Resilience has to be number one priority: Baron

Commercial Risk Asia editor Adrian Ladbury discusses the key questions for this year’s Risk Frontiers survey, sponsored by HDI Global and Brokerslink, with Franck Baron, founding chairman of the Pan Asia Risk & Insurance Management Association (Parima) and group deputy director, risk management and insurance, International SOS. Mr Baron says that the crisis has shown once again how important it is for risk management to be at the heart of business and indeed government, as we all face up to the fallout from the Covid-19 pandemic, coupled with a host of interdependent mega risks such as climate change and supply chain risk. Insurance provides part of the answer but the number one focus has to be business resilience, believes Mr Baron. Adrian Ladbury (AL): Were you surprised by the shock caused by the Covid-19 pandemic and apparent lack of readiness for the impact, given that we had already gone through SARS, MERS, ebola and the like, and the insurance industry had largely excluded it almost 20 years ago? Franck Baron (FB): I was not really surprised. Working at International SOS, I had a pretty good view of the situation as it developed and saw things as they started to happen in mid-November. I was not really surprised by the arrival of the pandemic and the relative lack of preparedness, particularly in national health systems because the number of available beds and equipment had been reduced for some time. The past pandemics such as SARS and MERS did not really affect Europe, so it was not really a shock to see that most people were so surprised there. The strength of governmental lockdowns and lack of mobility was actually a surprise for most as well, as it’s spread around the globe. AL: What do you think are the main lessons learned from this crisis from a risk management perspective? FB: The big one is the lack of risk management planning at governmental level, as pointed out recently by Airmic CEO John Ludlow in an interview in Commercial Risk Europe. Risk management should be at the heart of government. This has clearly not been the case. Every citizen should expect their government to at least provide protection (including healthcare) and anticipation with regards to massive crisis scenarios. In France, for example, there has been a rising population and yet the number of hospital beds has decreased by a third since 1986, so it is no surprise that the system cannot cope. I know that this has a price attached to it but better decisions could have been taken, such as with the track-and-trace technology. It needed a more strategic response. AL: How do you think Asia responded, compared with Europe and the US? FB: Look at successful countries during this crisis such as Hong Kong, Taiwan and South Korea. They have had proper training, capabilities and capacity to respond in place and thus made it more manageable. It is about priorities and of course it is a difficult task because you can only have so many hospitals as they are expensive. Major Asian countries have been leading examples for the so-called developed countries of Europe and North America. They should have learned from them in terms of how to manage such a sanitary crisis. That should help avoid such stringent economic and social measures such as mobility restrictions and lockdowns. AL: Some have suggested that the risk management profession and community has benefited greatly from the crisis and is now more appreciated and valued. Do you think this is the case? FB: Not really actually. I do not think the crisis has really raised the profile of risk management overall because, generally speaking, if risk management was not appreciated before the crisis, I don’t think that this will have really changed. The main responsibility for the reaction fell upon business continuity, resilience and crisis management professionals, and less so risk management. How many risk managers in charge of ERM had this scenario mapped and well signposted, so were closely involved in the management of the crisis? Not so many, I suspect. Having said that, this crisis will help risk managers raise their profile because it will be easier to talk about Armageddon scenarios. It will hopefully be easier to talk about climate change, the surge of natural catastrophes, geopolitical tensions and the like. There is definitely a stronger opportunity for risk managers to enter the boardroom if they are not yet invited. Let’s not waste this momentum! AL: What were the main risks presented by the crisis in your view? FB: For manufacturing companies, the breakdown in the supply chain was another very loud warning signal and surely forces one to question the basic economic model of transferring everything to third parties, continuing to use suppliers in far-flung territories, because when the crisis hits you really are in trouble. As a risk manager, you have to ask whether you have a resilient supply chain in place. This sanitary crisis coupled to an economic one does highlight once again that our current economic model does not adequately take into account some critical externalities (whether it is social, environmental, sustainability or resilience related). AL: What other major risks has the crisis highlighted? FB: Cyber has also made an impact. The rapid change in the style of working, with widespread home working, has presented a serious IT security risk. This had to be done overnight and is the new way of working and continuing business. This requires a big investment in technology and cyber risk management. Covid-19 and the pandemic is obviously the number one risk for everyone but we can’t forget about the other big risks such as cyber, climate change, supply chain, people and reputation; and of course they are all linked and interdependent, which makes it all so much more difficult to manage and fix. Speaking of Cyber risk, we talk a lot about it but the job is not yet done. AL: What impact will this all have on the insurance sector? What must risk managers prepare for? FB: As an insurer, I would be pleased that the hardening market was already happening and the arrival of Covid was just a way to accelerate this process. Most insurers are struggling currently but I am seeing quite successful rating increases from their perspective. There is a reducing premium base in lines such as business travel. But if you look at D&O, general casualty, aviation and the like, they have been quite successful at generating more premium. It is easier to say no to a customer electronically, when it is not possible to meet face to face. This makes negotiation more difficult for the risk manager. It is even more difficult for SMEs that do not have the skills and people to negotiate. This is why we have seen cases brought in France against insurers by restaurants and the like, to try and claim on their business interruption cover. AL: What do you think about the calls for state-backed pandemic insurance schemes? Does this make sense? FB: It is happening because there is no other way around this. The insurance market cannot cope with the magnitude of the scenarios. But in my view, these schemes that are under development in France, Germany, the UK, the US and elsewhere need to be focused on SMEs. Big multinationals should be able to manage these impacts with the right risk management and loss-prevention strategies. AL: In the absence of insurance for such a risk, what are the best alternatives? FB: Above all, you have to make sure that you have proper resilience in the business to make sure that the business model is more robust. You need to deploy your in-house resources in the most effective way. You can use a captive to ensure that you have the right level of coverage. The level of uninsurability is rising – there is no question about that. It will be difficult to secure the same level of coverage as before, so it is all about resilience. This is how you deal with the real corporate killers, such as pandemics or global warming. For the real Armageddon cyber scenario, there is no chance of finding capacity at an acceptable price. If there was a global cyber catastrophe that lasted six months and you received an insurance payout of $10m, that would not be of much use really. As stated above, the positive thing about Covid-19 for risk managers is that it shows that it is acceptable to think about so-called black swans with dramatic impacts, whereas before the attitude really was ‘it won’t happen to us’. One of my main lessons learned from this crisis is that it is primarily up to organisations to develop their risk financing capabilities (be it self-insurance, captives or provisions), as commercial insurance is less and less relevant to the critical risks that organisations face.

Resilience has to be number one priority: Baron

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