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Business interruption, political risks grow as TMT business models evolve

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By José Mercado | August 5, 2019

Amid a growing number of potentially catastrophic risks – from physical to political – telecommunications, media and technology (TMT) companies should include board-level and C-suite oversight of active risk management.

TMT companies are embracing new business models as they strive to serve disparate customers and meet shareholder expectations. Some traditional telecoms are plunging into media, for example. Others may be providing cash transfers and other banking services. The list goes on.

Although business models are changing, the TMT industry has at least one major constant – its dependency on telecommunications infrastructure, and undersea infrastructure in particular. By one estimate, nearly 99 percent of international communications traffic is carried by undersea cable.

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Reliable infrastructure is vital, but it’s not just the temporary disruption of a broken undersea cable that alarms a risk manager or CFO. The real concern is shifting to the risk of massive, long-term financial losses that inevitably will follow business interruption – a threat that will grow as business models change.

So, here’s the big question: Is your risk management program keeping up with the changing scope of your business and an increasingly complicated risk landscape?

Vulnerabilities of undersea cables

The potential for financial loss has grown incrementally over the years as undersea cables evolved from simple telegraph lines to serving as conduits for the massive data loads that support commercial transactions and global information exchange. The volume will grow further with a boost from new technologies, including artificial intelligence, the Internet of Things and worldwide introduction of 5G.

Cable operators can deal with the growing volume with new routers and other advances, including new fiber optic sophistication. But even fancy infrastructure enhancements are vulnerable to the actions of a commercial fishing boat that, for whatever reason, snaps a cable as its anchor bounces over the seabed.

Business interruption losses could be catastrophic

Fixing a broken cable can get expensive, but the real financial hit may come after that. When a line is cut, the operator or the operator’s business partners face potentially catastrophic financial losses from business interruption. Data-dependent customers will quickly move to competitors or other carriers, perhaps permanently. For the operator, this risks the loss of significant future revenue as well as reputational damage.

Consider growing political risk

While business interruption may be the most material risk for many TMT companies, it’s far from the only risk. Pointing to security concerns, the American government’s effort to block Huawei’s involvement in 5G networks is a growing political risk that could divide the world into an American-based internet vs. a China-based model. The long-term implications for TMT risk profiles aren’t yet clear if there are competing standards for 5G.

Political risks take other forms, too. If you have relay stations in, say, a country that may be sanctioned by the Office of Foreign Assets Control (OFAC), you may confront a thorny political landscape with deteriorating infrastructure and growing concerns around the country’s safety and stability. There is growing errors and omissions /professional indemnity potential. And we haven’t even touched on cyber risks from geopolitical or corporate rivals, or hackers.

The role of risk modeling

In this landscape, there is a growing need for effective risk modeling to assess all such risks. This is still a challenge for many enterprises in which risk management is “a work in progress.” In my experience with TMT companies the world over, I find two extremes in how enterprises handle risk:

  • Some companies have board-level risk management oversight, and they tightly integrate risk management with broader corporate strategy. These companies have professional risk managers, actuaries, sophisticated analytics and a well-defined risk appetite that is met with internal funding, captives and alternative risk financing.
  • At the other extreme, otherwise well-managed TMT companies may not even have a professional risk manager but rely on a mid-level manager or two to handle insurance policies. Little thought is given to risk management’s role in achieving larger business objectives.

Most TMT companies obviously fall between these two extremes, with widely varying levels of professional risk management, board-level attention, and robust risk retention/risk transfer capabilities. While it’s true that no two companies are likely to need identical risk management programs, it’s also true that TMT risks are becoming more complex and interconnected, they change rapidly, and the implications of business interruption grow by the day.

Companies flush with capital are obviously in a good position to essentially bring risk management in-house and to work with advisors when insurance and alternative risk capital is required. For companies that depend on traditional risk transfer, the insurance markets continue to have limited capacity for pipeline risks, but creative options are available.

I’m familiar with a Latin American TMT company that, as it moves towards a new business model, is adding undersea cable capacity to reach remote areas of the country. Working with other international providers and consultants involved with the project, we identified adequate insurance capacity in China and South Korea. In other instances, there is ample capacity in the U.S. and European insurance markets. But insurance is just one piece of the risk puzzle, and often not even a large piece.

“Table stakes” for TMT risk management should include board-level and C-suite oversight of active risk management that puts heavy focus on risk modeling to identify, measure and manage risks that threaten growth and profitability. The cost of professional risk management would be a tiny fraction of the costs that can be expected if customers flee because of transmission-and-distribution infrastructure failure.

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José Mercado
Latin America Leader
Technology, Media and Telecommunications

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