Skip to main content
Blog Post

How strategic CROs can drive actions in anticipation of risk environment changes

Insurance Consulting and Technology|Reinsurance
N/A

By Raj Bohra , Jennifer Gaffney , Matthew Ford , Dave Ingram and Nambassa Nakatudde | November 1, 2019

As soon as major changes are identified, the strategic CRO needs to ensure that the company considers actions to either take advantage of the change or to prevent or reduce losses.

Unlock More

About our ‘A Year in the Life of the Strategic CRO’ series

In our ongoing A Year in the Life of the Strategic CRO series, risk experts from our Insurance Consulting and Technology team, Willis Re and other parts of Willis Towers Watson cover how a strategically focused CRO can drive corporate strategy through the enterprise risk management planning process and throughout the year.

The strategic chief risk officer (CRO) is highly aware that enterprise risk management (ERM) is not a spectator sport. In a recent Willis Towers Watson poll, 95% of CROs said that they monitored changes in the risk environment. As soon as major changes are identified, the strategic CRO needs to ensure that the company immediately considers actions to either take advantage of the change or to prevent or reduce losses. In taking action quickly, companies can seize financial, strategic and reputational advantages and be in an optimal position to react with agility to the challenges that the emerging risk poses.

The types of changes that the CRO may encounter are infinitely wide-ranging. Nonetheless, it’s instructive to highlight some examples of risks ERM teams may encounter in the near future including:

  • Market disruption by Internet giants
  • Recessions
  • Insurance underwriting cycle
  • Shareholder value to stakeholder Value
  • Climate change

Market disruption by Internet giants

To quote the CEO, of Axa, Thomas Buberl, “If your endgame is to be an orchestrator of a community of the insured, with the aim of helping each other and leveraging the collective wisdom, which is the business model that you see in today’s market that is closest to that?” For hundreds of years, insurers have provided insurance, but that could change in the coming years. Internet giants such as Amazon, Google and Facebook have made moves suggesting they may take an interest in the insurance sector in the near future, but what does that mean for the CRO?

Big technology firms are known for their agile response to change, high levels of customer engagement, gigantic volumes of data and, of course, exceptional technical capabilities, all highly desirable qualities for the insurance consumer considering an appropriate provider. However, they have not yet acquired the deep understanding of the insurance sector and corresponding regulation that traditional insurers have been amassing for decades, leaving risk teams with an interesting question: to treat the technology firms as competitors or as business partners?

Of course, there are many more issues that risk teams may consider when deliberating the risks posed by big technology companies:

  • How will they disrupt product offerings?
  • How will they change distribution channels?
  • How will they use the data they own? How will they engage with the regulator?

As yet the answers to these questions are all unknown, but it is vital that risk teams continue to monitor the situation and be primed to move quickly should an opportunity or threat occur.

In the post World War II era, U.S. GDP has grown steadily from approximately $2 trillion in 1947 to nearly $20 trillion in 2019, according to the Federal Reserve Bank of St. Louis.
U.S. Gross Domestic Product

U.S. Gross domestic product, 1947 – 2019.

Recessions

Economists mark 10 recessions between the end of World War II and the Great Recession of 2007 to 2009. The most recent ten years of slow, but positive GDP growth, have weakened memories regarding the types of events that trigger recessions as well as the conditions to expect during a recession. Those 10 historical recessions were triggered by:

  • Monetary tightening following rise in prices (6)
  • Reduction in government spending to balance budget (2)
  • Rapid oil-price increases (2)

Looking at current conditions, it seems that two of those three causes seem to be possible in the short term: a reduction in government spending or a rapid rise in oil prices, in addition to the possibility of changes to international trading patterns due to the uncertainty around tariffs. The strategic CRO can look for these signs when monitoring the economy.

Businesses tend to react too late and too much to recessions, so the strategic CRO can help their companies to take a long-term business cycle view. While cost cutting is seen as important during a recession, it is also a great time to invest in business growth to gain a competitive advantage while competitors' focus is likely elsewhere.

Insurance underwriting cycle

During a period of declining prices, casualty insurance companies typically strive to grow market share as prior-year redundancies are supporting calendar-year profitability even though current accident-year results are deteriorating. Alternatively, companies may restrict writing as prior-year adverse development leads to calendar-year underwriting losses, even though accident-year results are improving. Reserve smoothing methods can delay the company’s proper response to changing market conditions.

When facing changing market conditions, the strategic CRO can help to improve company performance over the entire cycle by broadening the set of information it uses beyond internal price monitoring by:

  • Evaluating internal prices relative to external industry pricing surveys and focusing on changes in aggregate industry premium relative to exposure (e.g. economic GDP as a proxy)
  • Developing a view of industry-level reserve adequacy, which is a driver of calendar year results, could help inform whether the industry is rationally moving prices and whether a company should follow the industry trends or not. (The insurance industry as whole tends to respond to calendar results (the past) rather than accident year results (the future).)
  • Reviewing indications from more responsive reserving methods such as the paid or report chain ladder, possibly averaged over fewer years, which may provide additional useful information about trends in the current and more recent accident years.

Shareholder value to stakeholder value

Last quarter (Q3 2019) the Business Roundtable, representing over 100 leaders of major businesses, updated its Statement on the Purpose of a Corporation from one centered on serving shareholders, to one with “a fundamental commitment to all … stakeholders.” Though a collection of U.S. firms, the Business Roundtable includes several international market leaders and its movements have global implications. In the evolving position of a strategic CRO, this shift in the objectives of industry is one to keep sight of and monitor, even if only in the periphery.

Demonstrating a fundamental commitment to all stakeholders could have implications to a firm’s and an industry’s value. For example, stock markets may begin to price in this shift from shareholders to all stakeholders, depending on the actions of a firm. Without assigning a probability of occurrence to either an increase or a decrease in value, and assuming changes in corporations are operated move at a pace unaligned with consumer demand, the potential for market swing in either direction is worth a strategic CRO’s consideration.

In the most extreme case of decreased corporate value, insurer asset values could fall significantly, impacting asset and liability management and potentially hurting overall business outcomes. Still, an assumed increase in value could also have a negative outcome for a strategic CRO.

There is an opportunity cost to a company that neglects to take on increased risk assuming a greater than anticipated liability proportion. Any unanticipated capacity could give an edge to competitor insurers that are prepared and well-informed to take advantage of a stock market surge.

Climate change

The first step in addressing climate risk is to acknowledge and take ownership of it. With risks with such high levels of uncertainty, it can be difficult to know where to start, but debating the challenges with peers can be a useful way to open the conversation.

Transition risk, that is the risks (and opportunities) associated with a shift to a low-carbon economy, will vary greatly depending on how quickly climate change onsets. A fast transition would mean better anticipation of the risks, and a more proactive approach to managing the other consequential risks associated with climate change. A slow transition however would mean that risk teams would be playing catch up, likely resulting in expensive remediation strategies.

The physical risk from climate change poses a completely different problem for risk teams, and the impacts will vary greatly between companies in different territories with different exposures. It’s important that risk teams stay up to date on the latest scientific developments, which will help them to form appropriate strategies for managing their climate exposures.

Regulatory and public pressure to address the risks posed by climate change in a sustainable manner means that this is a change that the risk team needs to contemplate sooner rather than later.

In sum

The best positioned strategic CROs will be those who work closely with other functions within their organizations understanding how the needs of all stakeholders are being met when addressing changes such as those addressed briefly above. In this way they can leverage intelligence, demonstrate commitment to stakeholders and monitor exposure to the shifts in these emerging risks to ensure business plans and forecasts are kept up to date with the risk environment.

Previously in the series: How the CRO can communicate with the CEO about risk

Contacts

Raj Bohra
North America

Jennifer Gaffney

Matthew Ford
Senior Director, Risk

Dave Ingram
Head of Willis Re ERM Advisory

Nambassa Nakatudde

Contact Us

Related Content