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COVID-19: Rare risk management opportunity doubling as black swan

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

By Richard Baudin | June 29, 2020

For risk managers, COVID-19 created an unprecedented challenge — and an historic opportunity to shape financial strategies.

COVID-19 (coronavirus) and the resulting economic challenges have put pressure on nearly all organizations’ financial health. The financial upheaval caused by the pandemic is a wake-up call that organizations must increase their business resiliency. That may require significantly adjusting activities, cost structures, strategies, assets and supply chains.

Risk managers are central to this reevaluation and need to adapt to bring a fresh perspective and solutions to risk. They also face a new norm: As insurance markets continue to harden, the value of insurance is increasingly in question.

There is limited capacity to transfer risk, and what capacity is available may not be offered at an acceptable price, so risk managers are forced to find alternate solutions or combinations of solutions to finance their increasingly complex risks. An innovative reimagining of risk and the strategies needed to find the right risk balance will be needed to protect their businesses from the next black swan and build a more agile risk financing framework that adapts more readily to the accelerating changes we are witnessing.

Align risk strategy to financial imperatives

A good place to start is to clarify the organization’s risk tolerance with a precise review of risk strategy that supports and reflects organizational financial imperatives.

The most efficient and thorough approach to this reevaluation is to take a portfolio approach to risk and quantify their organizations’ full downside potential, revealing long-tail risks and potential worst-case correlations, and matching risk management solutions with financial key performance indicators (KPIs).

A single analytic risk finance decision-making framework quantifying all risks and contemplating all risk finance options is essential for risk managers to create a program that delivers value in an increasingly complex risk landscape. In fact, it’s the only way to objectively identify the best returns and maximize the company’s risk retention using a variety of vehicles such as captives and alternative risk transfer options in combination with traditional insurance.

A unified risk framework can enlighten risk managers and senior management to how different risks do or can interact. This clarity can improve risk governance and help CFOs better understand how risk strategies contribute to sound risk appetite. With the latest analytics technology, CFOs can now stress test a risk strategy in real time to measure business resiliency and better protect their organizations from the next major black swan event.

A logical, data-driven risk strategy could ease the strain that COVID-19 has inflicted on some organizations and make it easier for risk managers in budget-constrained organizations to decipher what’s essential and what business projects are simply nice to have.

A reconsidered risk strategy also needs to incorporate cash-flow planning so that there are faster payouts to cover catastrophic events. For instance, parametric solutions, which inject immediate cash into a company if a trigger occurs, can be a life saver for a distressed company.

New risk solutions for a new norm

There has never been a more critical time for risk managers to revisit and modernize risk strategy to reflect what we’ve learned from this transformational pandemic event. Insurance prices are rising, and the relevance of insurance is being challenged. Is it still fit-for-purpose, and does it deliver value for today’s risk financing needs? The future of risk management must embrace advanced analytic solutions that deliver better performing risk strategies and arbitrage fragmented risk markets.

Author

Richard Baudin
Head of Client Development – Great Britain, Western Europe, Latin America and Asia Pacific
Risk and Analytics

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