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How risk engineering can help companies weather the sustainability challenge

The worldwide move to more sustainable working practices will have significant short-term disruptions for companies. But, argue Philip Brandl and Bianca Willauer of Swiss Re Corporate Solutions, there are also great opportunities for companies and their insurers to co-create, combining long-term sustainability goals with strategic risk management targets, jointly driving a more data-driven risk assessment and the long-term benefit of creating value beyond risk transfer.

As the corporate world embraces sustainability, there are several important risk management implications for companies to consider, from the risks of meeting environmental, social and governance (ESG) targets to the challenges of a less reliable energy supply as a result of the transition to net zero.

The recent COP26 international climate conference in the UK emphasised the urgency and breadth of the sustainability challenge. The implications go beyond the remit of a risk and insurance manager and will affect all key roles within a company. They also highlight the limitations of traditional insurance products and the opportunity to go beyond standard risk transfer strategies, developing a data-driven approach to risk prevention.

There are new exposures arising out of the transition to make sustainability a core of a company’s overall business model, not least the introduction of new technology and energy sources as well as a change in stakeholder expectations. But crucially, there are also risk management benefits that will come from a greater focus on the supply chain and internal processes, as well as becoming a more attractive employer to a new generation of employees, putting a true meaning in what our customers and the insurance sector share as core values.

Aligned strategies

Primarily, it is vital that sustainability and the digital transformation are key ingredients of a company’s overall strategy. There currently is a strong focus on ESG targets and reporting requirements. For financial services firms there is the EU’s Action Plan for Sustainable Finance, which includes the Sustainable Finance Disclosure Regime.

There are also other more specific reporting requirements, such as the Task Force on Climate-Related Financial Disclosures, Global Reporting Initiative, Sustainability Accounting Standards Board, Carbon Disclosure Project, plus all the ESG ratings bodies as well as local initiatives like the Australian Modern Slavery Act, the French Law on the duty of vigilance, the German Supply Chain law or the Swiss ordinance on due diligence and transparency regarding minerals and metals from conflict areas and child labour.

Increasingly, companies have sustainability objectives built into their key performance indicators, which ensures that these issues get full corporate attention. However, it is also important that this does not come at the expense of core processes.

In addition to the basic burden of the requirements, companies (insurer and insured) will also be expected to examine their supply chain, ensuring that all critical nods such as internal and external supplier locations, transport means and sourcing of resources are compliant, reliable and fully transparent, meeting all relevant governance standards. The reputational risk of being associated with a non-reputable supplier is likely to increase under greater scrutiny, as customers have long included this in their purchase decisions.

Supply chain management has become a big focus in recent years, not least because it highlights the accumulation and interconnectivity of risk – from business interruption (BI) to reputational risk. Sustainability disclosure will require these supply chains to be much more transparent.

“We are convinced risk engineering will play a crucial role in connecting the dots, helping customers to develop a holistic view on risk and prioritise key initiatives and investments, targeting traditional risk prevention, a deeper knowledge of emerging risks and a true co-sharing of risk moving forward,” says Brandl.

“I am convinced the topic of supply chain provides an excellent overarching framework, where traditional approaches such as a pure line of insurance business view will be overwhelmed,” he adds.

Data management

This will require a change in mindset for many companies when it comes to data use. There will be issues around ownership, security and governance that will need to be resolved when it comes to sharing confidential data. The longer-term benefit will be a more resilient supply chain and greater protection against BI and other associated risks.

Once critical nodes within a supply chain are identified, all kinds of scenarios such as a fire event or flood at a supplier location, but also a pandemic in a certain region, a blockage of an important transport route, etc, can be used to stress-test the supply chain, quantifying the impact of its interruption. and be combined with sustainability risk aspects to absolutely novel scenarios.

The transition to carbon-neutral and renewable energy sources may also create short-term disruption for companies. We are moving to less-reliable energy sources with renewable but unproven technology that could impact national grid stability, increase the likelihood of blackouts and interruption to supply as well as make pricing more volatile.

We are observing legislations launching public awareness campaigns (such as by the Austrian government) about the likelihood of a blackout as a result of Europe’s reliance on weather-based power sources. Consequently, companies will have to be more mindful of the energy they use, which will involve much more monitoring and greater use of data.

Risk engineering

This is where risk engineering can play a vital role in helping risk managers deal with the challenges and reap the benefits of sustainability. In the greater scheme of things, insurance has traditionally focused on analysing historical loss data, attempting to predict and take a short peek into the near future.

“As we tackle climate change and other sustainability challenges, are we heading into a much less predictable future?” asks Brandl. This most likely will lead to taming uncertainty by creating “buckets of confidence” to support key risk decision-makers.

The emergence of innovations like parametric insurance has shown the potential for new products that take a more forward-looking approach to risk and is further testimonial for a changed mindset among the modern risk managers of the future.

They have also shown the importance of partnerships between companies and their insurers, and a more holistic approach to risk management. Companies will have to examine their processes in much greater detail as a result of sustainability and this can be used to reduce exposure and anticipate risks, rather than merely calculating losses.

Similarly, the role of the risk engineering department can go beyond insurance. Insurers have traditionally been good at asking questions of their customers but not always good at explaining how these answers are fed into the underwriting practice. This has to change. Just as companies need to be more transparent about their supply chains and internal processes, so will insurers need to be more forthcoming about how they use clients’ data.

Insurers will also need to offer data platforms that allow clients to contribute their own internal data that can then be used to combine with other datasets in order to look at the likelihood of certain scenarios and provide more accurate modelling.

*Contributed by Philip Brandl, head of risk engineering services EMEA, Swiss Re Corporate Solutions; and Bianca Willauer, head of property and specialty lines, EMEA, Swiss Re Corporate Solutions

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