Covid19 has dominated all our lives recently and the most common feeling from the government downwards is that we never could have expected this. We could not have anticipated the profound impact it has had on our lives, our society and the economy.

But on another level, we absolutely knew it would happen. We have had numerous precedents of easily transmittable diseases including the global flu epidemic in 1920 and more recently SARS, MERS and Ebola. We have had many people flagging up the problem – Bill Gates in a now much more noticed TED talk in 2015 looked at the probability and impact of a global pandemic with 10 million deaths. And we have had regulators and risk teams everywhere placing a pandemic on risk registers. So just how can we know and then decide not to take it seriously? What are the implications of this collective cognitive dissonance?

In this short article I want to explore how a Board needs to address that issue. As individuals we can be forgiven for choosing to ignore the potential risks, but Boards at least are expected to be dispassionate, expert and objective. How well did that work in practice?

This might be a hectic time with actually dealing with the very real consequences of a pandemic but I would argue it is also necessary for the Boards of Directors to devote the time now to take stock, learn the appropriate lessons and make sure we know now exactly where we stand.

Each board should be able to answer honestly the following questions.

Did we see this coming?

Was a global pandemic on our risk horizon and if so, what assumptions were made about impacts and probability? Were they adequate and realistic? Conversely, if we didn’t explicitly see this as a risk there really needs to be questions about why not. The Board would also need to take a hard look at its role in providing challenge and insight.

Did we prepare enough?

Risk registers often include high impact low probability events, but low probability in itself is no justification for inaction. Much of the focus currently is rightly on operational resilience but clearly there are much wider issues we need to properly understand and learn lessons from. For example, the insurance industry finds itself in the middle of litigation and controversy over coverage wordings and exclusion, but if a pandemic was a known risk that was intended to be excluded then why did the bulk of wordings apparently not explicitly address that?

At the other end of the spectrum of taking on more risk than we thought, motor insurers are under pressure to refund premiums to housebound drivers. Could the industry have foreseen that and dealt with it better both from a financial mitigation and a public relations perspective? And really are industry bodies doing a good enough job of representing us in public and to the government?

Are we managing to survive and operate adequately now?

This issue will be top of mind for management teams and Boards but it’s worth restating. For some companies, the transition to remote working arrangements was relatively seamless, if not entirely painless and their businesses are operating effectively and sustainably. For others it has opened-up gaps in their resilience planning and possibly gaps in management control and capability. For all of us it has required flexibility and new ways of thinking and working.

But do we know how much damage has been done so far? Does the board have access to a re-projected business plan and an update on claims and reserves? Do we know the impact on investments – not just equity but other classes that have been hit hard such as property funds? What is the position of our reinsurers? Is there any coverage mismatch and in any case has the financial standing been materially impacted? Do we have a realistic contingency plan to refinance if required? Does the new plan take account of a wider financial environment post-pandemic?

Just how much more is going to hit the fan?

The situation currently reminds me of conversations I had with senior executives in the late 90s about asbestosis claims. They saw 10 years beforehand that claims were increasing but they knew there were limits to coverage and expected the courts would support that and it would be a containable blip. That didn’t end well! Do we know this will be different? What we can see is huge and continuing damage to the prosperity of individuals, business and governments. It is a scenario in which lawyers and the courts and legislators will be actively seeking to find deep pockets and ways of emptying them. We cannot be complacent about coverage limits. We need to conscious of the wider pressures and be willing to consider a range of potential scenarios.

What lessons should we learn now?

I would argue one of the key lessons is to think again about cognitive dissonance in the context of organisations. Too often the risk function acts as the logical, analytical mind of the organisation and sets out risks clearly, only for the rest of the business to discount it and get on with business as usual. Perhaps also the typical impact/probability matrix encourages us to be overly sanguine about high impact/low probability risks. The Board needs to take a good look at the role and function of the Chief Risk Officer to make sure that person is empowered to control risk and is not just at worst a regulatory fig leaf.

To quote David Leonhardt of the New York Times:

“it would be foolish to think that the only risks we are still underestimating are the ones that have suddenly become salient.”

What else will we look back on in 20 years’ time and say we should have been ready for that?

What more do we need to do now?

It’s tempting to focus in the immediate here and now in the middle of a crisis situation but the really successful businesses will be looking ahead to anticipate and manage potential future developments. This will be at many different levels, from anticipating claims developments and managing public perceptions of the business to supporting and lobbying government, to adapting to a new way of working that embraces electronic trading and a move away from full reliance on the traditional office based model.

At the same time firms should be looking at what the opportunities are. The adage “from adversity comes opportunity” is an old and well known one. It has been around for a while for a reason. Events like these lead to opportunities and firms should be asking where they exist in a whole range of areas, not the least in terms of potential operational changes and new and revised products.

Is the business positioning itself to make the most of the dynamic environment? Does it have the skills and resources to adapt flexibly and to make the transition? Put simply who is taking the responsibility to chart the course from here forward and do they have the necessary time and skills necessary?

Next steps

A pandemic like Covid19 was maybe the most predictable catastrophe the insurance industry has faced in recent years. We knew it could happen but few prepared properly for it. Is that how we are dealing with climate change? Or any of number of other major risks?

Ultimately it is the board that is responsible and board members personally who are accountable. And we can be pretty sure that regulators and other stakeholders will make sure, once the inevitable post event reviews have taken place, that the word “accountable” will have an acute meaning for some.

Now is the time to make sure that the lessons are learned. Take time to look around at the wider issues as well as making sure the immediate crisis is being managed. Ask for external support and where necessary an independent viewpoint. ICSR would be delighted to help and can support firms with reviewing their Risk Frameworks and/or approach to governance and reporting.

If you would like to discuss any aspect of the way your board is preparing for and responding to risks, lease feel free to get in touch for a chat. ICSR has a number of risk and governance resources available to assist clients in a variety of different ways, all available for swift deployment. Please contact ICSR Director, Kenneth Underhill to discuss the options.

David Russell

Consultant – Regulatory & Governance Specialist
Implement Compliance Solutions and Resources Ltd
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About the author: David Russell is an acknowledged expert in UK and international regulatory issues with over 20 years experience at the FSA, the Corporation of Lloyd’s and in the insurance market. Intimately involved in the implementation of Solvency II and the Insurance Mediation Directive. David specialises in dealing constructively with regulatory challenges and helping businesses meet regulatory standards. David is a chartered management accountant.

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