Addressing High-Risk, Low-Resilience Threats

Lou Ann Layton


November 29, 2021

Illustration of a man in a suit with a briefcase standing at the beginning of a path that forks repeatedly, implying that he has many choices and decisions about how he wants to proceed.

To fully understand how businesses balance risk, two key factors need to be examined. One is risk perception, or how concerned business leaders are about the impact of a particular risk. The other is risk preparation, or how confident they feel about their efforts to address and mitigate that risk.

These two factors are generally in alignment. As a rule, we prepare for what worries us, but that is not always the case. In the recent study New World, New Risks: How Are Businesses’ Attitudes to Risk & Resilience Changing? Beazley identified several broad areas of mismatch between risk perception and risk preparation.

These mismatches are clearly areas where the insurance industry has an opportunity to develop innovative pre- and post-loss solutions to support companies and help them to improve their resilience.

High-Risk and Low-Resilience Threats

Seeking to determine how the pandemic has shifted risk perception, the study asked business leaders to identify the risks that were their top concern within four broad categories: Technology, Business, Environmental, and Political and Economic.

To ascertain how companies are working to improve resilience in a world full of interconnected risk, the study also asked them to rate their resilience to these risks in terms of their ability to anticipate and respond.

Overall, the business risk category had the highest number of high-risk, low-resilience risks, which are the risks where there are clearly some blind spots. Included within this set of risks are supply chain, business interruption and boardroom risk. In the technology risk category, only disruption risk (categorized as failure to innovate, keep pace with new developments, competitor activity, customer demand or market shifts) featured in the high-risk, low-resilience quadrant.

Climate change and environmental damage were the two risks of concern in the environmental risk category and the political and economic risks keeping more executives awake at night were political risk and legislative and regulatory risk.

Mismatches Examined

Supply chain is business leaders’ biggest risk and resilience disconnect. The spike in supply chain risk over the last year has left companies aware of the challenges but less than fully prepared to address them. This is an area where there is an opportunity for insurers to consider new risk mitigation solutions, but it is a complex area of risk. Coverage for different aspects of the supply chain does exist, but not in a “packaged” form and therefore it is a more complex purchase negotiation. Among the industries reporting greatest anxiety around supply chain risk are manufacturing, energy, and utilities and retail. Marine and warehousing businesses also register higher than average levels of concern.

Business interruption, although marginally lower on the risk ranking, is also an area that achieves a low resilience score, with only 41% of respondents “very prepared” to address business interruption risk. The pandemic shone a light on the cost of unplanned closures, and companies are now attempting to better prepare themselves for future outages. This has been an area of intense insurance industry innovation and has seen the introduction of various parametric covers for economic loss due to reduced footfall. Unsurprisingly, the hospitality and leisure sector are the sectors most concerned about this risk.

Boardroom and particularly legislative and regulatory risk have all come under scrutiny because of the pandemic. This includes every aspect of business—how, when and where to trade, how to manage the customer interface, how to enforce or adapt employment contracts, reporting and accountability. Add the rising tide of ESG and climate change reporting, and it is little wonder that business leaders are concerned about regulatory risk, which is fast becoming another significant factor impacting D&O portfolios.

Political risk has increased because of concerns about social unrest linked to a post-pandemic economic downturn and growing global protectionism. Neither UK nor U.S. businesses feel particularly resilient to political risk; only 39% of respondents rank this as a risk they are “very prepared” to address it. However, the geographic split is telling that U.S. business leaders are at least 10% more likely to feel confident they can anticipate and manage threats in this category, perhaps reflecting the transition to a new administration with less appetite to challenge the legislative and regulatory status quo.

Climate change encompasses three classes of risk—physical, transition and liability risk—and is rapidly becoming a driver of reputation risk and potentially D&O risk. The insurance industry is under intense regulatory pressure to drive change through underwriting policy, withdrawing or restricting cover for businesses without a clear plan to manage their CO2 emissions. This leaves many industries acutely unprepared to address this growing risk.

Beazley defines environmental damage as failure to prevent or manage environmental loss, biodiversity damage, pollution or harm caused by or to a business. In contrast to technology risks that present a clear and present threat, environmental risks are perceived both as less pressing and much harder to influence. There is also a possibility that concern over the environment has effectively been displaced into the more near-term threat of failure to manage enhanced regulatory requirements around environmental standards and reporting.

Disruption risk is the technology threat that businesses feel particularly ill-prepared to face, with only 40% of respondents reporting that they feel “very prepared” to manage it.

By its very nature, disruption risk is hard to anticipate. It challenges the status quo, reconfigures the value chain and can be difficult to recognize and respond to, particularly if businesses have been outpaced by others with a sharper vision or deeper pockets.

Addressing the Disconnect

Insurance is not a panacea for risk. By examining the mismatches between risk perception and preparation, we can see where improvement and innovation in the way insurance works are most needed. Companies should prioritize the high-risk, low-resilience threats, as risk mitigation solutions for them are less obvious and the potential for loss is therefore significant. These are the area of greatest need for businesses and therefore the areas that risk managers may wish to push for innovation from their carriers.

It also seems inevitable that there will be a growing tension between the risks that businesses can foresee and insure against (boardroom risk, employer liability and business interruption for example) and those that are either harder to foresee or insure against, including broader economic risk, climate change, supply chain and disruption or disintermediation by more agile competitors.

Whatever the complexity of the risk landscape, Beazley research clearly points to a need for insurers to partner more effectively with their insureds. Risk managers should expect three key things of their insurers:

  • A deep understanding of risk by sector and size
  • Specialist risk advisory services as part of the policy wording
  • Comprehensive, straightforward cover

The insurer’s role is not just to provide financial compensation when claims occur. It is in a carrier’s best interest to work with brokers and clients to build deep sector knowledge and understanding of risk trends, to deliver insight and pre-loss risk management services that help companies better navigate complex, interconnected risk. Risk managers should not be afraid to demand this of their insurance partners and should seek out insurers that recognize the importance of education and innovation not just at renewals time but throughout the year.

Lou Ann Layton is global head of broker relations and marketing at Beazley.