Aon predicts that corporate CFOs will have more say in structuring risk transfer solutions and at the same time, more [non-financial] companies will appoint chief risk officers to complement their risk managers.

Aon also envisages greater use of technology to accurately capture business risk information in order to satisfy the growing demands of insurers fed up with spreadsheets. Better still, the systems will utilize risk data standards so everyone talks the same risk language.

That in turn will lead to greater risk differentiation and clients not being tarred with the same brush by insurer.

Growth in enterprise risk management will be accompanied by insurers innovating around new risk transfer products that hedge commodities prices, for example, and weather related risks. Very big industrial companies will tap the capital markets for facultative capacity.

Compelling as it is, something is missing from this picture and that’s the new risks that are lurking over the horizon and will challenge risk managers and their insurers in the future.

Effective risk management with a systematic approach to structures and risk transfer is to be welcomed. But knowing about the potential risks around the corner so that systems can be adapted to the real world is crucial as well.

That’s why forward looking projects like Lloyd’s 360 Risk Insight and the Lighthill Risk Network are so important.

The Aon 2009 Terrorism Threat Map from Aon Crisis Management (2 June) shows a trend towards fewer terrorist attacks in the Middle East but increased activity in Pakistan, India and Afghanistan, with Thailand and Nepal also showing more incidents.

Produced in coordination with security consultancy firm Janusian, the map represents a snapshot of terrorist groups’ intent and capability and provides a graded indication of the current threat of attack in each country.

Terrorist groups with more traditional ideological leanings seem to be experiencing a resurgence, said Craig Preston, executive director at Aon, citing the communist Shining Path movement in Peru and a revolutionary anarchist movement in Greece as examples.

The global recession could produce a new generation of terrorists from disaffected communities and usher the return of class-based politics, he said: “This raises the prospect of new terrorist groups forming in the developed world on the far right and far left of the ideological spectrum.”

Although another major terrorist attack in a Western country by Islamists is possible, and there are signs of more sophisticated plots, the threat has subsided, Aon believes, as a result of improved intelligence and security.

“In general, operating conditions for terrorists have become more difficult in Western countries as well as in some Middle Eastern countries, such as Saudi Arabia,” Preston said. “Also there’s a shift of focus among terrorist groups towards establishing new fronts in places like Pakistan and Somalia.”

>Download the map (pdf) from the Aon website or ask for a copy of the 2009 Terrorism Threat Map from Aon

One beneficiary of this trend, the Economist notes, is the subscription market model and specifically Lloyd’s. At Lloyd’s the insurance buyer enlists a broker to place the risk among multiple underwriting syndicates (many of which are owned by outside insurance firms). By doing so, the client gets a single contract but, importantly, potential losses are spread between carriers.

And not only is the buyer’s risk diversified but Lloyd’s unique model means that because the market is partly mutually owned its customers have the security of both syndicate members’ capital and, as a last resort, a shared cash pool funded by all members. The article goes on to point out that even by the relatively hygienic standards of most insurers, the asset side of Lloyd’s’ balance-sheet is “squeaky clean”.

The Economist also lauds Lloyd’s for improved risk management that prevents individual Lloyd’s insurers from losing their pricing discipline.

Commenting on the piece Lloyd’s CEO Richard Ward agrees that better risk management has strengthened the appeal of the subscription model at a time of uncertainty in the insurance business. “People recognize that there is safety in numbers so it’s not surprising that more are considering sharing their risk among insurers at Lloyd’s,” he said.

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.