Downunder RMs dig deep into risk landscape

The cream of Australia’s risk management community met with the StrategicRISK team, local brokers and insurance industry representatives last week.

Held in Melbourne and Sydney, the Risk & Insurance Management Roundtable events provided a forum for discussions that ranged far and wide across Australia’s risk landscape.

As bushfires raged on the outskirts of Sydney, there was general agreement that climate change was at least partly responsible for the increasing regularity and ferocity not only of fires, but also of floods, storms and other extreme weather events.

While Australia’s Prime Minister Tony Abbott was busy dismissing the link between climate change and bushfires (claiming that the executive secretary of the UN Framework Convention on Climate Change Christiana Figueres was “talking through her hat” when she linked the fires with carbon emissions), the nation’s risk managers were more thoughtful on the issue. Many described how their companies were planning to relocate critical infrastructure, or had already done so, for a variety of environmental and climatic reasons.

Discussion about climate change led to the observation that insurers might be “stepping away” from certain regions owing to climatic or natural catastrophe issues. Nevertheless, it was agreed that there was no shortage of reinsurance capacity at present, and that the latest renewal period had seen keener pricing for clients.

The big risks

When asked to nominate the primary risks faced by organisations operating in Australia, most participants confirmed that natural catastrophe was a big one. Others included credit risk, political uncertainty and supply-chain disruption. Issues such as execution of contracts, refinancing risk, regulation changes, pricing volatility and falling interest rates threatening investment returns were also front of mind.

Uncertainty about world affairs and the global slowdown has clearly affected risk outlooks in Australia. Foreign exchange was a point of discussion, although most conceded that there was little that could be done about this. Risk professionals should focus on the things that they could control, it was suggested.

Talk eventually turned to the ability of Australian businesses to remain competitive in an increasingly challenging global environment. Most companies represented at the roundtables were targeting growth in international and emerging markets, with many moving into Africa and Latin America. The nature of risks in those areas was said to be quite different to those present in more ‘traditional’ markets, with emergency response and crisis management coming to the fore.

International challenges

Sourcing experienced and reputable partners in many countries was difficult, roundtable attendees were told. Do companies build their own distribution networks in massive markets like China? Do they purchase foreign companies and face the practical and cultural difficulties this can entail? How does an Australian company go about imposing its own governance regime and cultural values on overseas partners so that it is understood that what might be appropriate in one market is not acceptable from a global corporate perspective?

The legislative and regulatory complexities found in many developing markets were of concern to many, with the personal risks being perceived as too high to get projects up and running in some jurisdictions.

While on the theme of the increasingly globalised nature of business, supply chain and business interruption risks were major points of discussion. Many participants said that their organisation’s strategy for forecasting and planning for future natural catastrophes left much to be desired. Resilience was seen as key, especially in the longer term, and it appears that many corporations are now diversifying their production base and resourcing strategies, almost by default. While this assisted supply-chain security, sourcing of competitive pricing was seen as the main driver of such diversification.

Many of the larger organisations were assisting their suppliers to finance the building or expansion of their facilities, thereby helping to secure the supply chain. Interestingly, it was pointed out that key global dependency on a minor component from a second- or third-tier supplier wiped out by a natural catastrophe was often the biggest business interruption issue faced by large multinationals.

Organisational engagement

All the risk professionals present at the roundtables expressed a belief that organisations had to be careful not to create a ‘risk-management team’, and think that was all that was required. Everybody had to be involved in areas such as enterprise risk management, governance and risk financing. Certainly, it seems that it is generally understood that a risk manager’s role is not to manage a department’s risk; rather, he or she is there to help identify a risk and ascertain whether the controls put in place are effective. This approach was how you achieved “engagement across the organisation”, because it meant people took responsibility for their actions.

No discussion of risks faced by businesses anywhere in the world would be complete without at least touching on future risks. There was much talk about technological trends, a new generation of consumers with different expectations and innovation pressures. The storage of customer data came in for particular scrutiny, especially with regulations to support the amendments to the privacy act due to commence in March 2014.

That risk’s sibling is opportunity was made clear by talk of advances in areas such as robotics, 3D printing and driverless vehicles. Changes in the insurance sector were touched upon, with some suggestion that risk transfer and servicing from the insurance industry was not keeping pace with the changing risk landscape.

These roundtables, along with the discussions and interviews, will form the basis of StrategicRISK’s upcoming Australia Risk Report. This will join our series of country-focused risk reports, which will culminate in a pan-Asia risk sentiment study.