Tools for a Resilient Future

Tools for a Resilient Future

Transcript

We're seeing multiple crises happening at the same time. Things continue to be highly unpredictable. The problem is complex and the solutions are not easy.

Hello and welcome to the The Risk Opportunity, a series brought to you by Zurich Insurance Group. I'm Danni Hewson, a financial analyst and broadcaster. I've been covering finance and business for more than 20 years. As 2023 continues to become ever more challenging, we take a look at the risks we face so far and explore the tools required for building a more resilient future. In this final episode of The Risk Opportunity, we consider how multiple interconnected events are compounding risk and how risk management processes are being forced to adapt.

With me today are Amar Rahman, Zurich Insurance's Global Head of Climate Resilience for Zurich Resilience Solutions, and Owen Matthews – a former astrophysicist who now advises financial services clients for KPMG.

Amar and Owen, welcome to The Risk Opportunity. Thanks so much for joining us.

That’s a pleasure. Nice to be here.

Nice to be here Danni, thank you.

Amar, I am going to start with you. What are your highlights from this year's Global Risks Report?

To me, the most interesting aspect of the report is this new definition of polycrisis, the fact that we're seeing multiple crises happening at the same time. That’s new.

Owen, did you expect the year to unfold the way it has done?

No, there's certainly been a good number of surprises. I mean, I would have said on the very macro level, on the geopolitical level, if you'd asked me a few months ago, I might have said things looked like they were just starting to settle very slightly. But I think that view went out the window just recently with the Israel, Hamas situation. Economically the policy has been very hard to call this year in terms of interest rates. So things continue to be highly unpredictable.

Are you finding, Owen, people are talking about risk in a different way?

I think maybe what I'm seeing is, because my background has been more on the financial services side, and there I think a proper quantitative view of risk has been established for a long time. I think maybe what we're starting to see is that robust treatment of risk and understanding the fact that risk embodies opportunities is something which is starting to emerge more, maybe on the corporate side as well.

And, Amar, is that leading to the need to manage risk differently?

Absolutely. I mean, traditionally, you would prioritize risk according to the severity and probability of these risks happening, but with the landscape we're seeing today, one has to even consider the low probability risks as something that could very well take place. The other aspect is that, and I could refer back to the polycrisis aspect, is not only to look at the risks discretely, but see how they interact with each other.

Because when you have that kind of polycrisis, it must be hard, Owen, when you're talking to companies to persuade them to focus longer term when they’re dealing with the here and now, particularly when it comes to investing for the future?

I mean, that's traditionally been an issue with risk management. But when we see these complex crises, and particularly when we see crises such as the climate crisis, which unfolds over a really very long timeframe, those questions get more difficult because the planning horizon of firms tends to be shorter. The lifetime of individuals within a company tends to be shorter. Some of this can be handled through regulation. You see within financial services there are increasingly specific requirements which gradually tend towards having to hold additional capital for this particular type of crisis. But yes, it remains a challenge.

And I would imagine, particularly, when things are so expensive and you've got companies dealing with inflation, Amar, this must have been something that you've been coming up against.

Talking just from an insurance perspective, a very simple example, the replacement value that you're charged for within the premium and then that you get paid out depends on the costs that are agreed on at the time of signing the policy. Now, with inflation, with the increased cost of living, the replacement values of whether we're talking about the physical assets of building stock or whatever, is changing quite rapidly even within the duration of the insurance policy.

Before we go any further, let's just talk about Zurich and KPMG's collaboration. What was the motive behind it, Owen?

We've been doing quite a bit of consulting work for Zurich Insurance over the years, and our global lead partner was talking to his counterpart in Zurich and thinking about how can we, in addition to doing work for Zurich, where can we collaborate? The topic of climate particularly cropped up. Firstly, because it's clearly such a growth area broadly in the market. But then, on embarking on some initial conversations with Amar and team, it became clear that we had a really good synergy here where we can provide very strong transition risk analysis that is assessing the impact of the transition of the world into a low carbon economy, whereas Zurich are able to provide very strong physical risk impact calculations. And we put that together into a combined proposition which covers then the whole of climate risk, which is pretty unique in the market.

From our side, our typical stakeholder in our customer organizations is the insurance buyer or the risk manager, and they're being asked these questions, how to deal with these multiple risks, how to deal with these emerging risks. So our collaboration with KPMG was a direct response to the questions that we're being asked. The expanding role of risk managers who are being asked to look at these transition risks that Owen mentioned. We found KPMG to be a natural partner, seeing that their experience on transition risk side, our experience in the physical risk side, and how these two risks interact. Risks are not discrete. They don't come up independent from each other. Between us, between KPMG and Zurich, we could help our customers manage these risks and actually turn this into an opportunity rather than increasing risk.

Because when we're talking about risk, it’s so easy to see it as an issue, as a problem, as something which is going to be costly. But actually there are huge opportunities here, Amar. Are you seeing companies picking up on that now?

Absolutely, I mean, some companies respond to regulatory requirements. They have to do these changes. But what we're seeing more and more is even companies that are not required to comply at the moment with these sustainability reporting initiatives actually doing so because they see it as an advantage. They see themselves as distinctive from their competitors because their stakeholders, their customers are looking for such partners to support them on that sustainability journey. The problem is complex. And the solutions are not easy, but people are realizing more and more that when they work together they could leverage the advantages of each company to come to a solution, just as we did with KPMG.

I think Amar’s put it well. What we are able to do, which I think is very helpful in answering this question for our clients, is to actually do some quite robust modeling of which parts of their business are going to suffer. But it's not all parts of the business that will suffer. Some parts of the business may be able to flourish better under a transition. So we try and provide a robust calculation, showing which areas are actually opportunities as well as risks.

I mean, just by the fact that you are assessing your risks, you're aware of your risks, and taking action against them is an opportunity in itself because you're setting yourself apart from the competition, you are ahead of the competition in dealing with these risks and being aware of them.

So much data, so many risks. It must at some point just become loud for your customers, for the businesses that you're talking to. How do you simplify this, Amar, so it just doesn't become overwhelming?

We do that in a systematic way. We make clear to customers that this is an iterative process. You start off using very simple data points. You develop scenarios that are tangible and can relate to anyone in your organization and then build up on that. Increase the complexity slowly because you need to potentially adjust also the scope of the analysis depending on the concerns, on the definitions of risk within your organization. Risk is very, very subjective. Our perception of risk and the way we react to risks depends very much on our own personal experiences. Even if we talk about large corporations, that subjective element is still there.

And it’s always a challenge to tell a story around the scenario analysis that the higher ups, particularly in the company, who may not necessarily be the most quantitatively minded, are able to digest and understand and act on. Doing the assessment, doing the modeling, that’s half the story. But being able to put that together into a coherent narrative that explains the connections between the high level macroeconomic events in your scenario and the impact on the company in a way that people can understand, that's a major challenge. And I think that's what we spend a reasonable amount of our project time doing.

It's not only the sophistication of the analysis or the amount of data points. I think at the end of the day, it's communication. How do you communicate the results of your analysis in the way that's tangible to the multiple stakeholders in your customer organization?

And Amar, I wanted to ask you because you are called the Big Cat Tamer at Zurich. Why? What does that mean?

You put me on the spot there. Go read the article! I’ve had a very interesting life, not one that many people go through. I was originally born in Iraq. I spent 12 years there, unfortunately during the Iran, Iraq and the Kuwait wars. And then it was quite a long journey to get where I am today. And those experiences have shaped me as a person, but also how I work and how I engage with people. So a big part of my work, when I talk to people and try to communicate our findings, the findings of our team, I try to tell them stories. Explaining to them what the data is, trying to make it tangible and I think that personalization of risk, explaining to people what it means to them personally, to their families, to their coworkers, and not only to their business evokes a reaction. So I think that overlap between personal and professional has earned me that moniker, unfortunately.

And Owen, I know that your background is in astrophysics. How do they come together with where we are now?

Yeah, it's a bit of a change of track, admittedly, but there’s a lot of overlap. I mean, first of all, you see a lot of people with physics, astrophysics, mathematics backgrounds moving into finance and particularly risk because of its quantitative and mathematical nature. But I think astrophysics and risk are a particularly good pairing, actually, and that's because I think we have similar views around precision and accuracy. But in astrophysics, you never really have a very precise result. It's always an order of magnitude, as we would say. You have an idea of the direction of travel. So, we're used to the idea of working in an environment without precision, or with a limited precision.

And unlike maybe some people in the scientific domain, particle physicists etc., who think in terms of 20 decimal places of precision, which is pointless in risk and particularly in climate risk, I think we have a more realistic idea of what we're trying to achieve, which is to get a feeling for the direction of travel, give people an idea of how to prioritize and how to productively use the results.

But you two clearly are enjoying working together, Amar?

It's been an incredible learning journey for me personally, looking over the shoulder of the KPMG team and seeing how they interact with customers, how they use the data, how they turn these complex issues that companies are dealing with into something very tangible for them. So it has been also at a personal level, very interesting.

It has been an incredibly difficult, volatile year, 2023. I can't imagine that anybody starting out in January could have expected what we have come up against. But do you think that people are talking about risk differently? Do you think that they are seeing opportunities and that they are working towards being more resilient, Amar?

Absolutely. People are becoming more risk aware. Social media has a large role to play in that. It's becoming personal for many people, whether we're talking about war or natural catastrophes all over the world. People are consuming news at a different level than we used to previously. So people are very much in touch with the human factor around risk. And I think everyone at a very personal level is trying to do their bit around it. And we see that on the news with the demonstrations with young people going onto the streets and talking about climate change and dealing with it right up to the highest levels in different corporations. Everyone's trying to do their bit. Everyone is trying to understand the risks around them better and doing something about them.

Owen?

I agree. I would sound maybe a note of caution, though, particularly when we are thinking about climate risk. And that is because – particularly given what you said, Danni, about the last couple of years, having been so surprising to a lot of people, to all of us, I guess. There was COVID, there's been the the Ukraine-Russia war etc. So there are so many things in people's in-tray, both on a personal level and also the people running the banks and the corporations, that there is a risk of climate being drowned out, because it's this persistent nagging problem. And yes, there are specific flashpoints that we see. We see a bit of a mountain falls down or something and people remember, but there's maybe a risk of climate fatigue. I think that we need to be aware of and keep reminding people that this genuinely is existential.

What's been interesting this year is to see the number of companies in their earnings updates talking about climate issues. We've had retailers saying that they're not selling coats because it's been too warm. Is there a danger that maybe companies are thinking, we've already got this climate risk, we don't need to look further ahead?

Yes, it is a danger. I think, in the end, it comes down a little bit to the distinction between weather and climate. People think that they're managing climate when maybe they're managing weather, because they know what to expect this year, they maybe have a decent idea of what to expect next year. But if they want to plan ahead, 10 years, 20 years into the future, then we need to look at how things are changing, and know how things are today. And that's the message that we try and get through with our scenario analysis. It's not prediction, but it's a projection of what can happen down the line.

And Amar, I guess that brings us full circle. We were talking earlier about the fact that, for a lot of companies, thinking five years ahead is as much as they can do. But to try and think 15, 20, 50 years ahead, trying to get that across must be difficult.

Yes, that that is the question, the recurring question from companies. First of all, what climate scenarios do we consider in our risk assessments and then what time horizons do we look at? So we try to explain to them that it needs to be aligned to their net-zero strategy, looking at the strategic cycle within their corporations, and how that works. But basically we would recommend a shorter time horizon, say 2030 from an operational perspective, in 2050, from a strategic perspective, one of the main reasons being that the uncertainty of the data, whether it's the climate data or that your own data describing your activities and organization, the uncertainties increase with time. So you need to choose a time horizon where the data makes sense. Otherwise, the scenarios are unrealistic, purely around the data uncertainty.

And from the conversations that you're both having, are you feeling optimistic that companies can put in place measures which will keep them resilient, which will help them to stay healthy going forward, Owen?

There's no doubt that those companies which, by definition, those companies which manage to become resilient are those that will survive and those that will still be here in 20, 30 years' time. I think that message is starting to get through. I think the problem is not that people don't understand and accept that on an individual level. It's a question of making it systematic in companies so that the planning horizon is in line with what it needs to be. And part of that, which I think is really important, is incorporating that kind of climate planning, sustainability planning into the ongoing risk processes that a company is implementing. So it's not just a one-off exercise, but something which is continuously monitored and we see that being done more effectively. So yes, I'm reasonably optimistic. I think one has to be otherwise you just get depressed.

Amar, I'm going to give the last word to you. Just to reiterate what Owen said, it is a matter of survival and companies are aware of that. There's increasing pressure from their own employees, from society at large to do something and everyone is aware of that. So what we're seeing is a first step, and it’s a very, very important step. Companies are trying to understand their risks better, and many of them are already taking very tangible solutions.

Owen, Amar, thank you so much for joining us.

Thank you, Danni.

My pleasure.

It’s just been such a brilliant conversation. Really interesting to hear that everyone's experience of risk is so personal, so subjective. And it is so important to tap into that, to tell those stories in order to create an environment which helps companies really deal with and mitigate those risks.

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