Insurers name top risk concerns in 2021-22, and the pandemic isn't one
While COVID-19 was mentioned, risk professionals surveyed by Deloitte rated other top risk concerns much higher.
The strain the global pandemic has put on businesses and economies is sure to last many more months for some and years for most.
New survey data from Deloitte identifies insurers’ greatest concerns for the next two years, and surprisingly, the pandemic and the global economic crisis aren’t among the top three.
The 12th edition of Deloitte’s Global risk management survey assessed financial institutions’ risk management practices and the challenges they face. The survey was conducted from March to September 2020 and was completed by 57 financial institutions around the world.
The survey results and expert analysis of Deloitte’s findings were published this week, identifying 11 key risk trends concerning financial institutions in the short-term.
What’s keeping risk managers up at night?
J.H. Caldwell, a partner with Deloitte Risk & Financial Advisory, Deloitte & Touche LLP, and the principal author of the survey, says financial institutions are seeing more risk from more sources than ever before.
“The rapid economic downturn, coupled with abrupt changes in consumer and business behavior, may mean that systems, programs and models based on pre-COVID-19 data may no longer accurately reflect the post-COVID-19 reality,” Caldwell said in a statement. “Institutions will need strong risk management governance while having the agility and willingness to rethink their traditional approaches in a fundamentally altered business environment.”
When asked about the most important trends for their institutions over the next two years, COVID was mentioned with 48% of risk professionals citing the global financial crisis as a concern, and 42% naming global pandemics, but the fallout from these events proved more top-of-mind.
Leading the list of concerns, 20% of respondents named credit risk as the most important risk type for their institutions over the next two years, and 62% said that credit risk measurement will be an extremely or very high priority for their institutions.
Survey respondents named elements of credit risk management they expect to be particularly challenging to measure. Among them are collateral valuation, commercial credit, commercial real estate, unsecured credit, leveraged lending and middle-market lending.
Aside from credit risk, managing financial risks was not a concern for any risk professional surveyed, with nearly all rating their institution’s as “extremely” or “very effective” in this arena. But on managing non-financial risks, this number dipped from a near-uniform 100% to 65%, and dropped even further for specific types and aspects of nonfinancial risk. Among them: Conduct and culture (55%), geopolitical (42%), and data quality (26%).
Another top-3 concern, according to the Deloitte survey, is a constant on annual risk reports in recent years and only continues to worsen, especially with a fully remote workforce: Cybersecurity.
Only 61% of respondents considered their institutions to be extremely or very effective at managing cybersecurity risk, and 87% said that improving their ability to manage cybersecurity risk will be an extremely or very high priority over the next two years.
Another risk staple of the last decade filled out the remaining top three spots. As climate risks worsen and concern over these threats intensify, environment, social and governance risk concerns were among the top 3 greatest worries insurers named for 2021-22. Alongside credit and cybersecurity, 38% of respondents said concerns over climate risk will increase the most in importance for their institutions over the next two years — more than any other risk type when the top-three risks are combined.
Worse, despite acknowledging the threat climate risks pose, only 33% of executives considered their institutions to be either “extremely” or “very effective” at managing this risk.
Other risk trends to watch in 2021-22
Beyond the top three risk concerns named in the survey, the results showcased other risk trends to watch in the months ahead.
Among the key findings, the Deloitte survey found that most institutions recognize that they have more work to do to improve data management, with 69% of those surveyed saying that enhancing the quality, availability, and timeliness of risk data will be an extremely or very high priority for their institution over the next two years.
Only 26% believed their institutions are extremely or very effective at managing data quality, and just 8% of respondents considered their institution to be effective at the use and management of unstructured data. Institutions are under pressure as the target date for cessation of publication of LIBOR rates (end of 2021 for most cases) approaches. According to the report, financial institutions “may have underestimated the work required and would be well advised to prepare for the transition.”
Only 24% of those surveyed considered technology or applications updates and development to be extremely or very challenging, while 22% said the same about processes and controls updates and development. Just under half of those surveyed (45%) expect their institutions’ annual spending on risk management would increase over the next two years. The report highlights, though, that pressure on revenues is likely to intensify efforts to “reduce ever-increasing expenditures on risk management.”
Half of the respondents said efficiency-focused technology tools will be an extremely or very high priority for their institutions over the next two years, but as in recent years, most have not yet implemented them. The most popular tech adoptions were cloud computing (46%), RPA (29%), machine learning (27%), or cognitive analytics (13%).
Access to the full Deloitte report can be found online.
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