Risk management in "the age of risk"

As technologies and economies become more complex, so does risk. The internet, international supply chains, advances in travel, and many other developments have resulted in an increasingly complex environment that some risk managers may find hard to keep up with.

In his opening remarks at the 2022 RIMS-WTW Asia Pacific Virtual Risk Conference, Adam Garrard (pictured above), WTW’s global head of risk and broking, said that we are now living in “the age of risk”, where today’s risk manager doesn’t just manage insurance on a renewal-to-renewal basis.

“Risks are more complex and smart risk management means being proactive, looking at the portfolio holistically and ensuring the best possible return on the investment we make in risk management and risk transfer,” Garrard said. “Those risk portfolios are widening and changing.”

Some of the issues Garrard highlighted in his opening remarks were mounting climate risk, the ever-widening spectrum of ESG risks, and the ever-evolving cyber risk.

“In short, the risk management job is bigger than ever, more impactful than ever and more important than ever,” he said.

Due to the growing responsibility of the job, risk managers will have to harness one of the most powerful tools of our time – data and analytics.

“Smart use of data and analytics and the smart use of new technology – these are the essential ingredients needed to measure and monitor modern risk,” Garrard said. “Anyone who isn’t doing this will be at a significant disadvantage.”

To help achieve this, Garrard shared with Corporate Risk and Insurance three tips risk managers should keep in mind as they delve into data and analytics.

• Data and analytics can help with loss prevention, insurance limit validation, pricing of risk, as well as portfolio risk finance optimisation. Having a clear set of objectives in mind at the outset will make the process more efficient and help manage stakeholders’ expectation 
• Whilst we have seen exponential growth in the volume of data and continuous improvement in harnessing the data through technological advance, there is no such thing as a perfect data set. There is significant actuarial and analytical expertise to ensure the data is interpreted appropriately and then considerable professional judgment is essential in creating fit-for-purpose forward-looking models.
• Organizations should not be discouraged by the lack of good quality data they currently possess, as everyone has to start somewhere. A good risk advisor will have lots of industry relevant risk data on hand and know how to use this data to conduct robust analysis. We can also provide guidance on how best to capture, structure and store data

Garrard also warned risk managers against certain mistakes as they explore the age of risk. One such mistake is overreliance on insurance premiums as the main metric for the risk management function.

Read more: How does an insurance premium work?

“The tendency to use insurance premium as the defining key performance indicator remains common, even though risk finance is really about protecting your organization’s balance sheet by keeping retained risk within tolerance and maximizing the value from commercially available risk transfer capacity,” Garrard said. “Instead of premium, cost of risk is a better reflection of the efficacy of the risk management and insurance program that an organization has in place.”

Related to this, Garrard also cautioned risk managers to avoid taking things one year at a time – as if simply renewing an insurance policy – as risks are moving far too fast for this.

“As a community, we also need to go away from the habit of viewing risk through an annual insurance renewal lens,” he said. “The more profound risks are volatile in their impact and have greater timeframe uncertainty. Looking at things annually can lead to another common mistake of ‘doing things the same as last year.’ We live in a fast-moving world where organizations and their operating environments are under constant change.”