Bank Negara Malaysia calls for a ‘new breed’ of risk managers

“Businesses in Malaysia are currently facing a set of challenging business conditions and some are likely to find themselves ill-prepared to respond.”

This was the stern warning from Bank Negara Malaysia assistant governor Jessica Chew Cheng Lian at the KL2015 Seminar for risk managers and business continuity specialists in Kuala Lumpur last month.

Lian said firms in the country needed to broaden their risk horizon and take a longer-term view of possible exposures.

“While more firms are acknowledging the importance of reputational, human capital and environmental risks, actions [to mitigate those risks] have generally not measured up.

Many companies still have weak succession plans in place and remain vulnerable to key risks.”

Lian added that most firms were too focused on legal exposures, rather than developing “robust risk management frameworks that incorporate measures of how their products and services affect the wellbeing of consumers”.

“Clearly the gap between the existing risk management practices and a whole-of-business approach which fully embraces broader aspects of risk remains large,” she said.

“Regulation and greater shareholder activism will remain important drivers of change. And, in my view, so will a new breed of risk managers who effectively integrate traditional and emerging risk perspectives and who can speak to these perspectives in a compelling and cohesive way to an organisation’s key stakeholders.”

Lian also said there was a need for risk managers to view risks over a longer-term horizon and start “imagining the unthinkable”.

That way, she said, “the universe of what’s impossible becomes smaller and our vision is less likely to be blinkered by limited experiences from the most recent past”.

She said reverse stress testing and increasing the degree of internal and external collaboration on risk management issues was key to success.

“Scenarios are often based on assumptions which are simplifications of reality at best. Such scenarios should always be rigorously challenged to account for changing conditions,” she added.

Underinsurance

The issue of underinsurance in Malaysia and the broader Asia-Pacific region was also discussed.

Last year severe flooding in Malaysia saw more than 250,000 people displaced, with an estimated cost of more than MYR2bn ($478.3m) to repair damaged infrastructure.

“The use of insurance continues to be an important way to reduce this cost,” Lian said.

“But there is still a sizeable protection gap despite the increased frequency and severity of weather-related disasters and other nat cats. In 2014 insured losses in Asia only covered about 10% of total losses incurred as a result of natural disasters,” she said.

“Given the concentration of growth and development in emerging economies going forward, the extent of underinsurance is a concern.”

Bank Negara has introduced a series of reforms for the insurance industry, aimed at enhancing its competitiveness and encourage greater innovation.

Lian said there were two key elements of the reforms.

“The first is the progressive strengthening of prudential standards that aim to improve underwriting and risk assessment capabilities within insurance companies, while substantially strengthening incentives for insurers to differentiate themselves in the market. The second is the structural changes that are being introduced to reduce market distortions and drive efficiency improvements,” she said.

“Taken together reforms are expected to result in wider product offerings and delivery channels, service quality improvements, greater market transparency and more differentiated pricings that is reflective of risk. This will help risk managers for whom the decision to purchase insurance is increasingly driven by wider considerations which go beyond just the intention to transfer risk.”

Top risks in Asia

StrategicRISK Asia-Pacific editor Jessica Reid followed Lian with a presentation on the top risks facing firms in the region, based on a survey of nearly 200 risk and insurance professionals.

Economic risk, people risk and reputation risk are the top three concerns, she said.

“The interesting thing between these three risks is their interconnectivity. For example, a company with a damaged reputation might find it hard to attract talent and that lack of talent could result in a failure to innovate and meet customer needs,” Reid said.

Honing in on Malaysia, Reid added: “The country is aiming to join the league of high-income nations by 2020 but the biggest deterrent to this is the lack of skilled human capital. Many industries here face an acute shortage of the right talent as brain drain continues to flow to neighbouring countries, such as Singapore, Hong Kong and even China.”

She also discussed the risk management profession in the region, noting that Asia-Pacific risk managers have less years’ experience in risk and insurance roles compared to their European counterparts.

“Only 13% of European risk managers have nine or less years’ experience compared to more than 30% in Asia Pacific,” she said.

By contrast, 43% of European risk managers have more than 20 years’ experience compared to just 14% in Asia-Pacific.

“What this means in Asia is you’ve got a lot of young people in the profession, which is great that people are choosing it as a career, but that naturally means there’s less experience and the profession is arguably not as developed,” she said.

Other highlights of the day included presentations on cyber risk by Microsoft Asia chief security officer Pierre Noel and a subsequent panel discussions on how risk management and business continuity programmes can combat the often systemic nature of cyber risk, and how to engage the board in risk management topics.