New shocks are hitting business in wave after wave at the moment, and risk managers fear that a global recession could be the next big challenge.
The UK risk managers worry that the number of businesses that went under during the Covid-19 lockdowns will be dwarfed by what is to come. They also suspect that some of those businesses that only just survived the pandemic have been so weakened that they will not survive another major blow.
One risk manager from the construction sector explained that his firm has been relatively insulated from much of the supply chain disruption because of the way it operates, relying on locally sourced materials wherever possible. He said, however, that the supply chain crisis is playing into wider concerns about the state of the economy and whether the world tips into recession.
Alexander Larsen, chair of the Institute of Risk Management’s (IRM) Energy Special Interest Group and president of Baldwin Global Risk Services, thinks a big recession is now a major threat.
Larsen said many experts believed a recession was looming even before the Ukraine crisis, because of already rapidly rising energy costs, a big jump in inflation, supply chain disruptions and Covid-19. If a recession was expected prior to the Ukraine war, it is even more likely now and should at the very least be on risk radars, said Larsen.
He also believes risk managers need to look at emerging risks over a longer time horizon and think, for example, about the potential knock-on effects from the Ukraine war.
“I don’t see the Ukraine war itself as a risk; it is an unfortunate reality and one that businesses and countries alike will need to deal with. In fact, the war in Ukraine could lead to a number of risks that organisations need to be considering,” said Larsen.
He believes we need a huge shift in thinking, potentially led by risk managers.
“We shouldn’t think of our-post Covid world or Ukraine war as the ‘new normal’. Instead, we should think of it as the new reality – it is not normal, it is different. We need to understand what’s different, adapt to it, consider what risks could result from it, and then build that into organisation strategies – risk-based strategies. Organisations also need to ensure that their strategies can continue to adapt to ongoing changes,” he said.
Another risk manager pointed to shorter economic and risk cycles as a concern. “Historically, we used to have a new economic cycle every 30 years. But now we have had the 2008 market crash, then another crisis in 2014 and then of course Covid in 2020. And now we have Ukraine. The cycles are getting shorter each time and that should be a huge concern to everyone,” they said.
People risk is another big issue for the UK risk managers we spoke to.
“It is definitely right up there as a risk – second behind the state of the economy. Everyone is struggling, companies and insurers alike. Nobody can find enough staff, let alone fully trained staff. The difficulty with bringing in those without the necessary experience or qualifications is that they will need training; and right now we don’t have enough people to do the job, let alone to train others. It is a huge challenge,” said one.
“We need to bring new people into the industry – both insurance and risk management – but how do we attract them?” asked another.
Of course, it is not just about a talent shortage within the risk management sector. As one of the risk managers pointed out, a wider lack of talent increases the risk facing organisations. “We all know that human error adds to risks massively, and this is a serious conversation for boards from all types of business,” they said.
The ESG factor
Unsurprisingly, climate change is high on the risk agenda.
Those with business interests in more vulnerable parts of the world said they are already factoring in the increased risk of catastrophes. “It takes a finger on the pulse at all times,” said one of the group.
ESG is an increasingly important part of risk and strategic conversations, the survey participants agreed.
“It is part of everybody’s job,” said one of the risk managers. “It cannot be left to one tier of an operation; everybody needs to embrace these ethics and to ask questions about every aspect of their job. In that way we can achieve much more.”
Another said there is a real role for insurance to play in enabling, rather than blocking, development.
“Take the new fuels, for example. Hydrogen is one of them. There is a buzz around the potential use for hydrogen, but will the insurance industry support us if we try to design hydrogen-fuelled products?” said one.
Others echoed these concerns, saying insurers need to be much more proactive in developing insurance solutions for new technologies. “Companies want to operate in a greener way but we also need to know that we have the backing of our insurers,” said another of the UK risk managers.
The survey participants stressed that ESG is something risk managers have in the back of their minds all the time. And they feel there is a real opportunity for risk managers to shine within their organisations by proposing risk mitigation solutions.