What about all those insurers that have adopted enterprise risk management (ERM)? Don’t they have more esoteric challenges covered? Not necessarily. Indeed, while ERM eliminates some of the internal silos inhibiting traditional risk managers from addressing organization-wide exposures such as reputational or political risks, the approach could come up short when facing more existential strategic threats.

What's different about strategic risks?

The first step to rectifying this situation is appreciating what’s different about strategic risks and how insurers should go about managing them.

• Rather than focusing on standard, fluctuating exposures that are part of a company’s everyday operations, strategic risk management (SRM) primarily addresses longer term, game-changing trends in society, technology and the economy, as well as their impact on the fundamental way an insurer (and perhaps the entire industry) conducts its business.
• Strategic risks are difficult to predict and often even harder to quantify, which goes against the grain of standard, operational risk management.
• Most importantly, unlike more traditional risk management, SRM not only recognizes the potential upside of strategic risks, its practitioners look to achieve significant growth and differentiation by capitalizing on—rather than being victimized by—such disruptive threats. It involves both mitigation and commercialization.

To deal more systematically and effectively with evolving and emerging strategic threats, insurers should look to advance further along the risk management maturity curve by integrating SRM into their organizational infrastructure. To accomplish this, carriers could adopt a framework that can accelerate the discovery of potentially disruptive developments and help carriers adapt more quickly to any radical change in future business conditions.

(Photo: Shutterstock)

Establish a leader to spearhead SRM tranformation

The first step is to establish a clear leader to spearhead a SRM transformation and integrate the new discipline throughout an insurance company’s operations, while also assuring direct, regular involvement by senior management and the board of directors. One option is to appoint or upgrade the responsibilities of an existing risk manager—particularly if the company already has an enterprise risk manager or chief risk officer in place—to become more of a catalyst than a compliance steward. However, other C-suite members could fill this role as well, depending on a company’s structure and culture.

To fully empower a new SRM function, carriers also need to:

• Build or fortify risk sensing tools.
• Run computer-based simulation models to train executives to routinely think in terms of SRM.
• Prepare a scenario-based action plan to identify, assess and respond to key strategic risks.
• Conduct periodic mock drills to test preparedness and response options.
• Establish a continuous feedback loop for senior management and the board.
• Implement remedial programs to offset the effect of any psychological biases that could hinder an organization’s response to potential strategic threats spotted on the horizon.

Being proactive rather than reactive in dealing with strategic risks has become an imperative in this rapidly evolving economy and culture. At a minimum, the radical pace at which innovative technologies and new competitive paradigms are penetrating and disruptingnearly every area of business is likely to challenge the fundamentals and standard operating procedures of the insurance business more than ever before.

By building SRM capabilities, insurers can:

• Institutionalize processes to spot and manage strategic risks in time to make a course correction. • Bolster the odds of anticipating and mitigating against a potentially disruptive trend before it threatens to overwhelm their value proposition and business model.
• Improve their response time versus the competition, both existing and emerging.
• Change the mindset from defense to offense, by stressing opportunities to grow rather than focus only on how to prevent or at least minimize the impact of emerging threats.

The alternative is to deal with strategic risks on an ad hoc basis, which increases the chances of a carrier being caught unaware of a potential existential threat on the horizon, or at least undermine their ability to respond in a systematic way—not only to ward off the challenge, but to capitalize on it.

To learn more about how insurers can integrate SRM into their standard operating procedures, please refer to our full report on “Strategic Risk Management in Insurance: Navigating the Rough Waters Ahead.”

Sam J. Friedman ([email protected]) is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.

Jaykumar Shah is assistant manager for insurance with Deloitte’s Center for Financial Services in Mumbai, India.