Rarely does an urgent need to change coincide with an outstanding opportunity for positive change. COVID-19, while it is a tragedy for many and a crisis for almost everyone, it is also, for the entire risk management industry, just such an opportunity. Never before has the need for effective prevention of negative events, the early identification of a potentially negative event, and the need to plan ahead to mitigate the consequences of negative events been clearer.
While it is too early to identify all the lessons we will learn from COVID-19, it is already clear we could have done better than we have so far done. This isn’t to blame anyone; while in due course some will have been found to have reacted less well than with hindsight they would have wished, COVID-19 is a completely new experience for all of us. It is the first time a systemic risk on a global scale has crystalized and blame is a distraction while avoiding blame will make learning from the experience effective. And effective learning from the experience is essential because COVID-19 won’t be the last time a systemic risk on a global scale crystalizes.
In order to prepare for the next COVID-19, in whatever form it arrives, risk management and insurance need to be re-thought and, probably, re-engineered. Until (about) 15 years ago, traditional risk management focused on the prevention and mitigation of negative events like fires, floods, or thefts; insurance and risk management complement each other perfectly in this framework. From about 15 years ago, enterprise-wide risk management (ERM) shifted a risk manager’s focus to include objectives and sought to optimize the likelihood that enterprises would meet their most important objectives.
COVID-19 has exposed the limitations of both traditional and ERM based risk management in the face of systemic risk. Many organizations, whether using traditional or ERM based risk management, have been caught completely unprepared by COVID-19. Almost all insurers are saying most of their policies do not respond to COVID related losses. Even so, the financial damage the insurance industry will sustain from COVID-19 will be significant. Many insurance policies will cover COVID-19 related losses and some legislative and legal efforts to enforce coverage despite their insurer’s intent will be successful. COVID-19 will likely be an earnings event for almost every insurer and will be a solvency event for many.
Because of the widespread organizational lack of preparation, the extent of the financial losses enterprises and their insurers will sustain, and the reputational damage the insurance industry will suffer because of coverage denials, both risk managers (by whatever name they are known) and insurers need to develop new risk management approaches. In the future, risk management needs to consider systems as well as negative events and objectives.
Only a system-wide approach will ensure the next crystallization of a global systemic risk is identified far sooner than we recognized the danger posed by COVID-19. A system-wide perspective will allow enterprises to be better prepared to respond – not just for their own benefit but also to optimize the response of the risk management ecosystem in the interest of the entire economic system of which it is a part, which seems like the only effective way to mitigate systemic risk.
This isn’t to suggest a takeover of government’s role when the next systemic event happens but, by taking a system-wide perspective and coordinating their actions, enterprises of all types will protect themselves in the future better than they will likely manage on their own or with government help this time. A system-wide approach will also enable the provision of insurance protection that, if not initially able to match the full scale and scope of another COVID-19, will provide far more protection than the insurance industry will affirmatively offer for COVID-19 related losses.
The need to develop system-wide risk management is past due and, for those of us in the risk management industry, it is an outstanding opportunity.