The more organized corporate risk managers have completed their January 1 insurance renewals and cleared their desks. Now they can start to worry properly about what 2009 might hold.

Against a background of turmoil in the financial markets and fears of a global recession, on top of climate change and terrorism, the world has rarely seemed riskier.

Aon Global Risk Consulting, a unit of Lloyd’s broker Aon, has just done a survey of industry clients (opens in a new window) to identify the risk management challenges they see facing them in 2009.

The main finding was that, in addition to specific emerging risks, the risk management function itself will come under pressure in 2009 as a result of the deepening downturn.

Risk managers are concerned that their departments will be required to do more with less as corporate budgets are tightened.

At the same time they will be asked by their bosses to continue to drive down the total cost of risk by cutting insurance costs as well as uninsured losses. It’s a tall order and not without problems.

“The danger for companies is that in terms of risk management they might start going backwards instead of forwards in the downturn,” says Alex Hindson, head of enterprise risk management (ERM). “But risk management is more important now than ever because it is a time when companies least want a problem.”

Risk managers themselves are aware of that, judging by the key risk management challenges they identify for 2009. More than two thirds cited ‘embedding ERM culture in the organization’; over half said ‘creating a risk management culture’.

Meanwhile, the current climate represents real risk. When asked to identify specific risk concerns for the year ahead, over 80% named the economic recession and, linked to that, two thirds said supply chain interruptions.
Nearly half said customer or supplier insolvency.

“These issues relate to interconnectivity,” Hindson explains. “Companies are increasingly outsourced or offshored. They are dependent on other people. Your own company may weather the storm but if your suppliers don’t, you’ve got a problem.”

On the sales side for manufacturing businesses, Hindson says customers are destocking, abruptly cutting orders to preserve their working capital. Such moves have taken many risk managers by surprise as they were expecting a more gradual reduction in sales. “This is also a fundamental enterprise risk,” Hindson says.

A counterpoint to the risks around increased insolvencies is that as competitors leave the market opportunities are created, Hindson says.

“But that again raises enterprise risk management challenges: is your risk management framework capable of adapting to take advantage of these new opportunities,” he asks.

David Baxter lead researcher on emerging risks in Lloyd’s Franchise Performance agrees that the risks around critical and complex infrastructure will move up the risk manager’s agenda in 2009.

“With the increase in globalisation, supply chains are increasing in length and organisations are become increasingly interdependent,” Baxter says. “This means that when something goes wrong the implications—economic or in terms of liability—can be unexpected and far reaching.”

He says that the credit crunch is the obvious example but there are others, such as energy security. He cites infrastructure such as the ageing national grid, insufficient power station replacement as well as oil and gas supply.

Risks around continuity of other service provision include business’ increasing reliance upon the internet or GPS, for example.

Underwriters need to be aware of the changing face of corporate risk in 2009 as much as risk managers. Lloyd’s David Baxter says that the pace of technological change is increasing rapidly and with it, uncertainty.

“I, personally, wouldn’t say the risk could be said to be going up or down, but the fact that it is changing means that if insurers don’t want to be left behind, in terms of liabilities, extent of cover and new products, they’ll need to keep abreast of the changes,” he warns.

Tags: ERM, Risk management, Supply chain

This entry was posted by Garry Booth on Wednesday, January 14th, 2009 at 4:53 pm and is filed under Insurance Commentary.