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Rethink your risk financing strategy during challenging times

Captives|Risk & Analytics|Corporate Risk Tools and Technology
COVID 19 Coronavirus|Risk Culture

By Sean B. Rider | April 24, 2020

Difficult times call for bold thinking; a good place to start is your risk financing strategy.

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

In unprecedented times, bold, innovative thought make it possible to rise above adversity. Today we’re in such a time, facing a grave health threat and the likelihood of a severe economic downturn. The ramifications of the current COVID-19 (coronavirus) pandemic make it clear that new thinking is needed, particularly when it comes to risk.

The global pandemic has depleted the financial resilience of many organizations. Revenues, exposures and operations are all in flux. The markets for risk are in turmoil, and the search for cash is at full throttle. Current thinking about risk and insurance will need to be turned on its head.

Think ‘risk financing strategy’ rather than ‘renewal strategy’

We have to replace the idea of a renewal strategy with a completely re-envisioned risk financing strategy. Your focus needs to be on tuning your risk strategy to the shifting appetite, tolerance and capacity for risk that your organization can bear, not a reaction to the shifting insurance market.

In good times, it’s easy to assume that organizations can take on added risk using insurance as a cheap hedge. But that time is past. The hardening insurance market has demonstrated that insurance is not necessarily a cheap hedge. Now we can expect the insurance market to get even harder, at the same time the economy contracts, forcing companies to cut expenses while seeking improved stability.

CFOs, treasurers and risk managers need to clearly define their risk tolerance, appetite and capacity, and reevaluate their entire approach to risk financing. Above all, their risk strategy must deliver financial resilience to counter adverse events. This needs to be accomplished in an environment characterized by price increases, decreased capacity, increased volatility, and very likely both budget and personnel cuts.

How to start

How can organizations deliver on this tall order? Analytics need to be front and center, informing and empowering management to make rational and relevant decisions that deliver resiliency. Only by understanding risk in portfolio can you focus efforts on reducing risk in a way that accurately reflects real-world adverse events.

We also need to understand that insurance has different uses. Some organizations may need to retain more risk, in a captive or otherwise, to control costs. Some may transfer more because their tolerance for risk is suddenly lower. But all organizations need to consider their organizational financial priorities and capacity before choosing risk finance vehicles.

We need to deploy limited resources to secure insurance coverage that will deliver the greatest organizational value. This bold new way of thinking means that our insurance program is likely to look radically different than it did before.

The stakes are high

Those who fail to adapt will be left behind; those who harness the power of risk analytics will have a chance to steer their organizations through this crisis and sustain organizational flexibility in a world that increasingly demands resilience.

Author

Senior Director,
Head of Client Development – North America
Risk & Analytics

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