Risk management lags increasing unpredictability, finds QBE

Political risk is making the world a more unpredictable place to do business, yet many companies are failing to plan adequately for unexpected events, according to research from QBE. The insurer’s analysis of factors that have impacted stability during the past 30 years found the world has demonstrably become a less predictable and more volatile place. In particular, 2010 and 2015 were the most unpredictable years in QBE’s Unpredictability Index, driven by the financial crisis and a rise in political volatility. “According to our research, periods of stability appear to be getting shorter while periods of uncertainty are getting longer. We found that two of the most unpredictable years were 2010 and 2015, so if that five-year cycle continues, we could see a volatile year in 2020,” predicted Cecile Fresneau, executive director for UK insurance at QBE. Political risk has been the biggest factor driving unpredictability since the 2001 terrorist attacks against the US, and more notably since the global financial crisis in 2008, compounded by the European migration crisis and growing influence of China and Russia, the index finds. Mirroring the findings, an accompanying survey of business leaders found political risks are the most immediate concern and perceived as the most unpredictable area at present. With businesses operating on increasingly international scales and with more complex supply chains, political volatility in one country has the potential to impact risks far beyond its borders, explained Ms Fresneau. But it can affect businesses in other ways too. “Political volatility has the potential to affect businesses in a number of ways. For example, changes in regulation have the potential to impact trade and liability. In the UK, uncertainty around Brexit has been key in fuelling political uncertainty for businesses, with risks such as business interruption and trade concerns, as well as changes in consumer behaviour as customers waited to hear the outcome,” she said. But unpredictability is not limited to the world of politics. Environmental, societal, business and economic drivers are also increasingly unpredictable, according to QBE’s research. The predictability of key economic measures has declined during the past two decades, while societal and environmental changes are slow and incremental, and may only be discernible by looking back over many years, according to its study. Interconnectedness is the most striking finding from the index, notes QBE. Volatility in one area can have repercussions in another, prolonging periods of uncertainty. “Across the five pillars we examined in this report, we found a lot of interconnectedness where volatility in one area, such as political factors, reverberated through the others, impacting business and economic factors, and often reflecting societal changes,” said Ms Fresneau. Unpredictability affects companies differently, varying by size of company, location and sector. According to the index, four in five businesses (78%) have been significantly impacted in the last ten years by the pillars of unpredictability, rising to one in ten for large businesses. Economic events were cited as having impacted businesses the most, particularly as a result of the financial crisis and implications of Brexit. Preparedness for unexpected events also varies by business, size and geography. Three in four (77%) businesses felt they were prepared to deal with unpredictable events in 2019, although one in five (20%) did not feel prepared. Nordic businesses were the most likely to say they felt very prepared, while UK and French businesses felt the least prepared. “Out of the companies we surveyed, one in five did not feel prepared to cope with unforeseen events. Large businesses felt the most prepared and we found that the smaller the business, the less prepared it felt to cope with the unexpected. What is worrying about this is that the small businesses are also less likely to be able to absorb shockwaves from unexpected events,” said Ms Fresneau. While most businesses feel relatively well prepared for unexpected events in the short term, confidence falls away as they consider the mid- to long-term effects. More than two thirds (68%) of those surveyed felt that the next 12 months are predictable, but confidence levels fall to 50% when looking at the next three years, and 29% for the next ten years. The research shows that UK businesses are more likely to say the next 12 months are unpredictable, due to Brexit. Despite growing unpredictability, companies may be unwittingly overexposed, according to QBE. Just 29% have formal risk management plans in place, although large businesses are more likely to have a formal plan (45%), compared to just a quarter (25%) of small businesses. While the majority of businesses surveyed felt prepared, there appears to be a disconnect with the actions taken to fuel this confidence, according to Ms Fresneau. “Our research revealed room for improvement in areas such as scenario planning and having formal risk management plans in place. Companies in the UK are the least equipped of those surveyed to handle surprises. More than two thirds (69%) have no risk management plans in place, less than a fifth (16%) carry out stress tests, and 13% admit to making no preparations at all for unforeseen events. In times of heightened unpredictability, there is clearly much more to be done,” she said. QBE says its research suggests that businesses are not facing up to future challenges as much as they should be. Even though most unpredictable events are out of a company’s control, that does not mean they cannot prepare, states the insurer. Scenario planning should be “par for the course for all businesses” it says, yet only 17% of companies surveyed by the company carry out stress tests. QBE points out that the antidote to unpredictability is likely to be found in the development of risk management. As the size and complexity of risk grows, risk management and governance frameworks are becoming more sophisticated, and boards are increasingly demanding better information on risk, it states in the report. “Businesses should consider what support their insurer can provide from risk management to risk transfer. Insurers are perfectly placed to have a global view of company operations and exposures across a multitude of industries and can share best practice risk management techniques,” commented Ms Fresneau. “The partnerships between businesses and their insurers will become even more important. Insurance products and risk management services offered by insurers can help businesses explore new markets, diversify products or reassess their supply chain in a relatively risk-controlled way,” she added. The Unpredictability Index also highlights the upside of increased uncertainty and volatility. “Unpredictable events are not by their very nature negative, it is often how businesses are equipped to respond that ultimately defines them as good or bad,” according to QBE. To cope in an increasingly unpredictable world, businesses need to be more creative in identifying new opportunities, as well as being more carefully about the way they approach risks, according to Ms Fresneau. “From ongoing Brexit uncertainty to trade tensions between the US and China, it does not look like unpredictability is going away. In such times, we must focus on resilience,” she said. Commercial Risk is holding a one-day Supply Chain Risk Management conference in London on 25 November 2019. To find out more about the programme or book your space click here.

Risk management lags increasing unpredictability, finds QBE

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