More CROs open up about their biggest concerns
As more CROs open up about what keeps them up at night, we get an increasingly clearer picture of the key issues of 2019 and beyond. The top risks are the same as before, but with good reason. There is even more to consider than we initially thought!
Before the results are discussed, we’d like to thank the members of the RiskMinds community for sharing their comments and their expertise with us. We look forward to learn more from you at our upcoming events.
“Any disruption to the existing multilateral framework will not go without friction”, a CRO told us, “but we see that this order is challenged on multiple fronts. Enough reason for concern.”
The presence of geopolitical risk signals that we are living in a new world where the power hierarchy is still unclear. The unpredictability of political events since 2016 has secured geopolitical risk as the top risk to keep CROs awake at night.
“This creates uncertainty in financial markets and in the macro-economic environment which inevitably renders strategic planning that much harder”, a CRO explained. “It can also make day-to-day business more challenging due to factors totally outside the bank’s control.” Geopolitical risk has a knock-on effect on various other risks, including credit risk, market risk, counterparty risk, and more.
“We have seen that states are more and more inclined to implement policies that may help (part of) their industry but may not play out well for other countries”, a CRO noted. “Think of regulatory race to the bottom, unsustainably low interest rates, or supportive policies that distort competition.”
As Brexit negotiations carry on with no clear endgame and the US-China trade war escalates, tensions keep on rising, not to mention the political unrest in Hong Kong, which prompted ACTU president to warn against a free trade deal between Australia and Hong Kong for now.
“Here in Asia, there is a number of potential flashpoints: competing claims in the South China Sea, Japan/ Korea relations, an increasingly aggressive China, unease with the dominant role of the US”, a CRO told us.
For Asia, being home to many emerging markets, geopolitics can have a huge effect on the future of this region. For example, the US-China trade war is impacting more the two titular countries. India, Vietnam, Taiwan, Thailand, and Malaysia are all caught up in the ripple effects with some of these countries gaining more business at the expense of China.
“Cyber risk has become increasingly relevant in what has turned into a fast-moving threat environment driven by both internal and external threat vectors”, a CRO told us.
Carrying the potential of long-term disruptions, cyber risk is a hot topic in all industries, not just in finance.
“There is a significant amount of “unknown unknowns” we are dealing with”, a CRO said, which only adds to the threat levels it poses to enterprises.
The truth is that there are no universal cures to cyber risk, as the information security field evolves just as fast as technology does.
“The organisation may not have the agility to respond in a timely manner”, a CRO admitted.
When asked whether organisations are well prepared for a potential cyber attack, risk managers are polarised – half of them feel confident, but the other half isn’t.
However, they all agree that current risk frameworks are not fit to deal with this new era of cyber risk.
“As a matter of fact, one has to accept that it is not any more about ‘protecting the castle by making the wall higher and thicker’ but rather that intrusion will happen inevitably with the resulting challenge of having to be fast in detection and to have targeted and effective incident response/ action plans in the drawer”, a CRO said.
“Climate change is the least understood risk and not properly captured in our models”, a CRO said.
CROs are reporting that they already see climate change having a knock-on effect on seaside asset values and P&C and life claims occurrences, but the reality is that climate risk is still unquantified. Because of this, CROs are concerned that any change in the current status quo might result in material loss for the enterprise.
Extreme weather events, failure of climate-change mitigation and adaptation, and natural disasters are the top 3 risks most likely to happen according to the World Economic Forum’s 2019 Global Risk Report. This report also puts these 3 risks among the top 5 risks with the highest impact on the world.
Recently, Julie Sherratt, Head of Investment Risk at TD Asset Management, shared how her company is incorporating ESG data in an attempt to quantify climate risk.
“TD Asset Management (TDAM) has expanded its ESG capabilities, making use of third-party ESG ratings as well as the underlying indicators that inform those ratings”, Sherratt told us. “This has allowed us to build more comprehensive dashboards of ESG considerations, which help us to focus in on the holdings most exposed to material ESG risks. At the same time, we continually engage ESG data providers, discussing potential data limitations and improvements to ensure data quality.”
With public pressure rising, decarbonisation became a key conversational topic in climate change. Industries, enterprises, and governments need to consider investments into carbon-based energy sources. The backlash Australia received after declaring support for coal is indicative of the public sentiment around the globe. Environmental and social responsibility is now at the forefront of customers’ minds, so enterprises need to find a way to make the right choices while staying profitable.
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There is a huge appetite to adopt machine learning and leverage big data in meaningful ways – again, not just in finance, but in other industries, too. But our attempt to realise an industry 4.0 world needs careful consideration.
How could enterprises integrate technologies without alienating the current workforce? What does work look like in the future? How will your customers’ journey change? These are only a few of the questions you need to address.
Furthermore, increased connectivity means heightened security risks. In the rush to adopt, one might overlook the cyber risks that new technology brings to your door. But engaging with your information security team early on, for example in the planning stage, could prevent future disasters.
With so many fintech startups out there, it might be difficult to find real, scalable solutions that bring true value to you.
“Right now, what keeps me awake at night is the constant stream of startups who claim that they have “solved” the problem of assessing credit risk and that with data”, a CRO illustrated. “With technology and a “secret sauce” they can now lend further down the risk curve without worries of bad outcomes for customers and/ or financial losses for lenders. The benign economy over the past decade and the potential changes to that position looming on the horizon to even the most short-sighted seem to be being overlooked.”
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These are, of course, only a few of the latest risks that CROs must deal with to prepare for the future. Classic risks like credit, market, and counterparty risks are only heightened by the onslaught of new ones. As the list of CROs’ responsibilities is increasing, one question arises: how could CROs get their head around the new risks without neglecting their already existing tasks? It seems that the risk management function is changing, but what that looks like exactly, is still up for debate.