Times are changing. It’s up to you whether you see that as a concern or an opportunity, says David Hill, AIG’s head of liability risk consulting, Asia Paciﬁc.
We are operating in a new environment where we are dealing with exceptional risk factors. Change is taking place on top of change, owing to the interconnectedness of risks, supply chain complexity and interdependency. Then there are advancements in technology: machine learning, AI, quantum computing, along with autonomous vehicles and energy storage. All these factors come together, forcing change at an exponential rate.
As an illustration of this in an extended enterprise business model: when a new outsourcing partner is added to the chain, it is not only one supplier that is introduced, but an additional supply chain and a new risk portfolio.
CHANGE BEGETS CHANGE
The Thai ﬂoods of 2011 are, unfortunately, an illustration of escalating consequences. Hard drive manufacturers’ disruption affected PC production in the US and China, which impacted co-suppliers of processors and memory in Taiwan and elsewhere. In 2012, the World Bank ranked the Thai ﬂoods of 2011 as the fourth greatest economic natcat loss. It has since been surpassed by nine events.
Management’s challenge is traditional in concept, but the interconnectedness of risks is challenging the practicality of approaches to identify, analyse, treat. This is why Tesla has reverted to a vertical manufacturing model in its gigafactories – reducing proliferation of risks and maximising ability to control.
“VENTURES NEED TO PIONEER NEW AND UNPROVEN CONCEPTS WITHOUT FAILURE. TRIAL AND ERROR IS NO LONGER IN THE TOOLBOX.”
David Hill, Head of liability risk consulting, Asia Paciﬁc, AIG
TRIAL AND ERROR IS OUT
Whether this new environment is a cause of concern or opportunity will be determined by the adaptability of businesses. If we accept that change is unavoidable, businesses will need to reconsider their risk tolerance in light of this. Risk tolerance should allow for a degree of failure to attain the targeted success objective. Yet, societal values
lower the tolerance for failure. There is greater corporate accountability, as well as shareholder and media outrage. Consequently, ventures need to pioneer new and unproven concepts without failure. Trial and error is no longer in the toolbox.
RISKS ARE ADDITIVE
Risk managers therefore need to keep the risk agenda active, current and relevant. It is easy for fatigue to creep into the risk process as a result of ‘risk normalisation’. There’s often a need to compete for the attention of the board, with compelling arguments to accept, avoid or treat risks. This is important and on-going because the portfolio of risks is continually growing. New risks rarely replace old risks – they’re additive.
Lastly, anticipating the horizon has never been more important. We’re all familiar with legacy risks – asbestos hazards, plastics pollution, for example – but we must anticipate and make provision for unintended legacies of this new, complex business environment.