31st Jan 2021, By Shivash Bhagaloo
It is 2021 and we are still in the middle of a pandemic. We have already seen companies that managed to move forward successfully and others that are still struggling.
What is then the path that leads to success?
There is no solution that fits all, but what we know at Lux Actuaries and can consult you about is the importance of the framework of Enterprise Risk Management. The principles that govern how best to manage stakeholder risk are useful to remember in times of uncertainty and can be key to an organization stabilizing more quickly and regaining its former glory.
The key stakeholders that concern most corporates are:
A recent estimate by the World Economic Forum was that 2 out of every 5 jobs lost for Covid-19 related reasons (i.e. lockdowns, travel restrictions etc.) are unlikely to return.
This is a staggering figure to digest, particularly given the expected impact on the viability of some industries as a whole.
Human capital has always been of the utmost importance to companies, however after Covid-19 struck this relationship between employer and employee has been on a totally different level.
The Aon Global Risk Management Survey 2019 ranked ‘Failure to attract or retain top talent’ as the 11th highest risk as viewed by respondents.
It is obvious that letting go of a large number of staff simultaneously reduces morale and can impact employee resignations. There are even more ways that employee management can impact an organization.
The onset of the pandemic has further accelerated the need for regulatory involvement. This is clear. The Aon Global Risk Management Survey 2019 has ranked ‘Regulatory/Legislative changes’ as the 10th highest risk.
How does the ERM framework of an insurer allow insurers to absorb these regulatory changes without crippling the business?
Indeed such is the uncertainty with insurers denying coverage for losses caused by COVID-19 closures, the Insurance Council of Australia (ICA) started proceedings recently to test the application of certain infectious disease exclusions in business interruption (BI) policies.
To quote the ICA, “The Insurance Council initiated this test case on behalf of insurers that sell commercial property policies with business interruption cover. The ICA believes this test case is an important step towards providing greater clarity to insurers and small business customers in the treatment of pandemic-related claims.”
Current ERM Frameworks must rapidly adjust to accommodate regulatory changes that are desperately being pushed for by the general public. There is thus a greater need for companies to adapt given this increasing prominence.
ERM is a key part of the considerations of any rating agency that essentially provide to the broader public a ‘probability of default’ for a corporate. A strong framework that demonstrates the ability of an organization to protect its capital base from unexpected loss is a critical criterion for a strong rating.
When assessing the control processes of a company, the rating agency scores the ability to identify, monitor, and manage different categories of risk. These include:
The ability to weather rare but extreme events is also considered and assessed. None of the rating agencies have announced adjustments to methodologies or rating criteria as a result of Covid-19 however it is likely there will be a discussion on what should be measured going forward by the relevant rating criteria and what the real risk profile looks like.
Rating agencies must also balance communicating short-term credit risks to the market with the need to determine whether any of the short-term credit pressures lead to long-term and enduring issues for the issuers.
A distinguishing factor in the credit analysis compared to the 2008 market collapse is how apparent the current credit risks are to investors, particularly the short-term risks. This is unlike the complex asset-backed mortgage securities that are much less transparent and difficult to evaluate with the prior recession.
As anyone who has been involved in a rating exercise knows, an effective ERM framework and a strong credit rating usually go hand in hand. There are still many questions left unanswered about how the main stakeholders will lead us to get out of this unfortunate situation in the best way possible.
Discover more about successful shareholder management within the ERM Framework in our dedicated White Paper.
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