Risk management


Risk management

Risk managers face many challenges at present but, as three European executives explain, there are great opportunities too.

The last two to three years have brought significant changes in the way organisations approach risk—not least an increased appreciation for the risk management role in the light of the challenges posed by COVID-19.

Now, with war, climate change, cyber risk and ongoing effects of the pandemic all top of mind, the challenges look set to keep on coming.

“Supply chain disruption is a serious concern for many businesses, especially because of the war in Ukraine,” says Laurent Nihoul, group head of insurance at ArcelorMittal and a FERMA board member. “It’s a concern for everyone, not only those who have assets and operations in Ukraine, but with all the consequences that we will see in terms of economic impact and supply chain disruption.”

Carlo Cosimi, president of ANRA, the Italian association of risk managers, and head of corporate insurance at Saipem Spa, agrees that supply chain risk is a major concern.

“It’s the top concern in our community,” he says. “This is a very complex risk to tackle that arose during the pandemic, but also due to the war—and the sanctions situation is becoming more critical.”

Bart Smets, legal counsel–head insurance & risk at Umicore and board member at the Belgian Risk Management Association (Belrim), echoes these concerns about the war in Ukraine.

“Depending on the scale of your operations (national, regional or global) and the industry the business is in, the ‘ranking’ of the main risks will be different, but for a lot of our members, the current crisis in Ukraine and the geopolitical consequences will be top of mind,” he says.

“Cyber risk and the global supply chain disruption potentially causing slowdown or interruption of businesses remain top of the list, while climate change and in a broader perspective environmental, social and corporate governance (ESG)-related risks are climbing up the ladder and are without any doubt here to stay,” he adds.

Nihoul agrees, adding inflation and climate change to the list.

“People like to talk about emerging risk, but sometimes it’s not a new risk—it’s just the way the old risks are evolving,” he adds. He also highlights the interconnectivity of risks.

“For example, the war in Ukraine could have an impact on the food supply of the countries in North Africa, which could lead to social unrest,” he says. “These connections are everywhere and it can be difficult to assess all these interconnectivities.”

Smets adds that emerging risks are faster-moving and more interrelated than they have been in the past, making them more difficult to address before they become enterprise risks.

“It would be beneficial for every organisation to scan its risk landscape on a regular basis (eg, quarterly) for these emerging risks,” he says.

“The main challenge, however, still lies in how to assess these risks accurately and communicate them to the top in a clear and concise way, enabling proper actions to be taken.”

Cosimi notes that when it comes to supply chain risks, risk managers try to mitigate these exposures through diversification of suppliers and their geographical footprint.

“Other aspects are stronger contractor reviewing and using insurance products, when available, to transfer the remaining risks,” he says.

The hardening insurance market is, inevitably, an area of concern.

“We’ve had the triple crunch: pricing increase, shortage of capacity and underwriting restrictions,” says Nihoul. “Basically insurance cover has become poorer quality and more expensive.

“I don’t know any risk manager who is happier today than they were two or three years ago, because it’s much more difficult to place your programme and to keep your level of cover.

“I would say over the last two to three years insurance companies have been focusing only on their own challenge, which was to survive and rebalance their profit and loss. Now the market is still difficult, but it’s slowly coming back to a bit of stability.”

Smets notes that insurance and/or reinsurance is just one of the options organisations have to help them cope with risks.

“If the current market hardening does not slow down, organisations might question the use of insurance in the future for certain type of risks—and the first signs of this are already showing,” he says.

“We’ve had the triple crunch: pricing increase, shortage of capacity and underwriting restrictions.”
Laurent Nihoul, ArcelorMittal

The role of risk managers

One phenomenon reported by risk managers since COVID-19 began is that there is an increased appreciation for the importance of risk management within organisations.

“In an increasing number of companies, risk managers are sitting at the C-level, and they’ve responded very well, because now risk managers have the opportunity to be more involved with strategy,” says Cosimi. “The risk manager has played a very important strategic role in the COVID-19 crisis, and plays an important role in ensuring good practice is maintained.”

In the 2021 Belgian Risk Management COVID-19 survey report created by Belrim in partnership with PwC, 81 percent of respondents indicated that risk management is high on the agenda and this is being driven by top management.

“Almost 50 percent of the respondents to the survey indicated that the risk management function had a seat at the table during the pandemic and took an active role in guiding the decision-making on measures to be implemented, and 30 percent of the Belgian risk managers still had a limited role,” says Smets.

The study also revealed that almost 80 percent of respondents were convinced that COVID-19 had resulted in a change in the “risk management mindset” in their organisation, mainly “in favour” of the risk management topic—and almost half of the participants expect an increased investment in risk management in their organisation.

“A captive or any other type of alternative risk transfer can offer a lot of benefits.”
Bart Smets, Umicor

Approaches to captive insurance

In the light of the hardening insurance market, captive insurance is more attractive than ever.

“A captive is an efficient tool that helps you to maximise or minimise the gaps you have in the insurance market underwriting and terms and conditions,” says Nihoul. “We use a captive as a precise weapon to address the inefficiencies in the insurance market.”

Summing up the situation, Smets says: “In today’s market, the captive is mainly used as a solution to keep the working deductibles as well as the overall insurance cost at an acceptable level, together with finding solutions for the current market inadequacies following the reduced capacities.”

Cosimi agrees. “The risk manager has to respond to the hard market and increased deductibles, and when possible they use increased self-insurance retention through their captive,” he says. “The trend I’m seeing is that as well as using the captive to cover for the traditional risks, is used to take on some emerging risks.”

Smets adds that it can still be a challenge to demonstrate the value of captive insurance to the C-suite.

“A captive or any other type of alternative risk transfer can offer a lot of benefits to an organisation and/or its risk manager,” he says. “Having more ‘skin in the game’ obviously means that the organisation will take a larger part in a potential loss, but at the same time it allows the risk manager department to have an even better insight on the risk exposure and drive investments in prevention and risk mitigation as well as to develop a strategy over the mid- to long term.

“Convincing the organisation internally of the benefits of a captive, is not always that easy. It is therefore crucial to spend enough time in the preparation of the business plan, involve other departments in the discussions and get their support prior to presenting the project to the top management.”

“We are also facing natural catastrophe risk due to climate change.”
Carlo Cosimi, ANRA

The future risk landscape

Looking to the future, Nihoul hopes the risk management profession will be able to join forces with insurance companies again.

“I hope we can focus again on innovation, and do it together. It’s really about building up solutions,” he says. “The main challenge for risk managers will be to oversee all the combined challenges—the end of COVID, energy price inflation, war, political risk, supply chain disruption.”

Cosimi says the majority of big Italian companies are looking to improve their international risk management processes and evolving the use of risk managers in the strategic decision-making path.

“They are aware now that in the near future they are to face a lot of cat risk and systemic risk. We are talking about not only for supply chain risk or cyber—we are also facing natural catastrophe risk due to climate change.”

Smets believes the future is looking bright—subject to organisations and risk managers being willing to rethink the way risk management has been done until now.

“Risk management will become even more visible within the organisation, will gain more focus and will be growing from a sometimes ad hoc or informal activity to a fully integrated discipline, which is what enterprise risk management is all about,” he says.

This means organisations should step away from the traditional siloed approach to risk management, business continuity management and crisis management on one hand and the different internal risk functions on the other.

“As risks are becoming more complex and interconnected, it is key for risk management to interact with the other functions in the organisation in order for them to avoid blind spots,” Smets says.

“Risk managers will and should become more involved in ESG discussions, and the introduction of new technologies and the potential use of AI in the risk management profession will become the next big challenges for the profession.”

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