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Risk Management, The Recession & Insurance: A Wake-up Call For Commercial Staff

January 12, 2010

The Financial Times last week carried the story of a remarkable report by Mactavish, “an entrepreneurial research business acting as a risk analyst and catalyst for change in the insurance industry”.

Under the headline ‘Risks Taken In Recession Threaten Business’, the article proceeds to detail eight categories of risk that have resulted from the pressures of the recession. Most of these risks relate to commercial decisions that were driven by two tactical imperatives – the need to maintain revenue and the need to cut costs. But in many instances, it appears that the tactical responses had little oversight and there was limited review or understanding of their consequences. The resultant extra risks include:

  • Moving into unfamiliar product areas and territories (including taking on new and untested contractual commitments or trading / distribution partners)
  • Speeding up product launches (creating unknown quality or liability issues, internally and with suppliers)
  • Weakening supply chains and increasing vulnerability in order to reduce costs (for example by cutting the number of suppliers and distribution centers, or by relying on lowest cost suppliers regardless of their reliability or capability to sustain claims)
  • Increased outsourcing to unknown or high risk locations (pushing down unit cost at the probable expense of quality and reliability)
  • Acceptance of extra contract liabilities in sales bids and negotiations (warranties, recall costs, indemnities etc.)
  • Reducing supervision in key areas such as health and safety or contract oversight (driven by ‘suicidal’ bidding practices)

Although this report was based upon a study of UK companies, the list will be familiar to many of us across the globe. I had the chance to discuss it with Bruce Hepburn, CEO of Mactavish (who we will shortly interview on an IACCM Ask The Expert program). I made the point to Bruce that management has to weigh up the immediate risks of going out of business versus the longer term risks of building new capabilities. Therefore, the downturn has left many with limited choice about the incremental risks they have taken on.

Bruce accepted this point, but suggested that there was often far too little awareness in the Boardroom about the nature or extent of the risks being adopted and there is a naive assumption that these will be covered by a third party insurer. He highlighted several examples where sales or procurement has followed approaches that put the company at severe risk, yet those commmitments were not even included in the risk register, let alone actively managed. He also made the telling point that many times management is relying on an insurer to protect them when things go wrong, but based on the undeclared risks he is observing, he believes it is highly questionable whether the insurer would pay against the policy.

There are many implications to this story. Among them is the question of the role of commercial staff in the risk process. Based on Mactavish’s findings, groups like Procurement are adding to risks by their unilateral focus on unit cost reduction (if you don’t believe me, listen to the examples that Bruce Hepburn will discuss  in the interview). But more broadly, if executive management is unaware of the extent and nature of the risks being adopted, then where were we during this process? In my view, Commercial Management is not only about alerting management to risk; it is also about enabling the business to find ways to accept and manage more risk. But in this case, it seems that we were not only often silent, but that we have not been taking steps to prevent or protect against unpleasant outcomes.

I know this situation is not universal. From IACCM’s work in benchmarking commercial process, we can list a range of companies that are generally handling market and commercial risks extremely well. But the gap between those leaders and ‘the rest’ appears to be growing. It is time for commercial, legal and procurement groups to wake up and realize their broader responsibilities – and opportunities – in generating good and responsible governance. Otherwise, we may find that the insurance industry starts to make those decisions for us. Indeed, in their comments on the study, PwC made the observation:

“Insurers and insurance intermediaries need to fundamentally rethink how risk is assessed, how companies are insured and how to keep pace with an increasingly complex, uncertain and fast-changing risk landscape”. Sounds familiar? Perhaps it is time to look back at your mission statement – because this is precisely the role that any high-value commercial group should be performing.

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