We are all risk-takers now… whether we realize it or not…!

Most financial and many corporate businesses, (re)insurers such as Awbury included, have someone in the role entitled “CRO” and the concept of Enterprise Risk Management (ERM- in essence meant to symbolize an holistic approach to managing all the key risks a business faces) is now a given, on which managements are judged by markets, public rating agencies, regulators and peers. This is usually coupled with the “three lines of defence” approach to mitigating risks (much beloved of regulators) through involving business originators, the ERM function (or some analogous central function) and Internal Audit (which checks on everyone else) as supposedly sequential lines of defence against loss.

So, one would think that the Covid-19 pandemic can be seen simply another risk to be managed, albeit a potentially existential one in some cases.

In many ways that is, of course, true. However, we think there is more to it than that, because it requires starting from the assumption that, while the risk may be mitigated, it may not become definable or manageable for some time. So, using prior heuristics or parameters may well be dangerously self-delusional. Events quite clearly demonstrate that the standard linear, non-complex theories and practices that still underpin much financial and risk management theory cannot really cope with the complex, dynamic systems created by an event such as the pandemic.

A natural disaster, however bad, usually has a finite scope, even if there may be lingering second- or third-order effects (think of Chernobyl, or Fukushima); and then things go back to “normal”, until the next time. Models are updated and tweaked; pricing modified- i.e., increased (if possible).

The current pandemic is probably different. Of course (as we have written) there have been pandemics before, ones far more devastating in proportionate terms than the current one is ever likely to be, such as the Antonine Plague, the Black Death or the Spanish ‘Flu’. However, the severe economic consequences (and therefore many of the human costs) of the Covid-19 pandemic, while triggered by an epidemiological (and ever-changing) calculation, are largely man-made. Thus, successfully navigating Its outcome depends not so much on understanding the epidemiology, as on the behaviours of those supposedly rational, but inherently unpredictable agents known as human beings, and the capacity of our institutions and leadership to adapt and balance competing priorities.

And what if a major “normal” natural disaster were to occur during the depths of the pandemic, such an earthquake, volcanic eruption, hurricane and so on? Are existing risk models really going to be able to cope with a non-correlated, but significant CAT event, or several? After all, Nature is completely indifferent to the fate of Humanity.

All of this emphasizes that every single member of any entity, whether government, commercial or NGO, is a risk-taker as well as a risk-manager simply by trying to function and be productive in such times. ‘Twas ever thus, but the global pandemic has rammed the point home. Avoiding the risks is a risk in itself!

Fortunately, human beings and well-designed and well-managed institutions have, time and again, shown their resilience in the face of severe risks. This in time should be no different. It behooves the (re)insurance industry as a whole to demonstrate that being in the business of taking and managing risks is not merely a slogan, but an enduring reality. Individual businesses may become stressed, but the industry as a whole should be more than capable of weathering the storm; fulfilling its role; and prospering over time. Demand is not likely to go away in the longer term, even though it may be severely challenged in the immediate future.

At Awbury, with our range of flexible and bespoke, credit, economic and financial risk management tools and products, we stand ready to meet and master the challenge. It is why we exist!

The Awbury Team

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