With the Omicron variant causing a resurgence in COVID-19 cases, you might assume that the pandemic remains at the top of the list of business risks keeping owners and risk managers up a night. But you’d be wrong.
According to Allianz’s Risk Barometer for 2022, the pandemic only comes in fourth; and it’s significantly behind the #1 risk: cyber incidents. After reviewing the research, here’s my take on the biggest challenges facing the insurance industry in each category. Included are steps that businesses of any size can take to mitigate these risks.
The Big Risk: 2021 was a rough year for cybersecurity. But despite the dramatic increase in both the number and severity of cyber events, I’m going to say that the biggest risk that business owners face in this area is overestimating their own preparedness. Those statements may seem contradictory. Surely if threats are on the increase, businesses are taking extra measures to protect themselves and their data? Unfortunately not, in many cases. While research continues to show that having an Incident Response Team and testing that team’s response plan significantly reduces breach costs, many SMBs continue to skip this essential step. Many companies also over-estimate the financial protection that their current insurance policies provide in the event of a breach.
Steps to Take: First, get an outside perspective. It’s easy to assume that because you haven’t experienced a major breach yet, your defenses are effective. Don’t be too sure. A number of public and private groups now offer initial cybersecurity assessments and penetration testing at a minimal cost. Find a reputable partner, and take them up on that offer. Then sit down with your insurance provider(s) for a serious talk about what your general, professional, and cyber liability insurance policies do (and don’t) cover.
Natural and Man-Made Disasters
The Big Risk: I lump these two together because the distinction between natural disasters and the consequences of past management decisions is increasingly difficult to make. 2021 was also a bad year for weather/climate disasters. The National Centers for Environmental Information reported 20 events with losses exceeding $1 billion each in the United States alone. Worse, many of these events occurred in places or at times outside the norm. While “experts” continue to argue over root causes, it’s clear that older risk models are no longer reliable. Add in the -C grade on the ASCE’ 2021 Report Card for America’s Infrastructure, and it’s clear that our communities are increasingly vulnerable.
Steps to Take: It’s time to move beyond a that-sort-of-thing-doesn’t-happen-here mentality. Start preparing your clients and your business to cope if it does. Yes, if you live in the heartland your chances of experiencing a hurricane are minimal; but torrential thunderstorms that dump inches of rain day after day, for example, can have a similar impact. Fortunately, lots of technology groups inside and outside the insurance industry are doing innovative research into current risk conditions. Find them and use their work to inform your contingency planning.
The Big Risk: As someone who’s studied the history of pandemics, I was skeptical of early predictions that COVID-19 and the public health measures meant to contain it would be over in a few weeks or months. The Spanish Flu, which parallels our current situation, began in the spring of 1918 and didn’t end until after a fourth wave in the winter of 1920. Given the nature of the COVID organism, it’s unlikely that the disease will simply fade away. Rather, we’ll become used to periodic flare-ups of a less virulent form. To my mind, the larger risk for businesses is that we are only now starting to see what forms the long-term impact of this global event will take. Ongoing physical and psychological vulnerabilities, especially for children, may ultimately have an even more significant impact.
Steps to Take: It’s time to stop seeing the pandemic as a short-term crisis to wait out or a problem to be solved. Instead. business leaders need to treat it as a situation to be managed. How we address employee health and benefits, as well as what the future workplace will look like, how it will function, and who will inhabit it are all being shaped by decisions being made now.
The Big Risk: It’s a truism that laws and regulations often lag behind the practices they’re meant to control. After all, regulation is by its nature reactive. We don’t tend to prohibit an activity until someone’s actually tried it and we see the consequences. With the rise of the insurtechs, however, regulators were already feeling the strain of trying to balance the need to modernize our industry with their primary responsibility to protect consumers. The rapid pivot to digital technologies during the pandemic only exacerbates this strain.
Steps to Take: It’s time to re-think our regulatory paradigm. That doesn’t mean abandoning a thoughtful approach to regulation and compliance in favor of an “anything goes” environment. It does, however, mean embracing greater flexibility. I favor the approach advocated by Dan Quan in his article on regulatory sandboxes for the financial services industry. He promotes a “flexible regulatory regime, where rules of the road are clear and regulators are willing to provide guidance when uncertainty arises,” with sandboxes offering a safe space to gather real-world data. Failing to move with the times risks rendering our industry irrelevant to the very consumers we seek to help.
The Big Risk: Many insurance professionals are now experiencing their first true hard market. Add to that concerns about inflation and a long-predicted market crash, and it’s not surprising that many business owners have fears for the future. We’ve also yet to see the long-term economic fallout from a 2+ year global shutdown.
Steps to Take: The best way to weather any economic environment is to give yourself and your business options. One of the best ways to do that is to manage your debt. While it may not be possible or even advisable, to totally eliminate debt, you should control it — not the other way around. Furthermore, any debt you assume should have a clear strategic purpose and make a meaningful contribution to your long-term growth. Avoid taking on debt as a knee-jerk response to what may well be a short-term crisis. Build up your financial reserves. While you’re at it, don’t forget about your team’s needs. Consider adding personal finance training to your professional development program. After all, your employees are more likely to be focused and productive if they aren’t fretting about how to make ends meet or pay off student loan debt.
The Big Risk: For years, we’ve anticipated a talent crisis for the insurance industry as Baby Boomers with their decades of institutional knowledge retire or transition into other careers. Now, in the wake of the global shutdown, many of them are making that move. Add to that the turnover caused by the Great Resignation, and some insurance businesses are really hurting for qualified employees. People’s expectations for their work experience have changed much faster than the systems for supporting them. Furthermore, today’s workers are less monolithic in what they want.
Steps to Take: Today’s volatile labor market is as much an opportunity as it is a risk. Reconsider your basic assumptions about what workers want, or (deep breath) actually ask them. Be prepared to revamp your professional development and benefits/incentives programs accordingly. Now is also the time to look beyond your traditional talent pools for candidates. Connect with educational institutions and professional associations for groups historically underrepresented in our industry to learn how to build a more diverse team.
The Big Risk: Any of the risks we’ve already talked about can create business interruptions. Over the last two years, we’ve all seen businesses closed or severely restricted in their operations by damage from cyber-attacks, severe weather, social distancing measures, and staffing shortages. Many times, these closures were mandated by government authorities rather than being voluntary. Multiple waves of interruptions have caused massive financial harm and forced companies in many sectors to close or fundamentally alter their business models.
Steps to Take: While we often talk about making our teams and companies more resilient, it’s time to take it to the next level and build systems that are anti-fragile. As defined by Nassim Nicholas Tabeb, anti-fragile systems not only survive shocks and uncertainty, they thrive in these conditions, becoming stronger with every challenge. We live in an uncertain world. That’s not new, although many people are only now coming to accept that reality. Why not use that chaos to your advantage?
It’s Not About Being Negative
Yes, these are real and serious issues. The takeaway, though, is that we are NOT at the mercy of our circumstances. There are actions each of us can take to make ourselves, our businesses, and our industry as a whole better. That means we’ll be more able to help our customers and communities no matter what comes our way in 2022.