What's ahead for risk managers, commercial insurers in 2023?

Risks facing global businesses and governments in 2023 are more volatile and impactful than in any other time in recent memory. 

First, pandemic-related labor shortages continue to impact global supply chains with the supply gap widening against global demand. Second, Russia's war in Ukraine and energy war with the West has further complicated the global supply of food, energy, and metals – base ingredients for safety and security in modern society. Third, Russia's handshake with China appears to have opened a window where nations are preparing action in long-disputed territories. Geopolitical unrest persists and we are seeing China threatening Taiwan, the world's focal point of microchip manufacturing, while Turkey and Greece continue to escalate towards a war of disputed territories and undersea energy deposits. Fourth, the United States and the West's reliance on China is crippling and making it difficult for businesses to decouple. China currently controls the world's raw materials for pharmaceuticals to critical minerals used in industries from defense to green energy.

While global volatility continues to rise, there are other factors also in play exacerbating the situations – cyberattacks, catastrophes and inflation have also increased. These factors' confluence has challenged corporations, their executive teams and boards, and insurance companies. While the vast majority of risk exposure has long been uninsurable, the chasm is widening today faster than ever before.   

We are now in a global first, where boards and business leaders are focused on and taking action around managing risk and volatility in their businesses – while the insurance markets are increasingly excluding the high risks that businesses face. This dynamic will likely give rise in 2023 to innovations in the risk-facing capital markets and spark government intervention. As an example, the U.S. government has a request for comment out on building a cybersecurity risk backstop in the insurance markets akin to the National Flood Insurance Program. Such a move by the government would enable companies to gain insurance for more catastrophic risk scenarios – in this case, a catastrophic cyber-attack. 

Regardless, company executives and risk leaders absorb the cost of these risks today without the tools that provide better visibility and solutions to the acute risk issues that threaten their businesses.  

Redomiciled supply chains mean evolving risk profiles

Western nations are diversifying their supply chains, trending away from regions of geopolitical risk, where supply is becoming more and more uncertain. The pandemic's microchip supply chain pain points inspired the U.S. to pass the $52 billion CHIPS Act in a potentially transformative attempt to return manufacturing to U.S. Subsequently, this redomiciling of supply chains has a global impact on labor and supplies; numerous decisions need to be made around the risk adjusted basis for where companies locate supply and build manufacturing facilities. Those decisions are muddied further by legislative, cost, and supply assurance factors. If the U.S. wants to mine for critical minerals domestically instead of importing, then environmental and regulatory obstacles will arise. 2023 could bring some stout complexity to an already convoluted risk environment.

Difficult dynamics between ESG policy, interest, and consumer behavior

Companies are striving to adopt sustainable supply chains in alignment not only with regulatory necessity but also shareholder and investor demands. Likewise, U.S. consumers want and expect their microchipped mobile phones, TVs, and computers, affordable energy to heat homes, and critical minerals to power electric cars. Due to a myriad of geopolitical conflicts, companies in many sectors are still struggling to ensure supply chain continuity. Risk officers have an imposing challenge in protecting against ESG liability and reputational harm. We will see a continuing conflict between ESG aspirations, ESG policy, and the reality of consumer behavior and national security needs in 2023.

Risk managers find it harder to understand their companies' exposure 

Corporations and insurance companies will have to find ways to accurately understand and quantify these new and often inscrutable risks. With market fragmentation, there is a gap between coverage, pricing for coverage, and the need to write the softer risk, forcing corporate risk officers to try to find ways to allocate money to solve these knotty risk issues as insurance traditionally only covers a percentage of all risks that businesses face. Risk leaders are tasked with protecting the enterprise from all risks, whether insurable or not, and finding alternative mechanisms therein. The C-suite, directors, and risk leaders will need help understanding their actual exposure and articulating risk with precision.

Insurance companies race to adapt to alternative risk financing trends

For many years to come, we may see a sustained fragmentation in the insurance industry because of the massive losses in recent years from natural catastrophes, pandemic catastrophes, and geopolitical strife. Two of the most costly natural disasters of the past decade, with over 200 lives lost,  were 2021-22 with hurricanes Ian and Ida, with price tags of $100 billion and $75 billion, respectively. Businesses have taken notice and insurance has been a top-of-mind topic, yet corporate risk managers are finding that what insurers cover often does not align to their company's greatest risk exposures. So, companies are exploring all types of innovative alternative risk financing. Likewise, insurance companies are trying to adapt to these new trends and get more creative in their coverage offerings. 

While insurers are being forced to reallocate their priorities, this also represents an opportunity for P&C insurers to innovate and transform. Carriers are finding niche ways to cover new risks. Capital markets are beginning to disaggregate the insurance marketplace in select places, providing innovative products from insurance linked securities to all-risk indemnities collateralized in the capital markets. We will continue to see an evolution toward alternative risk financing strategies, including new platforms and vehicles for trading risk, advanced captive strategies, and newly designed products for resolving acutely defined risk needs underwritten by MGAs and traditional insurers. 

Innovation and improvisation 

An unprecedented nexus of events has pressed enterprise risk managers and their commercial insurers to innovate and improvise as the geopolitical winds have shifted around them. Once we include the record ransomware impact of the past two years on corporations and predictions of a global recession into the conversation, it is obvious that only the most resilient and forward-thinking corporate risk players will thrive in 2023. Insurance companies that best leverage data-driven technology solutions to predict and understand the intricate morass of new risks will position themselves to succeed. Likewise, businesses also need to take a more active role and ensure they are equipped to weather a changing landscape. This may require them to think outside the box and seek a sophisticated partner in strategic risk advisory and risk management services that provides an always-on view – relieving organizations and allowing them to remain focused on their core mission.  

One thing's for certain, the confluence of risk and security threats from across domains tops the agenda at many organizations. Harvard Law School Forum on Corporate Governance just listed risk management as the number one issue in corporate governance in 2023. Change is in the air and the most forward-looking and prepared will be the ones to thrive.