A dozen risks for brokers to navigate, part 2

The Institute of Risk Management South Africa (IRMSA) 2021 Risk Report flags a dozen risks that financial advisers and insurance brokers must navigate in the coming years. Over 114 pages, the report weighs up the impact of each of these scenarios on South Africa, and firms operating here, against 10 metrics. These metrics include leadership, institutional capacity, politics, social cohesion, national policy, service delivery, inequality, economy, global trends and climate. FAnews unpacked the 12 risks contained in the report in two newsletters: Part 1, published on 15 March 2021, unpacked five of the risks, with the remainder discussed today, in Part 2. Let us dive straight in, with the sixth risk.

Risk 6: Failure to root out and / or curb deeply-entrenched corruption

The Judicial Commission of Inquiry into Allegations of State Capture, also called the Zondo Commission, has kept South Africans enthralled for over a year. It has delivered irrefutable evidence of corruption that average citizens hope will keep the country’s courts and prosecutors busy over the next decade. But corruption is proving hard to shake. “Despite [the commission’s] efforts, the country was still hit by a R2.2 billion personal protective equipment scandal [in the first half of 2020]” writes IRMSA in the report. 

Government’s failure to curb corruption introduces a range of risks, not least of which taxpayer resistance to costly reforms such as National Health Insurance (NHI). “Fighting corruption requires coordination and efforts from all parts of the organisation supported internally by good governance and externally by organs of state, the SAPS and the NPA,” opines Jaco de Jager, CEO of ACFE South Africa, in an essay written for the report. “This coordinated effort is normally short-lived unless it includes more sustainable solutions in the form of developing an ethical values-based culture, good governance, punitive consequence management and basic respect for the rule of law”. 

Financial advice practices are already held up to close scrutiny under South Africa’s world class financial services legislation. Adherence to these regulations, which are based around six Treating Customers Fairly (TCF) principles, will ensure that your practice does its part to curb corruption. 

Risk 7: Failure to reform education and skills development

Education and skills development are topical across the broader financial services sector. The report places the spotlight on the risk posed by poor outcomes in these areas, pointing out that the country’s education and skills development systems need to recalibrate to accommodate the new normal. Failure in this regard will “result in worsening unemployment statistics, a collapsed economy and increased poverty”. 

Skills in the financial advice sector have improved over the years thanks to the introduction of regulatory examinations, continuous professional development and the ongoing drive by associations such as the Financial Planning Institute of South Africa and IRMSA to develop and uphold professional standards. Clearly, skills development goes beyond school and university output to include ‘on the job’ training. “The world has entered an innovation economy,” writes Jonathan Foster-Pedley, dean at Henley Business School SA, in an essay included with the report. “We need more than technical skill; we need to teach business owners both business and creative acumen to innovate”. He also argues that developing skills through trial and error will enable South Africa to produce a diversified economy, scalable companies and an incredible number of new jobs. 

Risk 8: Extreme weather, natural disaster and climate change

“The World Economic Forum Risk Report 2020 presented five of the Top 10 global risks as being environment-related, including extreme weather events, natural disasters and the planet’s ‘elephant in the room’, climate change,” writes IRMSA. It is common knowledge that South Africa pollutes above its GDP weight due to an overreliance on coal-fired power and other old-tech manufacturing industries. 

How, one wonders, might financial advice practices make a difference in big picture risks that arise out of apparently unstoppable global trends? The answer is simple: You should examine your business processes and systems and make adjustments that will reduce your carbon footprint. Remote working is one example of a step-change that reduces our need for travel and thus carbon emissions; eliminating paper-based systems is another. 

Risk 9: Youth under increasing pressure, the lost generation

Statistics South Africa’s latest labour force survey reveals a ticking timebomb under the heading ‘youth unemployment’. By end-December 2020, 63.2% of South Africans aged between 15 and 24 years, and 41.2% of those aged between 25 and 34, were unemployed. It is difficult for small firms to appreciate the impact they can have on changing the unemployment dynamic. 

Financial advice practices can help by getting more involved at the grass roots level. You could, for example, offer career development talks at local schools in your area and follow these up by identifying promising individuals from schools and universities to join internships at your firm. You should also create an environment in which new hires can lead your charge into the world of digitalisation and fintech / Insurtech. Remember: A journey of a thousand miles starts with a single step; denting youth unemployment begins with the first new hire! 

Risk 10: Disruptive technologies and Risk 11: Cyber risks

Risks 10 and 11 illustrate the interconnectedness of risks. Firms will have to acknowledge the impact of disruptive technologies on the economy and society. “Technology, accelerated by lockdown, opens up a whole new era for economic and social development by taking advantage of fast evolving technologies such as artificial intelligence, robotics and virtual reality, among others,” notes IRMSA. One of the elements that risk managers are wrestling with is how to integrate disruptive technology into their risk processes. The focus is on leveraging disruptive technologies to better inform risk decision making at all levels within the firm. 

Cyber risk has meanwhile become elevated due to remote working and other tech-backed innovations adopted in response to pandemic. Craig Rosewarne, MD of Wolfpack Information Risk, says that the blurring of the line separating corporate and personal IT systems heightens the risk of exposing sensitive information on personal devices. “Organisations cannot merely focus on company security; they need to also focus on the people and home aspect of security during and outside working hours,” he writes, in an essay accompanying the report. “Cyber risk is no longer just an information technology problem; it is an extremely serious threat to the wellbeing of a country, firms and individuals,” adds IRMSA. 

Risk 12: Prolonged deep economic recession and / or collapse

The South African economy needs to grow at around 3.5% per annum to address some of its serious structural flaws. Unfortunately, our post-pandemic GDP growth is pencilled in at just 3.2% for 2021 followed by two years of sub-2% growth. “This year’s medium term budget policy statement provided another sobering but realistic assessment of government finances, especially the rapid and unmitigated deterioration in key fiscal parameters,” writes IRMSA. Government hopes to avoid the fiscal cliff by reining in the public sector wage bill; but they may not have buy-in from unions. If debt continues to balloon we risk spending more and more of our revenue on servicing debt, with less available for infrastructure and social expenditure. 

The IRMSA 2021 Risk Report launch culminated with comment from the institute’s chief risk strategist, Christopher Palm. “IRMSA is focused on integrating strategy, risk and resilience; we do not want to rescue firms from bad decisions but rather support the making of excellent decisions, whether these are around changing consumer behaviour, disruptive technologies, education or extreme weather,” concludes Palm. “Our report differs from the various global risk reports in that it reacts to South Africa’s need to elevate the risk profession”. He adds that the value in professional risk management has been highlighted over the past 24 months. 

Writer’s thoughts:
The IRMSA 2021 Risk Report appears to be written for large corporations; but it contains a wealth of information for Small, Medium and Micro Enterprises (SMMEs) too. A good understanding of local and global risks is essential to manage your business and position it to be in the sweet spot of future growth. Do you believe that a small financial or risk advice practice can make a meaningful difference in addressing overarching country risks? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.