Your organization has diverse choices when it comes to addressing interconnected extreme risks, from building flexibility into your operations and talent, to combining quantitative analytics with qualitative ‘storytelling’ approaches to better identify and manage risks.
In this, the second insight on hyper-volatility and coping with states of extreme and unpredictable fluctuations in global systems, we look at wide-ranging strategies to help your business not only cope but continue to be successful. These strategies are:
Understanding and quantifying risk tolerance is crucial to building financial resilience in a hyper-volatile world. However, we see many businesses fail to assess the critical benchmark of the point your company might face insolvency or default in light of severe disruption to operations or revenue. Understanding this and your organization’s risk tolerance, then maintaining appropriate cash reserves, can act as a buffer that helps you withstand unexpected financial shocks and avoid insolvency or default.
By setting just enough cash aside, considering the opportunity cost of doing so, you’ll have the liquidity to continue operations and meet financial obligations, even in the face of hyper-volatility where significant and unforeseen climate or geopolitical risks are more likely to occur. With robust cash reserves your organization can, for example, quickly respond to a sudden increase in raw material costs without compromising financial stability.
Events like economic shocks, geopolitical disruptions and climate-related incidents can trigger one-off, unbudgeted losses. You can use financial analysis frameworks to evaluate your organization’s capacity to absorb a one-off, unbudgeted loss in excess of insurance in the context of your financial priorities, such as maintaining a budget, protecting credit ratings and preserving solvency.
These frameworks help align reserve adequacy with defined risk tolerance thresholds, providing a structured approach to evaluating your organization’s financial resilience under stress by assessing the potential impact of those severe, low-probability loss events on financial performance.
We’re seeing more organizations manage hyper-volatility by building operational flexibility. Some practical examples your organization might consider include:
An organizational culture that values adaptability and innovation can prove vital for building financial resilience against hyper-volatility. When employees at all levels understand and prioritize the need to pivot and innovate, implementing and maintaining strategies that protect your company's financial health becomes easier.
Continuous training, clear communication of your risk management goals and known incentives for identifying risks proactively can help here. Workshops on scenario planning, problem-solving and critical thinking can also help your workforce better understand and then plan to respond to hyper-volatility.
By combining scenario testing, data and advanced analytics, you can create hypothetical scenarios that capture the cascading effects of multiple risks, such as natural catastrophe events or geopolitical tensions, and then analyze how these scenarios would impact your supply chain and financial performance.
Consider the 2018 and 2023 wildfires in Hawaii, which had starkly different outcomes. The 2018 fire was contained with minimal damage, while stronger winds and the presence of non-native grass species exacerbated the 2023 fire, leading to significant losses. By testing scenarios that consider multiple and nuanced environmental and climate-related factors, you can better identify and then address potential vulnerabilities.
And by translating insights from stress-testing into financial terms using advanced analytics, you can demonstrate the potential material impacts of a severe climate event, such as a drought, on your operations. Quantifying the risks and showing the materiality of the potential losses puts you in a better position to make the case for securing the budget for appropriate resilience-building measures.
In a hyper-volatile environment, continuous learning and adaptation can prove essential. This is about reassessing your risk management strategies regularly, using quantitative and qualitative methodologies and making adjustments as needed.
For example, staying informed about emerging risks and trends and using advanced analytics to monitor real-time data on market conditions, such as fluctuations in commodity prices, means you can adjust financial modeling and cost structures accordingly in real time.
To discover how you can manage complex and interconnected geopolitical and climate risks more effectively, get in touch with our specialists.
WTW hopes you found the general information provided here informative and helpful. 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 advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
