Although the COVID-19 pandemic threatens business operations virtually everywhere, it is useful to remember that the virus was initially feared for its impact on global supply chains. Its first hot spot was Wuhan, China, a manufacturing hub that produces vital components for hundreds of companies, mainly in the technology, automotive and pharmaceutical industries.
Global supply chains were already under pressure, with risk managers having to think about new or evolving geopolitical and cyber risks as well as the more familiar exposures. While these risks were bad enough, COVID-19 is on a different scale entirely. Among the reasons:
- The pandemic is forcing abrupt shifts to new business models in ways that will significantly alter company risk and resilience.
- Supply chains, already a target of economic nationalism, now face new questions about risk concentration.
- Company revenues are falling globally under twin blows of production disruptions and weakening demand with a ripple effect among third-party vendors and contractors.
Business models are changing rapidly because of COVID-19. To use a simple example, many restaurants are shifting from a sit-and-dine model to one of takeaway and food delivery. Larger companies are not immune. Think of retailers at the end of a supply chain who depend on high volume of foot traffic. How do you sell the latest fashion to customers no longer comfortable entering your premises?
The pandemic also may accelerate supply chain trends that were already underway. Under the pressure of economic nationalism, some companies had already come to question their dependence on current supply chain arrangements. This follows on the heels of other exposures, such as reputational risks arising from third- party labor practices.
Apart from the human costs, revenue shortfalls might be the heaviest blow of all. Recession fears are climbing around the world as stores close their doors, production slows and financial markets are highly volatile, oftening marking steep daily declines.
In other words, we’re not just seeing the rise of a new risk or two. We’re seeing a sea change in the whole business environment. Some of the change will be permanent. I increasingly see COVID-19 as a wake-up call for risk managers and other business leaders as well as the insurance industry.
The risk management dilemma
At this stage of the pandemic, the insurance industry and its clients are still attempting to gauge the impact. Business conditions change by the day. Government efforts to prop up shaky economies are taking on a scale not seen send the Great Recession of 2008 with the outcome unclear. By common reckoning, the worst is yet to come in many countries, though at this writing the outbreak may be easing in China, South Korea and other parts of Asia.
Insurers, brokers and their clients are in the process of dealing with the immediate issues – loss control, coverage details, claims handling (e.g. event cancellation, or business interruption) and other particulars. A frequent question that I’m getting is basic: “Am I covered?” (My Willis Towers Watson colleagues have written extensively about the insurance implications.)
The pandemic is revealing coverage gaps. While these gaps may prove to be costly, they are also instructive. As a former risk manager, I have found that we can learn as much from an uninsured loss as from an insured loss. The uninsured loss has 100% financial impact, of course. But the insured loss also has a financial impact, perhaps in the form of retention, the deductible or even through an increased premium at renewal.
Risk managers and their risk management partners need to start talking and planning now for a very different insurance landscape. Insurance companies will immediately look at your previous claims history. If you filed a claim, it’s important to put a well-documented story around it – for example, what you learned from the incident behind the claim, remedial efforts you’ve taken to avoid or mitigate a recurrence.
Looking towards the next renewal cycle, assume you’ll be working in a hardening market apart from property coverage. Engage your broker and the markets early to get a reading on how the insurers are feeling. Engage your CFO and management team to determine how your company’s risk appetite may have changed because of the pandemic. Forecasting your financial performance will be nigh on impossible in the current climate and there will be a definite need for you to make sure that is reflected in any rating charges.
It’s also important to begin thinking in the context of your total cost of risk as your business strategies and operations evolve. Say, for example, that you plan to disperse your workforce with more employees working remotely. How does that affect your exposure to a future incident? Will you be spending more on business continuity planning after the pandemic?
For supply chains, it will be important to know how third-party vendors specified in your coverage change their risk profile, too. Will they be using different contractors in new ways? What efforts are they making to identify, quantify, mitigate and transfer their risks?
COVID-19 changes the rulebook
Remember the risk management basics: Identification, quantification, mitigation and transfer. COVID-19 is reason to look at your business fresh from each perspective, with a heightened need to make more effective use of data and analytics.
For supply chain risk identification, there was a time when our primary focus was on physical risks. We’ve already noted that geopolitical, cyber and reputational risks have become more challenging in recent years. While pandemics are not new, COVID-19 shows that many companies (and governments, for that matter) were caught off guard by its rapid spread and intensity.
Virus-driven changes to your business model – some made on the fly – may create new risks while perhaps diminishing others. More companies may choose to disperse manufacturing and production. More employees may be working remotely.
Quantification issues will also become more extreme. For one thing, you may need to go deeper into your third-party vendors to better understand their exposures and efforts at mitigation and transfer. But what do you know about the supply chain below that? Who supplies your supplier? If this wasn’t on your mind before COVID-19, it must be now.
Quantification must also engage other risk analysis processes such as enterprise risk, which is linked to your company’s strategic objectives. Business continuity preparations require a close look, including a business impact analysis. Among media businesses, for example, many supply chain issues are not for physical products, but for large swathes of expert freelance labor. Risk managers will need to look at the deployment of talent with a fresh eye on the threat of contagion.
Mitigation flows from this. As noted earlier, I think COVID-19 will force many companies to diversify. To use my restaurant example, in the United States, U.K., and other countries, the government permits restaurants and bars to convert easily to food delivery. Very different regulations will apply. There will be other technology based companies, especially start-ups, that handle change at a greater rate and indeed diversification is part of their success. As an example, Amazon has a delivery and a significant cloud computing platform, Uber has Uber Eats for food delivery and are exploring logistics analysis.
Risk transfer will also face new challenges in the wake of COVID-19. Uncertain business conditions will make for difficult discussions with underwriters who can’t see certain risks and have little data or claims history with which to discuss terms, conditions and the pricing of new policies.
Risk managers may want to test their coverage, not through claims but by having conversations with their brokers and insurers. Expect discussion scenarios that deal with varying degrees of future uncertainty, always within the context of corporate strategy, enterprise risk management and business continuity. Engage several once disparate areas of risk management tools into a tighter process.
I believe we’re also likely to see further hardening in insurance markets in major coverage areas as insurers seek to offset the impact of interest rates and equity returns on liquidity and reserves. The Insurance Information Institute, in its 2020 first quarter Global Macro and Insurance Outlook, expects greater event frequency among insurers providing supply chain coverage such as business interruption with comparatively higher impact on general liability and directors and officers liability coverage.
We will sort this out. Risk managers and their insurance partners have been through traumatic events in the past, notably terrorism, wars, natural catastrophes – even pandemics. But the uncertainty we see at the moment should serve as a wake-up call, not just for insurance professionals but for corporate finance executives, other senior management and boards.
Disclaimer
Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.
COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.
Although the COVID-19 pandemic threatens business operations virtually everywhere, it is useful to remember that the virus was initially feared for its impact on global supply chains. Its first hot spot was Wuhan, China, a manufacturing hub that produces vital components for hundreds of companies, mainly in the technology, automotive and pharmaceutical industries.
Global supply chains were already under pressure, with risk managers having to think about new or evolving geopolitical and cyber risks as well as the more familiar exposures. While these risks were bad enough, COVID-19 is on a different scale entirely. Among the reasons:
- The pandemic is forcing abrupt shifts to new business models in ways that will significantly alter company risk and resilience.
- Supply chains, already a target of economic nationalism, now face new questions about risk concentration.
- Company revenues are falling globally under twin blows of production disruptions and weakening demand with a ripple effect among third-party vendors and contractors.
Business models are changing rapidly because of COVID-19. To use a simple example, many restaurants are shifting from a sit-and-dine model to one of takeaway and food delivery. Larger companies are not immune. Think of retailers at the end of a supply chain who depend on high volume of foot traffic. How do you sell the latest fashion to customers no longer comfortable entering your premises?
The pandemic also may accelerate supply chain trends that were already underway. Under the pressure of economic nationalism, some companies had already come to question their dependence on current supply chain arrangements. This follows on the heels of other exposures, such as reputational risks arising from third- party labor practices.
Apart from the human costs, revenue shortfalls might be the heaviest blow of all. Recession fears are climbing around the world as stores close their doors, production slows and financial markets are highly volatile, oftening marking steep daily declines.
In other words, we’re not just seeing the rise of a new risk or two. We’re seeing a sea change in the whole business environment. Some of the change will be permanent. I increasingly see COVID-19 as a wake-up call for risk managers and other business leaders as well as the insurance industry.
The risk management dilemma
At this stage of the pandemic, the insurance industry and its clients are still attempting to gauge the impact. Business conditions change by the day. Government efforts to prop up shaky economies are taking on a scale not seen send the Great Recession of 2008 with the outcome unclear. By common reckoning, the worst is yet to come in many countries, though at this writing the outbreak may be easing in China, South Korea and other parts of Asia.
Insurers, brokers and their clients are in the process of dealing with the immediate issues – loss control, coverage details, claims handling (e.g. event cancellation, or business interruption) and other particulars. A frequent question that I’m getting is basic: “Am I covered?” (My Willis Towers Watson colleagues have written extensively about the insurance implications.)
The pandemic is revealing coverage gaps. While these gaps may prove to be costly, they are also instructive. As a former risk manager, I have found that we can learn as much from an uninsured loss as from an insured loss. The uninsured loss has 100% financial impact, of course. But the insured loss also has a financial impact, perhaps in the form of retention, the deductible or even through an increased premium at renewal.
Risk managers and their risk management partners need to start talking and planning now for a very different insurance landscape. Insurance companies will immediately look at your previous claims history. If you filed a claim, it’s important to put a well-documented story around it – for example, what you learned from the incident behind the claim, remedial efforts you’ve taken to avoid or mitigate a recurrence.
Looking towards the next renewal cycle, assume you’ll be working in a hardening market apart from property coverage. Engage your broker and the markets early to get a reading on how the insurers are feeling. Engage your CFO and management team to determine how your company’s risk appetite may have changed because of the pandemic. Forecasting your financial performance will be nigh on impossible in the current climate and there will be a definite need for you to make sure that is reflected in any rating charges.
It’s also important to begin thinking in the context of your total cost of risk as your business strategies and operations evolve. Say, for example, that you plan to disperse your workforce with more employees working remotely. How does that affect your exposure to a future incident? Will you be spending more on business continuity planning after the pandemic?
For supply chains, it will be important to know how third-party vendors specified in your coverage change their risk profile, too. Will they be using different contractors in new ways? What efforts are they making to identify, quantify, mitigate and transfer their risks?
COVID-19 changes the rulebook
Remember the risk management basics: Identification, quantification, mitigation and transfer. COVID-19 is reason to look at your business fresh from each perspective, with a heightened need to make more effective use of data and analytics.
For supply chain risk identification, there was a time when our primary focus was on physical risks. We’ve already noted that geopolitical, cyber and reputational risks have become more challenging in recent years. While pandemics are not new, COVID-19 shows that many companies (and governments, for that matter) were caught off guard by its rapid spread and intensity.
Virus-driven changes to your business model – some made on the fly – may create new risks while perhaps diminishing others. More companies may choose to disperse manufacturing and production. More employees may be working remotely.
Quantification issues will also become more extreme. For one thing, you may need to go deeper into your third-party vendors to better understand their exposures and efforts at mitigation and transfer. But what do you know about the supply chain below that? Who supplies your supplier? If this wasn’t on your mind before COVID-19, it must be now.
Quantification must also engage other risk analysis processes such as enterprise risk, which is linked to your company’s strategic objectives. Business continuity preparations require a close look, including a business impact analysis. Among media businesses, for example, many supply chain issues are not for physical products, but for large swathes of expert freelance labor. Risk managers will need to look at the deployment of talent with a fresh eye on the threat of contagion.
Mitigation flows from this. As noted earlier, I think COVID-19 will force many companies to diversify. To use my restaurant example, in the United States, U.K., and other countries, the government permits restaurants and bars to convert easily to food delivery. Very different regulations will apply. There will be other technology based companies, especially start-ups, that handle change at a greater rate and indeed diversification is part of their success. As an example, Amazon has a delivery and a significant cloud computing platform, Uber has Uber Eats for food delivery and are exploring logistics analysis.
Risk transfer will also face new challenges in the wake of COVID-19. Uncertain business conditions will make for difficult discussions with underwriters who can’t see certain risks and have little data or claims history with which to discuss terms, conditions and the pricing of new policies.
Risk managers may want to test their coverage, not through claims but by having conversations with their brokers and insurers. Expect discussion scenarios that deal with varying degrees of future uncertainty, always within the context of corporate strategy, enterprise risk management and business continuity. Engage several once disparate areas of risk management tools into a tighter process.
I believe we’re also likely to see further hardening in insurance markets in major coverage areas as insurers seek to offset the impact of interest rates and equity returns on liquidity and reserves. The Insurance Information Institute, in its 2020 first quarter Global Macro and Insurance Outlook, expects greater event frequency among insurers providing supply chain coverage such as business interruption with comparatively higher impact on general liability and directors and officers liability coverage.
We will sort this out. Risk managers and their insurance partners have been through traumatic events in the past, notably terrorism, wars, natural catastrophes – even pandemics. But the uncertainty we see at the moment should serve as a wake-up call, not just for insurance professionals but for corporate finance executives, other senior management and boards.
Disclaimer
Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.
COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.
