Strategic Business Risk Insurance 2008

Transcription

1 Strategic Business Risk Insurance 2008 Jim Doherty Investors want to know about risks and risk management By declaring the risks, and quantifying them somehow, they give investors confidence in the company. They can show what systems they have for risk management. The company has to show in detail how it operates its current risk management. It has to show it has a clear knowledge of the difference between business risk and financial risk. Demonstrating how the risk approach adds value; showing the benefits of protection through risk management. Page 2 Page 1

2 Yet there is a strategic risk management gap An enterprise risk assessment does not always go beyond financial reporting Q: What is the focus of the risk assessment? Focus of risk assessment Operational/business risks 22% Financial/financial reporting risks 20% Compliance risks 14% Strategic risks 7% 72% of respondents focus on all four areas of risk in their assessment 28% of respondents do not focus on all risk categories Strategic risk is the least focused on Separate risk categories 28% All risk categories 72% Note: Multiple responses were possible Source: Ernst & Young, 2007 from Compliance to Competitive Edge Page 3 Strategic risk: destroyer of value If strategic growth is a significant driver of value in companies, understanding strategic risk is of high importance Review of large share price drops suggests that strategic risk can be a dangerously quick and permanent destroyer of corporate value (Ramse Consulting) But strategic risk has been neglected in recent years, with resources prioritised on financial and compliance risk and less focus in enterprise risk assessments Page 4 Page 2

3 EY Research Report Strategic Business Risk Insurance 2008 Page 5 EY Research Report Risk Identification Subject Matter Experts Macroeconomics International trade Finance International security Information technology Law Environmental issues Business regulation Social trends Research science Energy Business strategy We worked with Oxford Analytica to interview more than 70 analysts These included specialists in over 20 subjects with crucial impacts on business performance Interviews were open-ended Analysts were asked to list, rate and comment on the 10 most significant trends or uncertainties that may impact companies list the five most significant strategic business risks to firms within their industries Page 6 Page 3

4 EY Research Report Risk Prioritisation Industry Banking and capital markets Technology Insurance Consumer products Oil & Gas Asset management Automotive Media and entertainment Telecommunications Utilities Pharmaceuticals Real estate Biotechnology Panels of sector experts, including journalists, researchers, advisors and Ernst & Young Practice professionals rated the severity of the sector risks using a numerical rating Analysts were asked to rate The loss impact The competitive impact The risks that were rated as having the greatest impact across the largest number of sectors were identified as the top business risks for global business Page 7 1. Climate change 2. Demographic shifts in core markets 3. Catastrophic events 4. Emerging markets 5. Regulatory intervention 6. Channel distribution 7. Integration of technology with operations and strategy 8. Securities markets 9. Legal risk 10. Geopolitical or macroeconomic shocks Page 8 Page 4

5 The Ernst & Young strategic business risk radar Our risk radar is a simple device to present a snapshot of the top 10 strategic business risks for a company, a sector or indeed the global economy as a whole Not all strategic business risks are the same in nature, therefore we have divided the radar macro threats that emerge from the general geopolitical and macro environment in which we all operate; sector threats that emerge from trends or certainties that are re-shaping the specific industry; operational threats that have become so intense that they may impact the strategic performance of leading firms Page 9 Risk radar: Top 10 risks as macro, sector or operational threats Page 10 Page 5

6 1. Climate change A long-term risk with broad-reaching implications Can affect pricing structures, reserving policies, solvency Can lead to broader, more gradual consequences including: Mortality and health problems Spread of environmentally-related litigation Political risk linked to conflicts for control of resources or inadequate response by governments Page Demographic shifts in core markets Creates new demands that insurers are well-placed to satisfy New products for changing financial, and retirement, needs (the pay-out phase) Key challenge will be to maintain market share in core markets in the face of competition from other sectors Page 12 Page 6

7 3. Catastrophic events Rising costs increase potential impact on insurers earnings and capital Significant challenges include: Capital available / required Pricing Contract structure Financing Page Emerging markets Both a risk and an opportunity success is not guaranteed Competitive threats could see today s leading global players displaced Many companies growth strategies are essentially emerging market strategies, but challenges abound Page 14 Page 7

8 5. Regulatory intervention New regulatory developments and increased scrutiny Could result in changes in operations and underwriting practices Politically-driven intervention could enhance risk Compliance costs, primarily driven by government policy, can be unpredictable Page Channel distribution Technology can change how insurance services are sold Traditional agent based distribution models are under pressure from technologies that allow companies to reach clients directly Competitive advantage goes to companies with multichannel access for sales and information Page 16 Page 8

9 7. Integration of technology with operations and strategy Technology must be seen as an enabler to keep up with the competition Technology has: Opened new distribution channels Allowed more sophisticated and accurate underwriting Reduced unit policy processing costs Related risks include the threat of cyber-terrorism and over-dependence on outsourcing partners Page Securities markets Pressure from securities markets needs to be closely monitored New players are entering the market Financial innovation has seen: Blended products challenge the position of traditional insurance companies New sources of capital investing in insurance start-ups Page 18 Page 9

10 9. Legal risk Legal uncertainties could threaten a company s standing or result in financial loss Three main areas of liability law: Environmental Managerial Undeveloped Page Geopolitical or macroeconomic shocks Global Economic Threats Financial melt down from derivatives and hedge funds Fuel prices Terrorist activity Page 20 Page 10

11 Potentially above the radar within 5 years 1. Over-reliance on model-based risk management 2. Threats to the reputation of the industry 3. Losing the war for talent 4. Increasing corporate exposure to global regulatory heterogeneity 5. Possible emergence of entirely new risks Page 21 Are you protected? Are you missing out on opportunities? How does your company identify, assess, manage and monitor strategic risk? How do you exploit strategic risk as a point of competitive advantage? Who assures the strategic initiative portfolio from selection through to benefits delivery? What is your equivalent of the Strategic Risk radar? How do you keep it refreshed? How does it warn you of impending danger? What infrastructure exists to assure controls are in place over strategic business risks? Page 22 Page 11

12 Possible management action Conduct an annual risk assessment that defines key risks and weights probability and impact on business drivers Extend the risk assessment beyond financial and regulatory risk to consider the wider environment in which your organisation operates and the full extent of its operations Conduct scenario planning for the major risks that you identify and develop a number of operational responses Evaluate your organisation s ability to manage the risk that you identify in particular ensure that your risk management processes are linked to the risks that your business actually faces Ensure you have effective monitoring and controls processes that can give you both earlier warning and improved ability to respond Keep an open mind about where risks can come from. We live in an increasingly interdependent global economy and risks that can damage your business can initiate in markets and sectors a long way from your own Page 23 Questions & Answers Page 24 Page 12

13 It is never the risk that causes damage or creates opportunity it is the response. Thank you Strategic business risk Page 13