to invest properly in risk management. It’s not rewarded by insurance—because insurance products are not available.

“It’s probably also not in that sense rewarded by the government because, for the time being, they have not made any difference,” says Wegener.

Regarding the overall status of the commercial insurance market, he sees companies presently as being caught in the middle of a perfect storm in which there is a hard market, and an increase in exposures—particularly in relation to climate change.

“There’s no doubt that the reaction of the insurance market has been a significant diminishing of the offerings. This comes in a period when most corporates are working under high cost pressure. They still suffer or have to overcome the financial losses caused by COVID-19, and therefore have tight budgets for insurance.

“You get less cover for more money at a time when you don’t have more money to spend, which ultimately means that a lot of risk managers cannot buy the insurance that they would like, or they may not have the means to pay the higher premiums, even if the coverage is wonderful.

“As a consequence, we see a lot of interest in self-insurance concepts—first and foremost, of course, in captives.”

The digital agenda

In FERMA’s interactions with European institutions such as the EU Commission and Parliament, it works to promote the importance of the risk management function—in particular, in supporting the agendas of the European institutions, which address issues such as sustainability and climate change, but also with a strong digital focus.

“It’s clear that the economy of the future will be based on data and IT, but on the other hand, we have also recently seen the exposures associated with this transition. Cyber threats are high on the agenda of the European institutions, and it’s a core risk management issue. Here too, we are seeing the insurers reducing the limits they offer at a time when the exposures are increasing,” Wegener says.

“Therefore, we try to moderate a process to support our members to, on one hand, find the necessary capacities in the insurance market but also to lobby the European institutions on the general idea that the safety of this transition is paramount.

“The idea of a public-private partnership might be one mechanism to increase the comfort level of corporates in pushing this digital transformation without being confronted with unacceptable exposures at the same time.

“We need to find a balance, and we try to moderate the communication between these two aspects, because cyber exposure is becoming a concern in the digitisation of the economy.”

As the potential severity of interconnected risks grows, Wegener sees an increasing need for risk managers to collaborate with other functions and other experts.

“In that way we will maintain our ability to provide the enterprise perspective of our organisations that our executives and decision-makers need,” he says. And while the role of insurers in the coming years remains unclear, Wegener hopes that the partnership between insurers and risk management will continue.

“We’re in the middle of a process of evolution, and cannot tell what the final outcome will be,” he says. “However, we can imagine that core risk management activities of risk identification, analysis and treatment, will gain renewed importance. Risk managers have the opportunity to go further.

“A key lesson from the pandemic is that measures that are sufficiently flexible, such as a robust business continuity plan, can create resilience for organisations even to catastrophic and systemic risks,” he concludes.