Cambridge University developing corporate risk management tools to tackle undervalued threats

The Centre for Risk Studies at the University of Cambridge Judge Business School believes corporates are undervaluing risks, and is developing new tools to help risk managers close this gap and calculate the value of mitigation steps, including buying insurance. According to Oliver Carpenter, research assistant at the Centre for Risk Studies, the need to understand and quantify corporate risk is becoming increasingly pressing. But he said the centre believes corporate valuations of risk are “not holistic, not comprehensive and too internally-focused”. He warned that “corporates often undervalue external exogenous risk”. This conclusion is drawn from work carried out by the Centre for Risk Studies into corporate risk, including adapting its City Risk Index to corporate risk profiling. The index, produced with Lloyd’s, compiles the impact of 22 risks into a single, annual measurement of economic loss for 279 worldwide cities. It shows how much economic output (GDP) each city would lose on average annually from various types of rare risk events and those that occur more frequently. When calculating the amount of GDP at risk, each city’s resilience is considered. This includes a city’s governance, social coherence, access to capital and state of its infrastructure. If a city is very resilient, it can expect to have lower losses. This year’s index also shows how boosting resilience can reduce GDP at risk. Simon Ruffle, director of research and innovation at the Centre for Risk Studies, explained that the centre has been working with corporate partners for a couple of years to allow corporates to make direct use of this and other research. This has not been straightforward but recent progress looks promising for readers of CRE. Mr Ruffle noted that the centre has had problems communicating ideas around probability, return period and, particularly, exceedance probability curves to companies. But work is ongoing to help risk managers more easily understand these powerful analytical tools. The centre is currently looking at what risk outputs and reports risk managers, and boards, need to support business decisions. “We want consistency of infographics across threats, geographies and organisational units,” said Mr Ruffle. “We love our GDP at risk metric in the City Risk Index and its consistency across threats, but corporates are going to need something else. We are working on this,” said Mr Ruffle at the centre’s Risk Summit 2018 in London. The centre has been developing an enterprise risk management dashboard and is looking at a range of other hypothetical solutions. Some of these are at the prototype stage, with others at an earlier phase of development. Mr Ruffle said all the ideas being considered could theoretically be used for a company’s own network and supply chain. One tool in the pipeline is a corporate risk dashboard. “We are imagining a set of risk indices organised around leading threats. These threats include finance, economics and trade, geopolitics and security, nat cat and climate, technology and space, health and humanity, and regulation and liabilities. The dashboard would hold a rolling, up-to-date measure of the state of each threat. We have ongoing research to drive this,” said Mr Ruffle. From this, the centre envisages a corporate threat overview map where risk developments would link to multinational company assets around the world. So, if there is social unrest in Spain or a cyberattack in Japan, for example, that map would flag the assets at risk. Another tool under development would allow site-specific risk assessments. It is here that the work carried out for the City Risk Index could really be put to work for corporates, explained Mr Ruffle. “Where we currently deliver a risk ranking for our 22 threats by city, we would do the same for individual assets or facilities of the corporate. It would in effect rank the threats for each location. We are not using GDP at risk here anymore, we are instead looking at different metrics – such as business outage, repair cost and people risks,” he continued. A further risk management solution would show the effects of risk mitigation on a site-by-site basis. The idea is that risk managers could click on a physical measure and see the probability of certain events reduce, explained Mr Ruffle. Insurance is, of course, one mitigation option. The Centre for Risk Studies has therefore been prototyping a Risk Transfer Manager application with some of its broking partners, to show how insurance might reduce risk and inform purchasing decisions. “You could use this to define your own insurance products, apply different types of insurance to individual sites and then see the impact of insurance on the entire company. You can look at that site by site and see assets exposed with or without insurance,” explained Mr Ruffle. “So, there are some very interesting things you can do to bring this up to the corporate level. You could, for example, take cyber risk and work out the cost-benefit for a range of mitigation activities,” he added. In research looking at how risk can directly impact corporate balance sheets, the centre is currently trying to ascertain key drivers of risk, key risk scenarios and what metrics would be of interest to boards. “Is the metric going to be debt equity ratio, probability of a downgrade, one in 100-year loss, a profit warning, risk contribution by business unit or probability of ruin? This is the question we are now trying to answer,” said Mr Ruffle. Dr Michelle Tuveson, executive director at the Centre for Risk Studies, said there is a growing movement for risk reporting to be quantifiable. This is where the Centre for Risk Studies hopes to be of use. “Tools we are working on would allow companies to benchmark between others in their sector and cross-sector to see vulnerabilities,” said Dr Tuveson.

Cambridge University developing corporate risk management tools to tackle undervalued threats

Want to read this article?

Read Next

International SOS warns of ‘burnout epidemic’

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

International SOS warns of ‘burnout epidemic’

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Want to read this article?

Read Next

International SOS warns of ‘burnout epidemic’

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Related Articles