Uncertainty and risk are nothing new for today’s leaders, no matter the industry or the geography. What is new, though, is the magnitude of the risk—or at least the perception of it—because leaders are facing a set of unusual and complex economic circumstances:
- High interest rates
- Stubborn inflation
- Soaring insurance premiums
- Rising operating costs
- Increasing employee benefit costs
What’s more, the mere existence of these conditions brings a risk of its own: newer talent inexperienced in navigating such an unusual economic environment.
4 approaches to managing risk
Here are four risk management strategies to help guide your decision-making and help you navigate these uncertain times.
1. Identify risks early.
Insurance costs climbing at 9% to 10% were initially viewed as a bump in the road. Now, brokers and businesses expect higher premiums—which increased for the 22nd consecutive quarter in Q1 2023Disclosure 1 Such increases, paired with other inflationary pressures like higher operating and labor costs, raise more questions than answers for leaders. Chief among them: “Is this a blip, or is this a trend?”
“Early identification of emerging risks is the key right now,” says Marcy Fink, head of Commercial Real Estate Credit at Truist. “My team has a weekly conversation with experts from around Truist who are managing clients, underwriting loans, or approving deals, and we talk about new things we’re hearing and seeing to learn if it’s a one-off situation or if it’s potentially a trend we need to begin tracking and preparing for.”
Stay connected to your colleagues and broader industry network to monitor risks and stay ahead of the curve.
2. Know your exposure.
A key step in identifying risks requires assessing, quantifying, and prioritizing your risks in four quadrants, says Keith Scroggins, chief administrative officer at McGriff Insurance Services, part of Truist Insurance Holdings:
- Strategic risks include vulnerabilities in reputation and brand, business continuity, developing leadership talent, managing complexities of mergers and acquisitions, and technology.
- Financial risks can encompass interest-rate fluctuations, global economic instability, credit risks related to accounts receivable, insurance deductibles, or retention limits affecting coverage.
- Operational risks include the strength of the supply chain, product recalls, and the impact of employee benefit costs—not to mention the company’s regulatory compliance and employment practices.
- Hazard risks are potential dangers that can cause harm or impede business continuity—from fire to flooding to environmental liability and cybercrime attacks.
Review your business’s risk profile within these categories and look closely at what has changed over the past few years.
3. Minimize surprises.
In a volatile environment, hardly anything is routine, including insurance renewal plans. Companies may well be coming to grips with double-digit rate increases and high interest rates.
“Therefore, the process of identifying risk exposure and areas of concern needs to occur much sooner, at least 120 but up to 150 days in advance,” says Scroggins.
In this uncertain market, Scroggins recommends:
- Preparing senior management for potential impacts on budget/premiums, coverages, and longer quoting timelines
- Expecting even the earliest renewal submissions may come down to the wire for finalization, particularly for more complex programs that include the need for catastrophic insurance
- Engaging in effective and clear communication with both the insured and insurers
“The process of identifying risk exposure and areas of concern needs to occur much sooner, at least 120 but up to 150 days in advance.”
Chief Administrative Officer, McGriff Insurance Services
Then, Scroggins says, run the numbers. Start by setting realistic budgets with multiple options based on current market conditions. Be sure to conduct a loss analysis and consider multiple retentions and structures. And keep in mind that many carriers now require 10 or more years of losses summarized.
4. Broaden your team’s knowledge.
Navigating a turbulent economy requires leaders to focus on fundamentals, watching expenses, retaining talent, and boosting productivity, as well as helping internal teams and with high interest rates,” Fink says. “As the workforce turns over, many of our talented teammates haven’t really navigated through an environment like this. We can help by finding experts who have worked in unusual and uncertain economies to provide context and insight that can sharpen the team’s ability to identify and manage risk in any economy.”