Risk Perception: Mistakes to Avoid When Assessing Corporate Risk

A trio of Covid-19 related risks heads up the 10th Allianz Risk Barometer 2021…’ states the introduction to this year’s eponymous survey of the key business risks of each year.

Previous Risks

What a surprise! Strangely enough, the pandemic did not feature in the top 10 business risks in last year’s (January 2020) survey (it was 17th), whilst the 3 surveys prior to 2020 nominated business interruption as a key risk.

In 2012 (the first year of the survey) the top two business risks were economic risks and natural catastrophes, which reflected the experience in the previous year of both the aftermath of the 2010-11 financial crisis and also the devasting floods in Thailand.

Actually, none of these rankings are that surprising, but to those of us interested in risk management what is interesting is to see how we humans frequently rate the most recently experienced risk as the most threatening.

This pattern of human behaviour is well known but can be a problem when conducting a business risk management exercise. There is a tendency to prioritise the risks that have just happened over risks that may be equally or more relevant and/or more likely to occur.

Business Interruption

The risks of business interruption feature strongly in the Allianz surveys and the current pandemic has raised their profile more; business interruption is a generic risk that can cover a multitude of events. As insurance is concerned with tagging the financial cost of any interruption to a specific insured event (or uninsured, as we have seen during the past year) it is limited to mitigating at best some of the exposure to financial loss. Other events that can cause business interruptions such as wider supply chain disruptions, staff absenteeism or economic risks will be uninsured. Therefore, a good risk management programme must address business resilience across a wide spectrum of events, from known exposures to those ‘unknown unknowns’ and mitigate these as much as possible, using insurance as well as a range of other measures.

Risk Management

Where should responsibility for risk management lie? For decades insurers and brokers have worked with company risk managers, whose role frequently was limited to managing insurance purchases and thereby minimising insurance spend. Today there is a greater recognition of business risk and the value of a strong risk management programme. This has led to boards of directors becoming more responsible for a company’s risk management strategy.

This positive trend will continue as the insurance and financial markets become ever closer, developing products that are better suited to protecting a wider range of risks. It is also pleasing to see that the pandemic has encouraged government, financiers, insurers and academics to devise better methods of risk management and to enhancing systemic economic resilience to risks that threaten more than just a limited number of businesses. However, complacency – the ‘it’ll never happen to me’ mentality – is still often prevalent and it remains an obstacle to risk management planning in many economic sectors.

Risk perception is a wide and fascinating area of study; we all have different risk appetites and perceptions of what is risky. When conducting objective risk management exercises we need to put prejudices and pre-conceptions aside and consider what the real issues facing our business are just now. This should be an exercise that involves senior management taking a holistic view of as wide a spectrum of hazards as possible, evaluating the resilience of the business in the face of these hazards and devising an appropriately wide-ranging mitigation strategy. In short, when considering the risks your company faces, try to look around and ahead – not back.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as both an underwriter and a broker, in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.