Time to get back on the front foot

This has been quite a year for the European and global risk and insurance management community, and I am sure most will be very happy it’s over and looking forward to a bit of a breather (so long as the renewal is looking in good shape of course).

That breather should, however, not be taken for too long as 2023 looks like it’s going to be another tough one.

Geopolitical events will continue to dominate the headlines and the economic and financial knock-on effects will continue to challenge businesses of all shapes and sizes.

The scale of the challenge facing European companies in particular should not be underestimated.

Europe as a whole and certain nations in particular – notably Germany and Italy – were shocked to realise the scale of their dependance on Russian gas after it invaded Ukraine.

The EU has worked tirelessly to try and come up with a workable way to rapidly reduce this dependance, but no-one is happy with the way it is being done because no-one can be satisfied in such a crisis.

This is a horrifically complex challenge that is stretching European unity – at a time of polarisation in political sentiments – to the limits.

The fact that Italy has managed to cut its reliance on Russian gas down from about 40% before Putin sent the troops over the border to about 10% through rapid increases in supplies from Algeria and Egypt has to be applauded.

Germany managed to reduce its dependance on Russian gas from 55% at the start of the war down to 26% this summer, and continues the drive for ‘independence’.

But it is hard work and riddled with serious challenges, not least the parallel dire need to reduce carbon emissions.

Global coal demand will reach an all-time high this year amid the energy crisis, according to the International Energy Agency (IEA).

Global coal use is set to rise by 1.2% in 2022, surpassing eight billion tonnes in a single year for the first time and eclipsing the previous record set in 2013, said the IEA.

It added that, based on current market trends, coal consumption will then remain flat through 2025 as declines in mature markets are offset by continued “robust “demand in emerging Asian economies.

This means that coal will continue to be the global energy system’s largest single source of carbon dioxide emissions by far.

As demonstrated by the collection of news and features in our first monthly review, this very basic battle for economic survival is occurring as rules and regulations related to ESG flow at an alarming pace.

The bottom line is that no-one can seriously argue that any of these measures designed to make sure that corporations adhere to the highest standards of ethical behaviour are a bad thing.

As profit margins shrink, it is inevitable that corners will be cut and the view of how to be compliant stretched to the limit. As BusinessEurope, which represents more than 40 European business organisations, keeps on telling us, European firms needs a breather from all this stuff as they focus on survival in a highly competitive global landscape. Fair point.

But, and it’s a big but, if we take a breather to protect profit margins and shareholder returns in Europe, what would the world look like in ten years’ time? Not very attractive, very wet and windy – and those analysts demanding ever rising profits on a quarterly basis would be asking: how did this come about?

So, it’s a tightrope walk that will be increasingly perilous in 2023 as the Russians continue their war in Ukraine, and who knows what will happen in Taiwan?

This is the macro environment that risk and insurance managers will have to work in. So, what should the priorities be?

Based upon my discussions with leading risk managers and market leaders throughout this tumultuous year, I would suggest the following:

• Persuade your boss to invest in some serious scenario planning. The winds of political change are blowing harder and faster than ever before and you need to be ready to react swiftly and decisively if, for example, China invades Taiwan or Donald Trump actually gets back into the White House.What would that mean for your business?
• Spend some deep-thinking time with your supply chain colleagues. If the health of the business depends on secure and reliable supply – which it does – then make sure it’s resilient. Do not just hope for the best – work out who those second- and third-tier suppliers are and what to do if they are no longer viable for economic or ethical reasons. Challenge your brokers and insurers to come up with business interruption solutions that actually work.
• Equally, take significant time to analyse the impact of the raft of coming European and international ESG-related rules and regulations with your legal colleagues. Are you inadvertently financing modern slavery or environmental destruction and what liability does this imply? Make sure your directors and officers are fully aware of the implications of non-compliance and remind them of their potential personal liability in the nicest possible way.
• Tell your colleagues in investor and public relations that greenwashing is a bad idea and make sure your bosses are behind you on this one (again use the D&O card). The action groups are becoming increasingly vocal and effective on this one and, of course, have an ever-growing body of laws, rules and regulations to back them up. Take this seriously – it’s coming.
• Invest time and resources in insurtech. This may look like a fad to sell more policies on a much cheaper basis (for the carrier) but the reality is that, in the commercial insurance market at least, it offers a potentially game-changing way of analysing, measuring and transferring risk in a much more transparent manner. Take the initiative. Choose a broker that knows what it’s talking about and that you trust, and take the game to the carriers rather than waiting for them to tell you how it’s going to be played.

Overall, risk and insurance managers need to try and drag themselves off the defensive and onto the front foot in 2023. We have all been battered by events since 2019 and, sadly, there is no reason to suppose that this will change next year.

My discussions with leading carriers and brokers in recent times suggest they are genuinely willing to work with you to try and find some real solutions to the new paradigm.

It’s been a tough few years for everyone, particularly as Covid-19 and Ukraine war ‘black swans’ swooped just as the commercial insurance market hardened faster than a non-Newtonian fluid.

But it’s not all over. Take that break, take that deep breath and get yourself onto the front foot for next year.

Lastly, please do email me to say what you really want us to focus on in 2023. We are guided by our readers: [email protected]

Adrian Ladbury
Editorial director, Commercial Risk