Other crises, the climate crisis being a prominent example, are more likely to emerge as developments that gradually manifest themselves. The full extent of their impact will only occur in the future and are therefore not immediately apparent.
“The time is out of joint,” lamented William Shakespeare’s Hamlet more than 400 years ago. Yet, one could be forgiven for thinking he was talking about the confusion of the present day as we battle crisis after crisis.Many of these crises are sudden, tend to be short-term in nature, and are local or industry specific. They affect us directly and persistently demand our full attention.
Other crises, the climate crisis being a prominent example, are more likely to emerge as developments that gradually manifest themselves. The full extent of their impact will only occur in the future and are therefore not immediately apparent. Due to their abstract nature, these developments are overshadowed by immediate events, although their relevance is often more far-reaching and therefore require our utmost attention.
The concrete crisis dilemma
In practice, companies are often faced with the dilemma of focusing on long-term, sometimes even abstract goals and the necessary resources required for them, when suddenly unforeseen events crop up out of the blue, disrupting the sustainable pursuit of measures that are crucial to achieving the changes that are necessary in the long run. The perception of strategic risks is therefore pushed into the background again and again. At the same time, sticking to managing these strategic risks is also an important contribution to being prepared for events that could occur at short notice.
It is human nature to pay close attention to risks that are tangible and have concrete repercussions in the here and now. Abstract dangers that are not immediately a threat to us are neglected in our subjective risk perception. As a result, politicians are tempted to follow the public mood to maximize their chances of success in the next elections, or the media orients itself accordingly to gain maximum circulation.
In times when public discourse seems to have lost courage and far-sightedness, and society is jumping from one crisis to the next, companies are required to act with foresight and keep an eye on their long-term goals. The urgently needed paradigm shift away from focusing on short-term results towards building strategic resilience is of particular importance.
Why we should listen to the next generation
Many political and economic decision-makers belong to a generation that can look back on an eventful life characterized by confidence and growth. Their diligence and commitment have made a significant contribution to the development of a society in Europe that is based on social prosperity and peaceful coexistence. To ensure this peaceful coexistence in the future, the tolerance that we have towards our fellow human beings and their risk perception and concerns is of the utmost importance. When dealing with long-term risks, such as the long-term effects of the climate crisis on our personal security and economic existence, it is crucial to include the next generation, which will be directly affected by these effects, and to take their concerns seriously.
How companies will deal with their ecological risk landscape – a pragmatic scenario
If climate scientists’ models are to be believed, the likelihood and impact of physical hazards will increase dramatically as global average temperatures rise. The climate-related change, which was previously perceived as a long-term development and the consequences of which will only appear in the distant future, will transform itself into an acute danger with immediately noticeable effects due to the drastic increase in suddenly occurring, climate-related events.
A possible scenario could be that the dimension of these primary risks is heading towards a tipping point, at which not only a clear public opinion manifests itself, but also political action becomes unavoidable. By then at the latest, banks and insurance companies as well as investors will place additional, non-material criteria at the centre of their risk assessment.
For both society and the public, the cost of managing these physical risks will be enormous, at some point exceeding the cost of transformation. From this point on, companies will put their full focus on the ecological transformation of their corporate strategy.
The costs of physical risk are becoming a competitive disadvantage for companies. From the tipping point, investments in ecological transformation will therefore pay off insofar as they increase the resilience of the company, open-up new business opportunities, and will ultimately emerge as a decisive competitive advantage.
What does this mean for risk management? In view of the increasing danger from physical climate risks, it is essential to identify their influence on one’s own assets and to eliminate weak points as best as possible. In addition, secondary transformation risks must also be identified as early as possible to be able to develop cause-related and effect-related measures for these, often new, risks.
Insurers – innovation vs. aversion
Insurers also play a key role in mitigating transformation risks. However, it is in their nature to primarily look in the rear-view mirror to be able to assess a risk based on the claim’s history. However, as we do not have the necessary historical data for transformation risks, the insurance market will have to find new ways to be a systemically relevant part of this transformation.
If insurers want to continue to fulfil their role as “enablers of the economy” in the future and not continue to lose industry importance, then it is time to support the transformation with targeted incentives and innovative solutions instead of with a restrictive underwriting policy only to keep an eye on their own risk landscape.
Therefore, the insurance market must be proactively involved in the transformation at an early stage. The prerequisite for this is the combination of the company’s agile and transparent risk management strategy, coupled with proactive risk mediation by the broker. Only through a joint effort will we be able to meet the challenges of the transformation ahead of us. What matters here is a sense of responsibility, future orientation, and mutual respect, because only a functioning risk partnership between companies, risk carriers and brokers will be able to contribute to the well-being of our society.
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If carefully designed and managed, a captive is a tool in the risk manager’s toolbox for large companies that can help build resilience to future transformation risks as a result of climate change, amongst other things.
If you have followed the media recently, you are probably aware that the younger generation cares about the environment and their future, and that they are willing to go to the extreme to prove their point.
A third of the younger generations believe climate change is the biggest threat of our time, and over half believe they don’t have the power to do anything about it.