Aon’s 2019 Global Risk Management survey identified economic slowdown as the number one risk facing organisations today – it’s also an entirely uninsurable risk. Economic slowdown was first ranked as number one at the height of the financial crisis ten years ago and has once again grabbed the top spot.
The bleak economic outlook is mirrored by the International Monetary Fund (IMF) that has cut its estimates for global economic growth to 3.5% for 2019 with a similar sentiment from The World Bank at a mere 2.9%. Closer to home, the IMF has set South Africa’s projected GDP growth rate for 2019 at only 1.2%.
The average reported loss of income as a result of the top 10 risks faced by businesses according to Aon is pegged at a staggering 30% for the Middle-East & Africa. Respondents in the construction, rubber, plastics, stone and cement, machinery and equipment manufacturing, and printing and publishing sectors are normally most affected by businesses reducing or holding back on capital spending during an economic slowdown.
Formulating an evolving risk management solution
The frequency and level of risks associated with economic slowdown are evolving and escalating so fast that risk management solutions have not yet responded fast enough to prevent or mitigate losses. A concerning trend identified in Aon’s 2019 survey is the lack of risk identification and an overall drop in reported readiness for this risk from 30% to 26%.
“About 10% of surveyed organisations declared they have no formalised process in place to identify and or quantify risks to their business,” says Tony Webster from Aon’s Commercial Risk Solutions Division. “Considering that more of the top risks in this year’s survey are ‘technically’ uninsurable than ever before, companies without a formal risk management process set a dangerous precedent.”
While we are beginning to see the start of a much more significant slowdown in 2020, it would be prudent for companies to start preparing now. “Completing rigorous stress testing and coming up with adverse hypothetical scenarios forms the basis to gauge an organisation’s preparedness for an economic downturn. Ways to improve efficiencies and productivity forms the basis of a well-prepared plan to put in motion to help mitigate the risks. Agility to respond is the key to the mitigation of exposures,” says Tony.
Methods of identifying risks such as economic slowdown and its impact on business
Aon takes a closer look at common tools and sources of information employed by organisations to gain a better understanding of their risks:
- Internal audit processes are a method for identifying risk, with 69% of corporates using this approach. While audit and risk functions are normally kept separate, too much focus on control assurance may lead to new or emerging risks being overlooked or underestimated.
- External sources of data – be it external reports or industry analysis – help inform organisations on the key risks to their businesses. This approach to risk identification becomes more critical when the risks under consideration are macro-economic in nature, such as economic slowdown.
- A structured, enterprise-wide approach to risk identification is becoming more commonplace, especially among larger companies, where the quantum of the exposures is assessed and can also be benchmarked. Aon’s survey found that over a third of surveyed organisations are yet to adopt such a formal structure, leaving room for improvement while companies in the Middle East & Africa are most likely to have a formalised approach in terms of enterprise risk management (ERM).
- There is often no substitute for senior management judgment and expertise with 67% of respondents in North America preferring this approach to a more formalised ERM system. While the knowledge and experience of risk directors are undoubtedly invaluable, companies should be mindful of bias and limitation on personal perspective inherent to the views of a few. This could be further aggravated by the exposure of the intellectual capital vested in the minds of key personnel as opposed to being formally documented.
The value of dealing with an expert broker with global capacity and expertise has never been more important. “A brokerage that understands the industry and business landscape both globally and locally, as well as the trends and emerging technologies that might disrupt your business going forward is paramount to compiling a well-rounded risk management strategy and insurance solution. Solid risk mitigation strategies and preparedness now, for an economic slowdown in the coming months are crucial attributes for businesses that will allow them to emerge from an economic downturn,” concludes Tony.
Economic slowdown is but one, albeit most significant, of the many risks that should be unpacked and reviewed inside a formalised ERM programme.