The need for resilience in the face of uninsurable risks

The desire to mitigate risks and improve resilience is nothing new, but risks are changing and evolving at a faster pace than ever and companies are facing ever-greater threats.

Considering the times we live in – an era marked by a pandemic and an increase in other, more familiar threats to our way of life – the world appears not as resilient as we thought. In response, companies of all sizes are realizing that it is no longer an option to rely solely on insurance protection. Rather, the focus is sharpening on risk prevention and dealing more effectively with the aftermath of loss events.

This emphasis on a new risk management approach has accelerated recently, driven particularly by Covid-19, together with the more familiar hazards of cyber threats and climate change, risks that in some cases may not be insurable. And, as these concerns call for new ways of managing risk, they are increasingly being addressed not just by risk managers, but by CEOs and CFOs as well.

C-suite concerns

At Zurich, we have done extensive quantitative and qualitative market research with multinationals and middle-market companies, mapping the major risks that they face, and while the overarching themes are resilience and sustainability, three areas have jumped out as crucial concerns, not just for risk managers but also for the c-suite – issues that keep the CEO awake at night: supply chain, cyber, and climate change.

• Climate change comes up more and more in our discussions with customers. Increasingly, they are turning to insurers to help develop engineering and operational measures to control the potential severity of impacts and risks related to current and future natural hazard events.
• In brutal fashion, Covid-19 exposed the fragility of supply chains and the vulnerabilities of many organizations, highlighting the need to transform traditional supply chain models. Companies need to gain much better control and understanding of their supply chains, and there will be urgent pressure to redesign them to be smarter, stronger and more diverse.
• Cyber risks continue to increase, for example the exponential growth in ransomware. Companies of all sizes are incredibly vulnerable and it is becoming increasingly difficult or even impossible for many companies to buy the right insurance for cyber incidents. Thus, the focus shifts to other means to mitigate the risks and an even greater emphasis is placed on prevention, education and, in particular, incident response, which involves having the right tools available when an incident happens.

Taking a holistic approach

These risks are some of the biggest challenges that companies face and are areas where traditional insurance may not be the sole risk management strategy, since it has been testing for our industry to provide a comprehensive solution for these emerging risks.

These issues are very high on the agenda of boards, and while CEOs and CFOs recognize that they should be taking a holistic view, they often struggle with how to achieve this. How does a large industrial company with 200 locations across the globe supported by hundreds of suppliers begin to benchmark its risks to set the right priorities? How do you assess and mitigate risks to the business globally, such as extreme weather, droughts, high water and environmental damage, or cybersecurity failure?

Companies realize that a risk management strategy that focuses only on insurance may not protect their core operations from the ever-expanding challenges and uncertainties that businesses face in the global economy, and such a strategy may not be sustainable over time. What is required is a holistic, end-to-end approach to risk: identifying and evaluating risks, taking proactive measures to prevent and mitigate, and practising your capacity to recover in the aftermath of an adverse event, which is one element of building your resilience.

In addition, our understanding of resilience involves also developing adaptive capacity – your organisational fitness to respond to new, emerging or simply unknown challenges ahead, whose associated risks are most often uninsurable.

Size doesn’t matter

This is an issue for companies of all sizes, from the largest multinationals to mid-sized firms and SMEs. For large companies with a risk manager, Covid-19, for example, has shown that some are much less prepared for even expected risks than they thought. It has been made clear that they have addressed such risks in a very siloed way. It is a similar story for middle-market companies and SMEs, where they could not imagine that they would be impacted by a scenario starting in a country far away from their actual market.

But the management of such risks is compounded for smaller companies, because they generally will not have the capabilities and specialists to address them. Only large corporates can afford a dedicated risk management team.

International business is not exclusive to large corporates, and more and more companies find themselves with overseas operations or suppliers, or even international sales. The more exposure a company has to different geographies, circumstances and regulators, the greater its vulnerabilities. Ultimately, there is no business anywhere, whether a small company or the largest in the world, that isn’t having to come to terms with this rapidly evolving risk landscape. Hence, being prepared for the known while becoming fit for the unknown is key to being a resilient business.

What does this mean for the insurance sector? What we consistently hear from our customers, and see elsewhere in the market, is an increasing demand for services other than risk transfer from insurers. Our customers expect us to explore our experience, access to data and capabilities in risk engineering and risk modelling, to support their growing emphasis on building a resilient business.

In the next article we will look at how all of this has triggered a rethink of some insurers’ strategies and, potentially, a change in the future of insurance. It is not just a matter of changing policy wordings or conditions; it is really a fundamental paradigm shift in dealing with many of the big risks.

Zurich has announced the launch of a new global unit, Zurich Resilience Solutions, to help companies with the mitigation and proactive prevention of risks:
Zurich Resilience Solutions 

Originally published on Commercial Risk Online on March 26 2021