Back to the Future: How Risk Management is Looking to the Long Term

Original content: AXA XL

The latest AXA 2021 Future Risks Report shows that major, global threats such as climate change, cyber threats, pandemic & infectious disease, and terrorism & security risks continue to be top of mind for both risk experts and the general public in the UK, Europe and beyond. As risk managers and their broker and insurer partners gather in Brighton for this year’s Airmic conference, Elie Hanna, chief distribution officer, UK & Lloyd’s market, and Tim Smith, head of UK client management at AXA XL, discuss the need for long-term thinking to address these challenges and the ways in which risk and insurance professionals must adapt in order to meet them. 

Q. What does the 2021 Future Risks Report tell us about the way businesses and individuals view risks and the ways in which risk professionals must adapt to manage and transfer these risks?

Elie Hanna: One of the interesting findings of this year’s Future Risks Report is that risk experts are, generally speaking, focused on collective risks, while individuals tend to be more focused on the risks that directly affect them.

The risk community – risk managers, engineers, brokers and insurers – have a role to play here in demonstrating the link between our actions as individuals and the risks that affect us collectively and how we can plan for, mitigate and manage them. We need to showcase how we can collectively make changes to manage risks – such as climate change and pandemic – that affect us all.

Risk experts can help communicate this link and get buy-in from stakeholders in all levels of companies to take action and plan for and manage risks too. We need to make it clear – up and down the organisations that we work in – that we all have a part to play in addressing risks, such as climate change and cyber. 

Tim Smith: A shift to thinking longer term will be vitally important. The risks that appear on an annual risk register do not change much over time; we need get away from an annual mindset and start thinking about the biggest risks that we face – like climate change – in a much more strategic way. The largest risks we face are long-term and to a large extent intangible, and so our thinking – as risk professionals – needs to be long-term and strategic not purely linked to an annual policy renewal.

It is also important to remember that with change there is also potential opportunity to step up and do things differently, such as the development of Environmental, Social and Governance (ESG) strategies, for example. And as risk professionals, we need to work with our clients to identify such opportunities. 

Q. Climate change is one of the biggest challenges facing our society and companies across all industries are exploring the ways in which they can make changes to help reduce CO2 emissions. How important is having a good Environmental, Social and Governance (ESG) strategy for companies today, and what part do risk managers and insurance partners play in developing this? 

Tim: There needs to be a tangible link made between good ESG practices, risk management and overall company strategy. ESG must be seen to be recognised by insurers: we must show that sound ESG and risk management – for the long-term – is reflected in insurance terms and conditions.

Many of the benefits of good ESG will take time and may not be realised during the tenure of a company’s current C-Suite. This is another area where we need to break the cycle of looking at things purely on an annual basis and must plan for the longer term.

Addressing an issue like climate change is, by its very nature, collaborative; it’s only collective action that will make a real difference. A recent study conducted by AXA Climate found that most employees want to do something – as part of the organisations they work for and as individuals – to combat climate change. This will be a differentiating factor in where – and how – people want to work.

As Elie mentioned earlier, we need to find ways to illustrate the link between the actions we take as individuals and the effect we can collectively achieve. Risk managers have a hugely important role to play here – they need to engage with the C-Suite as well as colleagues ‘on the ground’ to truly embed ESG as a brand value. 

Q. Pandemic and infectious disease is one of the biggest risks cited both by risk experts and the general public – in the UK, Europe and globally – in the Future Risks Report. As we begin to emerge from the COVID-19 pandemic, what major lessons have been learned that can be used to prepare for and manage this risk in future?

Elie: The COVID-19 pandemic has been a global human tragedy and has wrought huge changes on people’s lives, the communities they live in and the companies where they work. It’s shown us that these big, global risk events can – and do – happen. Individuals and businesses demonstrated vast amounts of adaptability and resilience in dealing with the effects of the pandemic. Many companies pivoted their business models to produce different products or to accommodate staff working remotely.

The COVID-19 pandemic underlined the point that we can come together to get through problems and many companies have learned that they can expand and adapt – quickly – when they need to.

Tim: But while there were many companies that were able to successfully adapt their business models and ways of working during the pandemic, in some industry sectors this simply was not an option. For these businesses, the pandemic underlined the importance of having long-term business continuity plans that are well-rehearsed and continually updated. As these companies seek to recover from the effects of the pandemic on their business and their balance sheets, risk expertise will be needed to help understand the lessons of COVID-19 and to strengthen those plans. 

Elie: It’s also important that all employers – ourselves at AXA XL included – heed the lessons that the pandemic has taught us about the importance of enabling colleagues to work flexibly and in an agile way.  

Q. You’ve talked about the need for risk management strategies to be longer term, more strategic and less focused on purely insurance buying. Is the role of the risk manager changing and, if so, how?

Elie: A large part of the risk manager’s role used to be transactional – buying insurance. This is still, of course, an important part of the role, but there seems to be more focus on long-term future proofing. These clients don’t just want to talk to us about insurance terms and conditions, they want to have broader, expert conversations around issues like climate change, cyber and pandemic.

Tim: There needs to be an aligned, long-term strategy between the purchase of insurance and risk priorities of companies, governments and individuals. These days, the biggest issues that concern risk managers – such as climate change and cyber – are to a large extent intangible. To address these risks in a strategic way requires risk managers to have a broader skillset; they need to be able to effectively communicate and set in motion long-term risk mitigation plans. They need to be able to use data effectively to demonstrate to their C-Suites – which often have a quarterly or annual financial focus – the value of long-term risk management strategies. Risk managers need to be able to access expertise in modelling, for example, and have the skills to demonstrate how investments in risk management can improve risk profiles. 

Elie: Insurers too need to communicate that we’re not just here to offer capacity – we need risk professionals to understand the full value of the expertise, knowledge and data that we can provide to help better understand, manage and ultimately transfer risk. Using this knowledge and expertise, we can help risk managers in their strategic planning if we work in partnership with them, for the long-term, rather than act simply as capacity providers offering coverage on an annual basis subject to negotiation around price.