Political risks on the radar – Marsh

Political uncertainty across the globe and a lack of progress on Brexit terms are putting pressure on chief risk officers and insurance buyers.

That is the warning of Richard Smith-Bingham, director at MMC’s Global Risk Center, who says the challenges currently facing risk managers require new flexible solutions unlike those large organisations running to fixed efficiencies are used to experiencing.

These background uncertainties require a change of culture at senior management level, according to Smith-Bingham, with the voice of the chief risk officer heard much more loudly than ever before.

“It’s about being a lot more creative with how these risks may evolve,” he said. “This goes beyond documenting risks in a risk register in a traditional fashion.

“It’s really about exploring some of these trends and dynamics in a deeper way and having more creative conversations internally that may challenge business plans or strategic assumptions that are held within companies.

“This slightly more robust conversation that risk leaders really need to be a part of in terms of being able to play an effective role within the organisation,” Smith-Bingham told StrategicRISK.

An unpredictable political environment around the world is a driver of these new challenges.

Smith-Bingham highlighted how uncertainty over electoral results and subsequent government policy, and the potential for countries to become paralysed by changes of leadership, require two lines of focus for risk managers.

These twin focuses are: building strategic agility to adapt to rapidly changing circumstances; and preparing contingency plans for unavoidable major risks, such as confrontations on the international political stage.

“Risk managers have to look at the many different ways political scenarios may play out in different countries and what that means for the organisation,” Smith-Bingham said.

“Where you don’t have that clarity of the outcome then the first thing you’ve got to do is put out different variations of potential scenarios and analyse the implications of that in terms of business operations and the associated costs and frictions,” he said.

“Then companies have to look at their broad-based resilience activities. That can be used to cover themselves against these different scenarios. That may well be about broadening the supply base in case suppliers in certain countries become particularly affected by different trade measures, or where the political situation in certain countries means it’s difficult to operate in the way that they have done before,” Smith-Bingham added.

The ongoing uncertainties created by Brexit negotiations were given as an example of the challenges facing risk managers.

The risk manager’s preparedness for Brexit could be central to determining the organisation’s future direction, according to Smith-Bingham, but final executive decisions will need to wait until the political outcomes become clearer.

He said: “There is a sense of the can just being kicked down the road further around trying to get clarity on the outcomes with Brexit.

“It’s apparent that certain firms are just saying ‘we have made contingency plans around our strategic positioning and we are beginning to pull the trigger on that’.

Some might have hoped for more clarity by now, with less than a year to go.

“Perhaps now they are doing that less comfortably because they thought there would be clarity by this point, whereas others are still evaluating their options and trying to understand what the consequences are,” said Smith-Bingham.

“Some of the changes required could be very significant and costly changes, so these aren’t decisions that can be made at this point. But you need to have a clear sense as to when there is more clarity what you are going to do, why you are going to do it and what it is going to cost,” he said.

“The risk manager needs to be playing a role in all of these discussions to challenge assumptions as to how things will play out and work out some of those changes that may be required,” he added.