When it’s easy to secure insurance coverage or hard to fathom a catastrophic loss, executives may have little interest in reassessing their company’s risk profile or exploring financing options. But complacent risk practices can leave companies at the mercy of changing market conditions and burgeoning exposures at a time when preserving every dime of capital is critical to business survival.
“Buying insurance may seem like a necessary evil, but funding an unanticipated loss is worse,” says Anne Petrides, senior consultant and actuary for Risk Advisory and Brokerage Services at Towers Watson. “Unless organizations have gone down the path of assessing how much risk they want to assume and developing a financing strategy, they could face an unwelcome surprise.”
“Many firms would be unable to exist in their same form following the extreme financial volatility imposed by a catastrophic event,” says Craig Nelson, senior consultant for Risk Advisory and Brokerage Services at Towers Watson. “The time to look at worst-case scenarios and explore mitigation strategies is before you enter the marketplace.”
Smart Business spoke with Petrides and Nelson about the need for disciplined risk fundamentals as part of a plan to preserve capital.
Why conduct an annual risk review?
Petrides: Risk tolerance is the cornerstone for all risk decisions and everyone from board members to shareholders must be comfortable with the company’s profile and appetite for risk. Executives should review each risk category on a periodic basis to decide how much exposure they wish to retain, from all categories of risk for a single event and in the aggregate. Realistically, companies will face trade-offs when they enter the marketplace but they need to anticipate their choices, calculate the impact and not let the marketplace dictate their risk tolerance.
Nelson: Although we don’t know if British Petroleum has enough (or any) insurance to cover claims in the Gulf of Mexico, the event is a reminder that all scenarios and stakeholders must be considered while constructing a profile and the possibility of a catastrophic event warrants executive attention. While most large companies might survive a catastrophic event like this, most would suffer severe damage to shareholder/stakeholder value. So, in many respects, it’s not so much survival versus nonsurvival, but what you are going to look like after the event and how long it will take to recover. By their very nature, a major earthquake, hurricane, or even a large, unanticipated liability claim can occur without warning.