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COVID-19 insurance risks: What risk management strategies should organisations have in place?

28 September 2020 Claude Hamman, Head of Specialist Risk Advisory at Indwe

This is the final article in a series of six blog posts providing COVID-19 risk advice. In part five we unpacked what organisations can do to ensure resilience and business continuity management.

Each organisation will adopt their own risk management strategy based on their industry, the prevailing macro-environmental forces that impact the organisation (political, technological, environmental, societal, economic, legal and regulatory) and its appetite and tolerance for risk.

It is important to have both an effective risk management framework, as well as a business continuity programme in place. The former is forward looking and focuses on the uncertainties of the future. Consider futures thinking, using scenario planning to identify possible scenarios and identify risks which will emerge as the scenarios unfold. This also allows the organisation to implement effective control to mitigate the likelihood of the risk occurring.

Business continuity management is engaged when one or more of the risks materialise and the organisation has to ensure response mechanisms are activated to reduce the impact of the risk event. The Business Impact Analysis is a highly effective tool to assist with analysing the organisations vulnerabilities and resource requirements.

Organisations should ensure that they perform a due diligence on their risks to identify their insurable risks. The limits and deductibles of the current programme should be carefully assessed on a regular basis, to ensure that the risk transfer strategy aligns to the organisations risk appetite. The organisation should consider how to treat the high frequency and low severity risks, as well as high impact low frequency risks. Traditional insurance is an effective risk transfer mechanism, but alternative risk transfer options should also be considered.

Alternative risk transfer mechanisms include contingency policies, cell captive and captive solutions. Each provide an alternative to traditional insurance, by allowing the organisation to retain more risk and structure its risk financing programme so that it can reduce the pay away premium to third parties. This approach enables the organisation to only insure for pure catastrophic risk and (with good risk management) reduce its risk profile and increase its appetite for risk over time.

Businesses should consider engaging a risk financing and business interruption specialist to calculate their Risk-Bearing Capacity and determine the appropriate risk tolerance parameters. Ultimately, the responsibility for risk management and the execution of business continuity plans reside with every single employee to ensure that risks are effectively mitigated and a crisis can be averted.

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