Risk/reward, the pivot on which almost all business decisions turn, has rarely been so out of kilter. A cocktail of toxic events, Covid, the war in Ukraine, cyber crime, climate change, inflation, has loaded the balance so heavily towards risk that businesses are being forced to reassess even day to day processes and functions. Or at least that’s what they should be doing.
Agreeing an exact definition of ‘poly-crisis’ remains a matter of debate. What is inarguable however is that everyone is being hit by the problems facing the global economy: risks are on the rise, rewards are becoming ever harder to secure.
These problems were explored in detail in the World Economic Forum’s (WEF) latest 2023 Global Risks Report. The stark warnings in the report mirrored those that experts around the world have been making for some time.
“The world’s collective focus is being channeled into the “survival” of today’s crises,” explained Saadia Zahidi the managing director of the WEF. “The persistence of these crises is already reshaping the world that we live in, ushering in economic and technological fragmentation. A continued push for national resilience in strategic sectors will come at a cost – one that only a few economies can bear.”
The report, based on a survey of 1,200 experts in risk found that most pressing concerns facing the planet over the next 10 years were failure to tackle climate change and environmental degradation. Both these issues can, and do, have a direct impact on businesses, think floods, droughts, fires, supply chain disruption and the soaring costs of raw materials including energy or basic foodstuffs. Other risks in the top 10 were even more immediately relevant to business. They included cybercrime, economic hostilities between major global trading blocs, societal breakdown and involuntary migrations.
What can businesses do to guard against these risks?
Much of the advice that flowed from the report focused on business resilience. Stockpiling of key materials, investing in the supply chain, even if that means acquiring suppliers, and building up defences against crime, cyber or otherwise.
These are all sensible measures and ones that will be occupying minds that focus on operational issues within businesses. But not all problems can be managed out of existence. Businesses are increasingly realising that their investment in mitigation, in contracts, insurance and disaster recovery systems are more likely to be tested than ever before.
Legal Counsels, the guardians of many of these business processes are being dragged from the sidelines of business into its very heart. But just as counsels are being asked to deliver more, so their suppliers, particularly when it comes to insurance, are offering much less.
For the last four years insurance pricing has been rising at unheard of rates, with some segments of the market such as Directors and Officers and Cyber covers quadrupling in price.
In return for these price increases companies might expect to be receiving more or better cover. Unfortunately the reality is anything but. As prices have risen, the standard of cover has fallen, with more and more exclusions written into contracts and standard policy terms tightened up, almost always in favour of the insurer and against the interests of the insured.
Take one very topical example, Cyber insurance. Our recent report exposed how the provision of insurance was falling as fast as the risk was rising. As businesses become more exposed to the threat of a hack, their insurers are less willing to provide protection. And even where insurance is provided there is little confidence that cover will respond. A third of companies said their cyber insurance was unfit for purpose; a quarter said they had little trust their insurers would meet their claim in the event of an attack.
These worries are well founded. Insurers are taking a far tougher attitude to claims. Our Claim Litigation Index exposed how companies are now three times more likely to end up in court suing their insurers over unpaid claims than they were five years ago. It is a grim reality of the current economic crisis that companies are being asked to pay more for less when it comes to insurance.
What can companies, and their legal counsels, do to protect against the erosion of insurance coverage we have witnessed over the last five years?
Taking control is key. Whether it is a full audit of a business’s insurance provision or direct involvement in the renegotiation of insurance contracts, it is no longer good enough to rely on off-the-peg products. We would also argue that the conflicts in the industry are now so apparent that few legal counsels will be unaware of the risk of relying solely on the standard broker model for advice. Where specialist input is required it is imperative it is independent and technically robust. Insurance should no longer be viewed as a grudge purchase. It is a vital part of a company’s defences and given the times we are living through is more and more likely to be called into action.