COVID-19 Pandemic May Accelerate Risk Management Trends

Businessman holding a small piece of paper with the word Pandemic spelled in all caps

July 08, 2020 |

Businessman holding a small piece of paper with the word Pandemic spelled in all caps

A recent survey of European risk managers reveals that many risk management trends, such as digital transformation and the use of captive insurance, may be accelerated by the COVID-19 pandemic, some believe.

The Federation of European Risk Management Associations (FERMA) 2020 European Risk Manager Report, conducted in partnership with PricewaterhouseCoopers (PwC), collected data from 764 risk managers through a Web-based survey conducted from January to March. FERMA conducts the survey every 2 years.

"It is obvious the results have been collected prior to the COVID crisis striking Europe," said Françoise Bergé, a partner at PwC and a participant in a recent FERMA webinar analyzing the survey findings.

Charlotte Hedemark, senior risk specialist at SAP in Denmark, FERMA board member, and chairman of FERMA's 2020 survey committee, who moderated the webinar, said that while the survey was conducted largely before the crisis, the COVID-19 pandemic colors many of the survey's findings.

The survey found that while traditional insurance management is European risk managers' main activity, 40 percent of risk managers are involved in crisis management and business continuity planning. "This shows this important role played by insurance in the mitigation strategies of our organizations," Ms. Hedemark said.

Crisis management and business continuity planning are increasingly at the center of organizations' efforts to manage exposures like cyber risks, she said, and, after the COVID-19 crisis, will likely be part of their efforts to manage future pandemics as well.

Risk managers surveyed identified the top risk concerns over the next 3 years as cyber threats (18 percent), speed of technological change (18 percent), and uncertain economic growth (17 percent).

Survey respondents' top risks within the next 10 years included climate change and environmental damage (17 percent), changing customer behavior (11 percent), and extreme weather events (10 percent).

The COVID-19 pandemic heightens many of the risk managers' top concerns, as illustrated by the rise of cyber attacks as companies have more employees working remotely during the pandemic, Ms. Hedemark said.

"I would say that for companies that have well-established risk management practices and are regularly updating their risk maps, the risk map hasn't changed all that significantly" due to COVID-19, Oliver Wild, group chief risk, insurance, and internal control coordination officer at Veolia in France, said during the webinar. "Cyber threat is still front of mind and increasingly so with the COVID-19 crisis."

For many organizations, a cyber attack on top of the current health crisis—with many employees working from home—could make it difficult to function, Mr. Wild said.

Another webinar panelist, Adriana Cavaliere, corporate risk manager at Skeyes in Belgium, said for many organizations COVID-19 actually presents an opportunity to take a new look at their risk management efforts.

"Never waste a good crisis," Ms. Cavaliere said. "This crisis has given us an opportunity to speed up or proactively work on elements that have been written into our risk management 5-year road map."

The COVID-19 pandemic might also accelerate the involvement of risk management in organizations' digital transformations, according to the panelists.

The survey found that 67 percent of risk managers say they're using at least 1 of 4 innovative technologies: data analysis (53 percent), data visualization (35 percent), process automation (28 percent), and artificial intelligence (8 percent).

"In 2020, the main new technology used by risk managers is data analysis at 53 percent," said Ms. Hedemark. "Still, most risk managers continue to use locally based IT tools such as software for governance, risk management, and compliance." Consequently, the use of data in risk management is moving more slowly than some projected, she said.

Risk managers face various obstacles to taking full advantage of digital transformation, Ms. Hedemark said. The size of the investment and the perception in some areas of the organization of the added value technology investments might bring to risk management are among the primary obstacles.

"I probably expected (the digital transformation) to be a bit faster, but it will probably increase over the next few years," said Mr. Wild.

COVID-19 will likely have an impact on that transformation, he said. "There's a need to get all this data input and be able to treat it in a very quick manner so it can be used by the crisis unit to make decisions," Mr. Wild said.

Having and understanding data is also critical in engaging insurance markets, Mr. Wild said. And, with risk management resources often limited, any productivity and improved quality that can be gained by using digital tools are positive.

Asked about their top concern about the hardening insurance market, 90 percent of survey respondents cited limitations and exclusions on emerging specific risks, 88 percent were concerned about changing market conditions, 68 percent were concerned about concentration in the insurance market, and 41 percent cited new regulations.

"This gives rise to the use of captives," said Ms. Hedemark. "While risk retention and alternative risk transfer vehicles are seen as the main method for dealing with a shortage of capacity in the market or capacity for emerging and strategic risks, the use of a captive is the strategy that has increased the most in 2 years."

The FERMA survey found 43 percent of respondents indicating they are considering using captives to address shortages of capacity for emerging or specific risks, up from 15 percent in 2018.

Of those surveyed, 27 percent said they will continue to use an existing captive over the next 2 years for difficult-to-place risks, while 16 percent plan to create a captive between now and 2022 to address such exposures.

Respondents also indicated that captive insurance will become more important across all lines of business.

"The use of captives is always something that's on the rise due to market conditions," said Mr. Wild. "Having said that, having a captive if you don't have one already requires quite good level of maturity and understanding of your risk.

"The captive is a useful tool to integrate what is almost a well-known occurrence of risk, then you would transfer volatility to the insurance market," Mr. Wild said. It's also a "great dashboard" to understand what's going on "in the field" with your organization.

July 08, 2020