London Insurance Sector: Beyond 2021

The London Insurance Market: Beyond 2021

GLOBAL SPECIAL REPORT

Innovating to address emerging global risks and volatility

On behalf of the City of London Corporation, I am very pleased to see the publication of this report, which will help set the agenda around the opportunities for the London Market in 2021 and beyond. London’s insurance capability is needed now more than ever. The Covid-19 Pandemic has, like few other events in recent history, brought home the message to people, businesses and governments across the planet that risk always looms in the background. And it has reminded us of the global nature of many of our most challenging risks and how quickly they are changing.

Alderman William Russell, The Rt Hon the Lord Mayor

Foreword

Many Industries Have Been Severely Impacted While Others Have Been More Resilient

A Data-driven, Accelerated Approach to the Future of Work

An Agile, Collaborative Approach and Risk Preparedness

Network Building, Collaboration and Communication

Leading with an Insights Agenda

Spotlight on Industry

The COVID-19 pandemic has devastated health systems and economies, alerting many leaders to gaps in their risk readiness and the need for a different approach. It will likely serve as a catalyst for change in many organizations—there was overwhelming evidence that taking an enterprise-wide approach to the crisis response was the most valuable lesson. To learn from the events of the past year, organizations should strengthen their decision making in each of the three time frames—react and respond, recover and reshape—and reprioritize enterprise risk management and resilience, including: Expanding risk to encompass long-tail and emerging risks: Boards and executive management teams need to broaden their perspective when considering risk and increase their focus on identifying and evaluating future major shocks that could disrupt strategic objectives and present threats to their organization. In doing so, organizations can be better prepared and further invest in the areas that help them grow. It is clear that resilience plans associated with prior business models will not be sufficient to protect organizations from these emerging risks. This will also require elevating the role of the risk manager to guarantee risk is part of C-suite and executive business priorities, and ensuring each business function is resilient and remains growth-oriented in a changing risk landscape. Building a more resilient workforce: There is an overwhelming consensus that people are at the heart of business resilience and strategy success. It is notable that during the early stages of recovery, respondents viewed protecting their people as the top priority across the globe. Workforce stability and engagement is a key driver for businesses to be sustainable and adaptable across all countries and regions in a volatile and changing risk landscape. To achieve workforce resilience, organizations should focus on employee well-being, talent retention, operational improvements and new, innovative working models and technology. Rethinking access to capital: Few respondents said they submitted a claim triggered by COVID-19 under their insurance program or captive, which suggests that insurance was not viewed as a solution or was unable to meet organizations’ risk financing needs. This is likely because the risks are either uninsurable, or the scale of the event exceeded conventional program limits or capacity. While government support has helped some organizations fill a gap, it is clear that companies need new and innovative solutions to face not only the pandemic-related risk exposures but also a changing risk environment that is becoming more complex and volatile. Organizations should seek solutions from the insurance industry to help manage their total cost risk and consider alternative financing structures, such as captives and specific coverage for emerging risks.

The Path to Reprioritizing Risk and Resilience

CONCLUSION

Proportion of senior leaders* who agreed the COVID-19 pandemic has exposed new risks and vulnerabilities that require a significant change in how businesses think about the future

68%

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For detailed insights and analysis from Aon’s COVID-19 Risk Management & Insurance Survey, click the button below:

Reprioritizing Risk and Resilience for a Post-COVID-19 Future

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Foreword Lord Mayor

City of London Corporation

Lloyd's of London

Axa XL

Aon

Energy, Utilities

Hospitality

Health/Pharma /Life Sciences

Financial Services

Construction & Real estate

Agrifood

Find Out More

Irish Food Board

* Represents responses from an Aon-commissioned survey, fielded August 3 – 16, 2020, of 800 C-Suite leaders and senior executives in the U.S., EU and the UK.

Within the sector, pandemic impact is mixed—some organizations are thriving, while others are under pressure, linked largely to distribution channels. Because organizations often supply to both retail and food service, even within an organization the impact can range significantly. Retail suppliers are dealing with demand surges and must find ways to respond quickly, manage resources and maintain food safety and security. Macro-economic factors will continue to influence the sector. Shifting consumer demand could change food and product selection; and a growing population coupled with sustainability imperatives are increasing pressure on the sector to be more efficient. This is creating disruptive business models, backed by new Private Equity and other investors, using technology-based solutions to generate new operating models. This is likely to be why M&A activity is identified as a higher priority in this sector. Climate change will also have a huge impact on the sector and its supply chain, reinforcing the need to plan ahead for future shocks.

Agrifood

As COVID-19 has forced companies to find new ways of decision-making, they have also had to look at the way they communicate – and build new bridges across industries and between the public and private sector. The Irish food industry, which makes up about $15 billion of the country’s exports a year, was hit hard when COVID-19 forced the closure of restaurants around the world. The Irish food board, Bord Bia, had to quickly establish new supply relationships to help those producers find new ways to sell and distribute their goods. Meanwhile, in the U.S., JLL worked with the mayor of the City of Chicago and Governor of Illinois to convert the largest convention center in North America into an alternative care facility.

Virtually overnight, organizations around the world had to shift to a new, remote, way of working. Having to set up an office at home has put new strains on employees. This, in turn, has meant that businesses have realized the importance of a resilient workforce and have begun to prioritize measures that can help motivate employees and, more importantly, safeguard their mental wellbeing. In the U.S., the workforce flexibility McDonald’s had already put in place before COVID-19 struck laid a strong foundation for shifts in working conditions. It also meant that the company could help managers meet the changing needs of their workers.

Business leaders have realized that the pandemic exposed new risks and vulnerabilities that would require a significant change in how they think about the the future. As Helle Thorning-Schmidt, the former prime minister of Denmark, explained in her interview: “This crisis will steer us in the direction of looking at risks like climate change and recognizing that we need to be even more serious about this now, because in a few years, certain things will be beyond repair.”

The current crisis has pushed organizations to identify, develop and redeploy team members who could best help find a path to the new better. Through its management of the pandemic crisis, Merck KGaA has identified best practice that it is then planning to use in its future of work program. This example highlights how businesses have had to identify colleagues with the right skills and expertise to facilitate a new way of operating. In its case study, Accenture illustrated how it brought together teams that would not have ordinarily worked togther to help the organization as whole prepare for rapid shifts in direction.

Change the way they assess risk

Look at their organization charts in a new way

Establish new lines of communication

Re-examine their compensation and staff wellness programs

Many of the changes that companies are making today were forced on them – create a virtual office overnight, rethink talent management and take a new perspective on risk. With spikes in infection rates, further restrictions and new developments expected to continue throughout 2021, the pandemic will force new decision-making choices. For example, the progress being made in producing a COVID-19 vaccine has meant that organizations will soon be making choices such as how to factor that into what a return-to-work plan looks like, and what role, if any, businesses will have with respect to vaccine deployment. The acceleration in technological advancements will also factor into how employers that do return to a traditional office environment manage and monitor things like health screenings and office access. Once those decisions have been made, and progress is made against the pandemic, more choices will be coming, including how colleagues and customers choose to commute, travel and meet one another individually and in small and larger groups. One thing is certain from our findings and conversations: How society works, travels and convenes has permanently changed as a result of the pandemic. The insights and expertise that the member organizations of the Work Travel and Convene Coalitions have shared – and will continue to share as meetings continue through 2021 – will prove invaluable in helping organizations not only move forward during the pandemic but, just as important, will help them prepare for what comes next. The underlying principles that were identified as helping business leaders get through crisis – innovation, speed, risk strategy, collaboration – will be critical for the future. These principles will also be the path forward in achieving the result of the new better.

In a rapidly evolving crisis such as the one in which we all find ourselves, there is little success to be had in defining a sure-fire strategy for success. Instead leaders have identified a number of key changes in organizational behavior that have helped them lead their organizations more effectively:

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The City of London has always been synonymous with the insurance industry. London’s coffee house culture of the 1600s gave rise to the maritime insurance industry and supported Britain’s growth as a global trading power. The world’s first fire insurance companies were formed in the wake of the Great Fire with this new service growing rapidly in the UK and abroad. The first joint-stock insurance companies, the first life insurance companies, insurance for workplace injury, burglary, motor vehicles, loss of profits, trade credit and aviation – all were either created or found their earliest commercial footholds in the London Market.

John Glen MP, Economic Secretary to the Treasury

Foreword

Safety, Strategic Planning and Integrated Decision Making

Industrials & Manufacturing

Network Building, Collaboration and Communication

Transport & Logistics

An Agile, Collaborative Approach and Risk Preparedness

Public Services

How We Can Learn from Crisis

Technology & Communications

Former Prime Minister, Denmark

Red Cross

Learn More

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

Our business has been impacted, but has been resilient

55%

23%

Aon Insights:

The effects of the COVID-19 pandemic are still being felt by organizations and the consequences are expected to last beyond a year by most organizations. Whilst it has caused significant financial, strategic and operational pressures on organizations, many have adapted quickly and demonstrated resilience. The scope and extent of the pandemic was not foreseen by most organizations, suggesting existing risk management frameworks need to adapt to support future decision making.

87.2%

*Data collected July – October 2020 by Aon’s proprietary Readiness Assessment from over 50 Work Travel Convene Coalition participants from the U.S., Europe, and Asia. Respondents span over 15 industries and represent multinational organizations with global footprint.

Before the COVID-19 pandemic brought a sweeping global health and economic crisis in 2020, Aon research found in 2019 that risk readiness had declined rapidly, reaching an all-time low in 12 years. An economic slowdown, business interruption, rapidly changing market forces, and failure to innovate were among the top 10 risks companies feared—while a pandemic or health crisis was at the very bottom of the list. Companies, governments, industries, and communities entered 2020 already concerned about the impact of a changing regulatory environment, geopolitical forces, cyberattacks, large-scale disruption, and more. Then, the unthinkable happened—and nearly all of those risks converged at once. In a new global survey, we examine the ways companies have reacted and responded to the crisis, the recovery moves they’re making now, and how they will reshape their business for a post-pandemic future. Already navigating through volatility pre-pandemic, today, as it continues to unfold, businesses and economies now face a drastically altered risk landscape and mounting long-tail risks, including climate change and a widening health and wealth gap.

Unlike preparedness plans for large-scale disasters such as hurricanes, the pandemic’s global impact was far more complex. Laura Schlicting, Accenture’s North America Geographic Services Lead, recalls the lessons learned from teams in China – the country first imposing lockdowns due to COVID-19: “We were able to learn from the approach that China took – how our teams were able to get ready and respond.” As the pandemic’s scope and scale grew, Accenture’s teams were able to build from the approach that was taken in China and continuously iterate and improve, all the while taking into account local variances – from government regulations in specific countries or in the case of the U.S., a patchwork of local laws.

Continuously Adapting, Adjusting and Improving Frameworks

A structure that supported integrated decision-making helped Accenture put strategic action plans in place. Leadership set strategic direction while various subgroups — procurement, human resources, employee relations, technology — brought their own targeted solutions and executed. “Across our most senior leadership, there was a group that met routinely, regularly, daily, as they set the strategic direction,” Schlicting says, and that “all-in” approach was replicated throughout geographies. “We pulled together a configuration of people who wouldn’t typically work together, at least in such a collective way,” says Keil. “That constant communication helped all of our teams prepare for rapid shifts in direction. Everybody had a 360° view on the totality of the situation on an ongoing daily basis. We were able to continuously manage the situation because of really close coordination and collaboration.”

Making the Best Decisions During Rapidly Evolving Situations

Lord Mayor of London

Foreword

The survey reveals a number of ways traditional business models and risk management approaches have left companies vulnerable. 82% of respondents said that prior to COVID-19, a pandemic or other major health crisis was not a top 10 risk on their organization’s risk register; their enterprise risk management (ERM) strategy and management failed to pick up the threat of the pandemic. And when it hit, their risk infrastructure struggled to cope with the initial response. Going forward, risk and business leaders must reprioritize risk—broadening their perspective and evaluating major shocks, not just anticipated losses, and elevating risk managers to an enterprise-level strategic role. By doing so, they will also be able to redefine resilience. Together, these are the post-COVID-19 imperatives required to reshape businesses into a more future-ready posture. Companies must now ask what risk management and resilience should look like going forward. Our research shows that building a resilient workforce is a priority. Protecting people and assets emerged as a top concern, with many companies focused on well-being, operational resilience, and the retention of key people. Particularly in the early stages of recovery, survey respondents around the globe said protecting their people is the top priority. And 84% of HR professionals agree that workforce agility is extremely or very important—which means that building agility through new talent strategies will be critical. There is a clear need to build a more integrated, agile, and enterprise-wide risk program, as companies are likely to find gaps in their strategy and in the market. 88% of respondents said their business did not make a claim on its insurance program or through its captive triggered by COVID-19, indicating that insurance was not viewed as a solution to help finance the exposure, and plays a small role in what are now the most significant risks facing companies. In the case of the pandemic, government response has been a necessary stopgap for a global event of this size, but the company response reveals a clear need for risk transfer solutions to support corporate mitigation efforts. Part of that journey will require companies to rethink access to capital alongside risk. As important is that the insurance industry innovates in response to companies’ changing needs, increasing global volatility, and emerging risks. Successful solutions for in the post-pandemic era will need to be more agile, strategic, targeted, and scalable—but addressing underserved companies, economies, and societies requires a fundamental shift in traditional insurance approaches. There is no question that the COVID-19 pandemic will change the way companies operate forever. Among the top priorities for companies seeking to reshape their business are the new and accelerated use of technology, redeploying resources, workforce planning, and rethinking the future of work—and these are only the beginning. How companies across the globe address new challenges and prepare for the future will be deeply intertwined with their approach to risk and resilience. The journey is different for every organization: 80% of respondents reported that their organization had moved beyond the first phase of react and respond, but this differs by region. This figure was higher in North America (89%) and lower in EMEA (73%) and LATAM (74%). Of those companies in later phases, 50% of companies report that they’re in recovery mode, and 30% are now in the reshaping phase, focusing on several key business priorities. The regional differences reflect fluctuating pandemic infection rates and impact. North American organizations were the highest proportion are in the recovery phase (59%) while organizations in APAC reported they were in the reshape phase in higher numbers than the benchmark (36% of APAC organizations compared with 29% overall), likely because they faced the first and second waves of the virus earlier on. Highlighting the challenge of the pandemic, the number of companies who have already moved beyond the react and respond phase was not materially higher for companies that did have a pandemic plan in place prior to COVID-19. Regardless of where they are now, the most effective organizations will be the ones willing to reprioritize risk and resilience, innovate, and explore new solutions. In the insights that follow, we examine how organizations are responding, recovering and reshaping to emerge stronger and more resilient.

Rory Moloney, Chief Executive Officer, Global Risk Consulting, Aon

Aon Insights:

There was an overwhelming agreement that the key lesson to take away from this event was the need to have an enterprise-wide approach to risk (81%).

Marc Spurling, UK Head of Enterprise Risk and Resilience, Aon

87.2%

As infection rates fluctuate across the globe and vaccine rollouts vary across regions, every company is adopting an ongoing crisis management posture. Even companies that have moved beyond the react and response phase may find themselves back at the beginning, reacting to large-scale changes or new restrictions. The companies that take this moment to establish their “react and respond” approach—balancing agility, speed, and structure—will be better prepared for other long-tail risks that will require them to manage shifting priorities in real time. There is a long way to go before we are in the post-COVID-19 era. The overwhelming majority of companies believe COVID-19 will continue to impact their business a year or two from now, and this may be compounded with other emerging risks, such as cyberattacks, that will become more apparent as companies work in virtual environments and rely heavily on digital infrastructure. The actions organizations take during the react and respond stage can help define an effective response to both the current pandemic crisis and future shocks.

For instance, very few organizations have sought to make an insurance claim as part of their response to the pandemic. This confirms the importance of pre-event crisis management planning and the speed with which organizations had to respond and adapt. However, it also exposes the inflexible nature of the commercial insurance market and how this rigidity leaves many significant commercial risks uninsurable. 43% of respondents did not believe their organization would be more dependent on risk financing or insurance as an instrument to help smooth volatility of performance, even if insurance products are available that apply to pandemic risk impacts. This may indicate those organizations who were best prepared are confident in their response to such a major event, as 48% of organizations considered their business to be resilient despite the impact of COVID-19. Companies are also evaluating where to invest in building greater resilience, from shoring up their supply chains to strengthening their workforce agility. Pre-pandemic, geopolitical forces had already pushed risk managers to make their supply chains less vulnerable to disruption. Incorporating more digital technology such as sensors, predictive analytics, and other tools were a start to smarter supply chains—but companies still need to be able to absorb shocks from all sides. Just over a third of companies faced a slowdown in demand as customer behaviors changed, and almost 20% struggled to source materials. Companies can use today’s experience to better react and respond to emerging long-tail risks that have the potential to severely disrupt their supply chains—from climate risks such as hurricanes and earthquakes to cyberattacks, particularly as companies seek to digitize the supply chain. As the risk landscape shifts, their enterprise risk management (ERM) models must too. There are regional takeaways that can help organizations prepare in the future. Prior to COVID-19, 52% of respondents in APAC had a pandemic plan in place, compared with 31% in North America and less than 30% in both EMEA and LATAM. Organizations in APAC were supported by state-run track-and-trace technology, and had built more robust pandemic programs in response to earlier threats such as SARS and the swine flu. Still, these companies report that they are accelerating a review of their ERM strategy, which highlights the urgency many companies, even those with a more mature risk response, feel. The response of organizations from other regions signals a global gap: A proportion of EMEA (36%) and LATAM (21%) organizations did not think the pandemic would accelerate a review of their ERM program although there were 31% of organizations in EMEA reporting it would review this. North American organizations reported the lowest number responding that they would review ERM process (25%) but a higher proportion had not decided. A critical part of reacting and responding to crises and building a successful enterprise risk management strategy is ensuring the workforce is able to adapt, communicate, and collaborate when crisis strikes. Companies must invest in the right tools and processes to support that level of agility. In a recent Aon pulse survey, the overwhelming majority of respondents said technology infrastructure and communications infrastructure and tools were very or extremely important to build and maintain an agile workforce. And the pandemic will likely change how companies plan their workforce and attract and retain talent—more than 80% of respondents said a diverse workforce and inclusive culture was very or extremely important for workforce agility. By building workforce resilience through strategic and targeted talent approaches and investments, companies will better position themselves to react and respond to risk effectively, mitigating disruption and maintaining productivity in the face of change.

Continuously Adapting, Adjusting and Improving Frameworks

Making the Best Decisions During Rapidly Evolving Situations

Organizations’ Pandemic Response

React and Respond

Aon Insights:

The survey suggests organizations do not identify the impacts from the pandemic as insurable. It is going to be more important than ever for organizations to identify and understand future shocks and risks associated with black swan losses to maintain resiliency in response to future events.

Richard Waterer, Managing Director EMEA, Global Risk Consulting, Aon

87.2%

Recovery efforts tend to be complex, as companies make a number of decisions quickly while they seek to stabilize the business. Thinking about recovery efforts from a risk management perspective can help prioritize, and the need is clear—the majority of companies say they are only somewhat prepared for the next major shock. Recovery will require a new approach to enterprise risk management (ERM), as only 1/3 of organizations believed their existing ERM program was sufficient to cope with the impact of the pandemic. Although insurance has provided a limited response to COVID-19, it is expected to play a more prominent role in the future—and the insurance industry needs to innovate to respond to this expectation. Few respondents submitted a COVID-19 claim under their insurance program or captive, indicating that insurance solutions were not viewed as a means to finance risk exposure. Only 13% of respondents said they would be more reliant on insurance or risk financing in the future. Yet future shocks, especially those associated with black swan events, are likely to be costly. Companies have to identify new risk financing strategies as well as unlock new sources of capital, such as intellectual property, and build resilience for those new streams.

The survey showed a consensus among organizations that companies should do more to integrate their corporate risk and insurance activities to ensure their current insurance solutions are effective at financing exposure to existing and emerging risks and helping manage total cost of risk, which will be impacted by the hardening market. For example, 49% of respondents agree or partially agree that the company’s Board will be reviewing the ongoing performance of a captive insurance company and 46% agree or partially agree that the Board will be investigating the feasibility of a new captive solution to ensure that their risks are covered. The numbers across regions were consistent, indicating that globally, organizations recognize their current insurance structures don’t meet all their needs and that new risk financing alternatives are required. Despite most respondents considering they had remained resilient, there is a consistent opinion that they need to review business continuity management (BCM), which suggests organizations understand the need to re-evaluate their existing plans to apply the lessons learned from the pandemic. There are a number of enterprise-level risk management strategies companies are now focused on, from risk financing to managing the total cost of risk. To achieve these objectives, the role of risk, and risk managers, should change, and a more cohesive and integrated approach is necessary to recover not only from the pandemic but prepare for future shocks.

Continuously Adapting, Adjusting and Improving Frameworks

Making the Best Decisions During Rapidly Evolving Situations

Organizational Resilience

Recover

Aon Insights:

Protecting people and assets was consistently ranked the top priority across all industries. Three specific areas were identified as critical: 1. Well-being of our people 2. Retaining key employees 3. Operational Resilience

87.2%

Business leaders have been confronted with a number of decisions as they steer their workforce, operating models, customers, portfolios, and finances through massive uncertainty. Some of the changes they’ve made are likely to last—and some are poised to completely reshape parts of their business. Take supply chains—now, companies are determining whether they can discard their long and complex supply chains with regional suppliers, short distances, and better inventory management. Indeed, during the pandemic, respondents said fluctuating demand was a more significant risk exposure than supply; and certain customer behaviors are likely to stick. That means companies must also reshape their business approach accordingly. The main business priorities companies have for the reshape phase are protecting people and assets, maintaining or increasing revenue and balance sheet protection, which were consistent for organizations around the world. Many leaders recognized that focusing on their people and their well-being was critical in the initial response phase of the pandemic, and that has carried through to their long-term planning as they seek to build a more resilient workforce.

Maintaining or increasing revenue was the second-highest priority for survey respondents, with many turning to the accelerated use of technology to advance that agenda, as well as focusing on asset investment opportunities and risks. As working environments become more virtual and hiring models change, being able to adapt through the use of technology will be pivotal to maintaining or improving productivity. From an office setting to the shop floor, automation and digitization—for both getting work done and expanding product and service portfolios—will play a large role in revenues. The growing dependence on more sophisticated and connected tools and platforms makes organizations more vulnerable to adverse cyber events, which will require them to refresh their cyber risk strategy, investments, and risk coverage. At the regional level, companies have different plans for maintaining and increasing revenue. New product development is the main priority in EMEA, APAC and LATAM, reflecting a need to innovate to not only survive but thrive in these markets. In North America, companies are focused on workforce planning, likely in line with higher employee numbers, wage considerations, and workers’ compensation regulations. Cost management and balance sheet protection are also critical for the reshape phase as companies seek to offset volatility in their revenue lines while optimizing their cash flow. To that end, companies are likely to use expense rationalization, liquidity planning, and credit protection as the three primary levers for repositioning their balance sheets. Some of the working model changes from the pandemic—such as remote work or increased use of automation—will result in long-term savings. Organizations will need to integrate their investment and digitization plans with their people strategy to produce more agile and adaptable human capital models, with significant strategic planning from HR teams. As with using technology to maintain or increase revenue, automation and remote work will change companies’ exposure cyber risk, so risk managers will need to look at their cyber profile through a new lens. In addition, redeploying resources was a priority in all regions other than APAC, which is most focused on business process reengineering, perhaps representing the higher percentage of manufacturing and trade sectors operating in this economy. Organizations are also focused on future planning. They have identified future major shocks, which many are looking at with a new perspective, taking lessons from the COVID-19 impact on their organization. Each of these has potential to challenge the organizational resiliency and stability. The most prevalent major shocks expected by respondents are economic disruption, a major health crisis, and geopolitical tension. Economic disruption and health crises dominate across all four regions, while geopolitical tension ranks higher in the US, reflecting ongoing trade disputes with China as well as domestic political unrest. Across each region, the higher-ranking expected shocks reflect geographic nuances. For instance, US companies rank major cyber events higher up on the list, with a higher volume of breaches and related costs than in other regions. APAC and LATAM, both large exporters, put business model disruption in their top shocks, as major supply chain disruption has a severe economic impact. Climate change is top of mind for countries in EMEA, especially as aggressive and ambitious targets for decarbonization are rolled out in the EU. Reshaping for the future and planning for future shocks will require an enterprise-level approach. Fortunately, more than 80% of survey respondents reported that the pandemic taught them to take an enterprise-wide approach to incident management, collaborating across functional units including risk, HR, IT, and finance. This will put risk managers in a better position to mitigate both short- and long-term risks—and prepare their organization for impact when certain incidents can’t be avoided.

Continuously Adapting, Adjusting and Improving Frameworks

Making the Best Decisions During Rapidly Evolving Situations

Business Priorities and Future Planning

Reshape

APAC had the lowest number of respondents within the recovery phase (only 39% compared to the benchmark of 52%) but they had much higher numbers of organizations in the reshape phase (36% compared to the benchmark of 29%). This may be related to the fact that the region was earliest to be impacted by first and second waves. It provides some indication that applying the lessons learned from the event and the resilience of organizations has enabled them to move forwards with strategic plans

APAC

APAC respondents were the only organisations to report significantly higher numbers of businesses thriving during the pandemic (11% compared to 7% overall). All other regions only reported 6% as thriving. This suggests that these organisations were more resilient and able to pursue the opportunities created by the pandemic

51% of APAC respondents had a pandemic plan in place prior to the event which is significantly higher than the benchmark (30%)

APAC respondents were the only organizations to report significantly higher numbers of businesses thriving during the pandemic (11% compared to 7% overall)

Organizations from all regions reported high numbers indicating they felt their business had been impacted by COVID-19 but had remained resilient (benchmark 48%) but again APAC beat the overall benchmark (57%)

Companies in EMEA are most concerned about climate change as a major shock when compared to other regions, which may be a function of concern over the impact on their supply chains and increased corporate scrutiny from consumers and investors

New use of technology topped the list of priorities for organizations in EMEA when asked about their top priorities for maintaining / increasing revenue

EMEA organizations appear more optimistic when asked about the integration of their corporate risk and insurance activities: 30% of respondents in this region do not think their company could do more to improve their processes

EMEA organizations felt their risk management was sufficient (71%) which was higher than the benchmark

EMEA

New product development is the main priority in LATAM when it comes to top priorities for revisiting business strategy, reflecting a realization that companies will need to innovate to survive

Companies in LATAM see business model disruption as a top three major shock. This could be because the region is a large exporter and any major disruption to supply chains, for example, could impact the economy significantly

21% of organizations in LATAM did not think the pandemic would accelerate a review of their enterprise risk management (ERM) program which could suggest organizations might not have fully appreciated the link between ERM and resiliency

78% of organizations in LATAM reported that they did not have a pandemic plan in place (compared to the benchmark 69%) meaning only one fifth were prepared

Latin America

North America companies are more attune to the chances / impact of a major cyber event, rating it their third most significant concern/future shock

North America organizations placed higher importance on reviewing business continuity management (BCM) plans (60% compared to the benchmark), whereas only 51% EMEA and 47% LATAM said that they would review BCM plans. This might suggest that North American organizations place higher reliance on business continuity planning rather than considering this part of the broader enterprise risk management (ERM) strategy

North America showed the highest proportion of respondents in the recovery phase (59%) and was slightly above the benchmark for organizations in the reshape phase. This suggests a level of resiliency within these organizations that has enabled them to stabilize and start to plan

North America had the lowest percentage of respondents remaining in the react phase (10%, which was 9% below the overall average)

North America

Future shocks 1. Economic disruption 2. Technological Disruption 3. Business Model Disruption 3. Climate change 3. Geopolitical tension

Well-equipped for a virtual work environment, the industry was most focused on employee well-being and talent retention. 13% of respondents indicated their business had thrived because of the pandemic, which is higher than the overall industry benchmark (6%). Alongside workforce management, the industry has a renewed focus on its supply chain, noting the vulnerabilities in its complex and sophisticated global interdependencies and seeking to shift risk where possible. Business strategy will be a high priority as well, with digital natives and long-established companies competing in a fast-paced and uncertain business environment.

Technology and Communications

Future shocks 1. Business Model Disruption 2. Economic Disruption 3. Technological Disruption 3. Geopolitical tension 3. Another health crisis/pandemic

53%

11%

13%

21%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

This is a highly regulated industry, and as a result it is common for organizations to show higher risk maturity levels. Almost half of respondents indicated they had a pandemic plan in place prior to COVID-19, which is higher than the overall benchmark. Nonetheless the pandemic impact has hit the industry in a few different areas, from supply chain to asset protection. Cost management was a significant priority for the sector; while organizations typically operate at high margins that are then reallocated to research and development, the pandemic has had an impact on their clinical trials and business strategy. Looking into the future, another health crisis is on the industry’s radar, but not just a pandemic-type event; new or accelerated lifestyle diseases, such as diabetes, can strain resources and supply chains. In addition, geopolitical changes such as Brexit are likely to impact organizations in this industry.

Health/Pharma/Life Sciences

Future shocks 1. Economic disruption 2. Geopolitical tension 3. Another health crisis/pandemic 3. Technological Disruption 3. A major cyber event

55%

18%

16%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

This demand-led sector was hit hard by the pandemic as there were sudden and significant decreases in demand globally. The low price of oil has also hurt organizations, pushing them to turn to liquidity planning. Protecting people and assets proved a challenge at the beginning of the pandemic, particularly for some offshore operations which struggled to cope with disease transmission, causing organizations to adjust their operating models to be more COVID-resilient. In addition to economic disruption and pandemic challenges, the industry must also prepare for climate risk, a changing regulatory environment and new and sustained ESG pressures. It is no surprise that climate change is an area of future risk which is ranked much higher for this industry than the overall benchmark.

Energy, Utilities

Future shocks 1. Economic disruption 2. Geopolitical tension 3. Climate change 3. Another health crisis/pandemic 3. A major cyber event

51%

12%

28%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

Public services was the only industry that ranked another health crisis top of the list of most significant future shocks. Public entities were at the core of the pandemic response, from funding to managing communications and regulations. At the same time, unemployment continues to rise which is creating uncertainty around tax revenues. Balanced budgets are an expectation for public sector organizations in many parts of the world, so cost management remains a priority given the uncertainty around long-term impact and timing. Many in the industry are re-examining business processes, including how funding is dispersed. During 2021, we can expect to see public sector entities look at revaluing pension costs, addressing the talent gap and emphasizing employment benefits to younger employees. Climate change also features highly in the list of shocks as natural disasters can exacerbate the infrastructure issues with which the industry is already grappling, creating both financial and social pressures.

Public Services

Future shocks 1. Another health crisis/pandemic 2. Economic Disruption 3. Technological Disruption 3. Climate change 3. Major cyber event

25%

10%

15%

50%

The industry was among the hardest hit by the pandemic and had the highest number of respondents reporting that they did not have a plan in place. Many organizations are still managing the immediate impact and working to survive, focusing on cost management and doing as much as possible for workforce wellbeing. Hospitality respondents ranked reputation as a higher priority compared to the overall benchmark, which is likely down to the potential transmission risk posed by normal operations. Wellbeing of employees, but also of customers, is key to providing confidence on COVID-19 security. The industry is also preparing for a wave of opportunistic acquisition and ongoing disruption that is likely to follow the pandemic, particularly a reduction in spending and travel.

Hospitality

Future shocks 1. Economic disruption 2. Another health crisis/pandemic 3. Business Model Disruption 3. Geopolitical tension 3. Technological Disruption

67%

20%

13%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

The industry is facing a number of changes, from a new focus on workforce and employee well-being to greater adoption of technology. Construction and real estate respondents ranked retaining key employees ahead of the general survey sample, which is not surprising given the industry’s aging workforce and the difficulty in attracting new talent from younger generations. While many construction organizations are accelerating their digital and technology innovating efforts, they remain behind the general survey results when ranking its importance. However, the impact of the pandemic, along with climate change, may serve as a catalyst for change. There is also increased pressure from investors and other stakeholders to respond to uphold higher ESG standards, which may further impact the industry and their risk management approaches.

Construction and Real Estate

Future shocks 1. Economic disruption 2. Another health crisis/pandemic 3. Climate change 3. Business Model Disruption 3. Technological Disruption

51%

15%

23%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Respondents from this industry indicated they were under pressure due to a drop in customer demand, but over a quarter of respondents said they did not see a supply chain issue, likely because of a more robust risk plan. Such a plan will be important with risks compounding in the future; geopolitical tension tops the list of future shocks for transportation and logistics companies, in particular administration changes around the globe and the shortening of supply chains is causing uncertainty for the industry. Economic disruption remains a key concern for the sector, despite elements of it benefitting from the so-called death of the high street and an apparent shift in consumer behavior. Whether this is a shift for good will become more evident over the coming year. Overall, risk management will continue to be critical for this high-risk industry. While digital technology and automation will address some of this risk, it will also bring new exposure to cyber risk.

Transport and Logistics

Future shocks 1. Geopolitical tension 2. Economic Disruption 3. Another health crisis/pandemic 3. Business Model Disruption 3. A major cyber event

24%

16%

45%

The unpredictability of supply and demand throughout the pandemic was a major challenge to the industry, but many organizations kept their focus on protecting people and assets. The pandemic exposed a number of supply chain vulnerabilities that companies will look to address, in addition to cost management and changes to operating models. Smart factory and Industry 4.0 changes will continue as the industry seeks to become more digital, efficient and responsive, which is perhaps why respondents indicated cyber risk was considered a top five future risk. There have also been some recent high-profile cases of operational ransomware threatening to close plants down. As the industry embraces automation, this risk is only likely to increase. The industry is one of those most exposed to market volatility, so organizations will continue to brace for impact as uncertainty remains in the coming year.

Industrials and manufacturing

Future shocks 1. Economic disruption 2. Another health crisis/pandemic 3. Geopolitical tension 3. A major cyber event 3. Technological Disruption

48%

20%

11%

15%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

The 2008 financial crisis and the nature of the highly regulated financial services industry has increased risk maturity, which has had the effect of helping organizations remain resilient during the pandemic. Indeed organizations in this industry beat the overall benchmark, indicating that they considered pandemic a key risk prior to COVID-19 (25% compared to the average of 18%). Many organizations were also able to adapt quickly to remote working and maintain productivity, though it also created a wellbeing challenge for the workforce. Many in the sector are focused on talent retention and adjusting appropriately for a larger change in the future of work. The acceleration of digital working and online transactions has financial services companies rightfully focused on the risk of a major cyber event, which will require a robust risk management approach.

Financial Services

Future shocks 1. Economic disruption 2. Technological Disruption 3. A major cyber event 3. Business Model Disruption 3. Geopolitical tension

45%

17%

30%

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has been severely impacted and will take significant time to recover

Our business has been impacted, but we are unsure of the long-term impact

Our business has been impacted, but has been resilient

Our business has remained steady during COVID-19 with little impact

Our business has thrived during COVID-19

27%

52%

31%

21%

APAC

North America

LATAM

EMEA

Did your company have a pandemic plan in place prior to COVID-19?

27%

52%

31%

21%

APAC

North America

LATAM

EMEA

Did your company have a pandemic plan in place prior to COVID-19?

27%

52%

31%

21%

APAC

North America

LATAM

EMEA

Did your company have a pandemic plan in place prior to COVID-19?

27%

52%

31%

21%

APAC

North America

LATAM

EMEA

Did your company have a pandemic plan in place prior to COVID-19?

Foreword Government

CII

APPG for Insurance

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As Policy Chair, and effectively political leader, of the City of London Corporation and CEO of the London Market Group, we are reminded daily of the importance of the London Market, for the City, for the UK and for global clients managing known and emerging risks. Across the world, the risk landscape is changingfast. Long-term trends such as climate change and the digitalisation of both business and private life are accelerating and intersecting with Black Swan events such as the COVID-19 pandemic. Livelihoods, commercial interests and investments are under threat. These risks do not respect borders and need global responses.

The London Market: Tackling Global Challenges

Catherine McGuinness, Policy Chair, City of London Corporation Caroline Wagstaff, CEO of the London Market Group

Insurance is at the heart of global economies, and as these economies have grown and developed, so too has the role of insurance within them. Since 1688, Lloyd’s has been proud to be part of this development – sharing risk to build the foundations of cutting-edge industries; supporting societies to bounce back stronger from periods of hardship; and ultimately, creating a braver world. However, insurance cover has never been universal, and the uptake of insurance remains inconsistent across geographies and sectors.

Collaborating to tackle the protection gap and create a sustainable future

John Neal, CEO of Lloyd’s of London

The past year-and-a-half has been a period of immense challenge and tragedy, but we have also witnessed a remarkable display of resilience and adaptability as companies, societies and individuals have grappled with the effects of the global COVID-19 pandemic. Against this backdrop, however, the pressing need to address the changing climate has not gone away. Businesses and governments have continued to try to find ways to reduce carbon emissions and mitigate the risks associated with this existential threat.

Building resilience to climate change: the London insurance market's role

Sean McGovern, CEO, UK and Lloyd’s at AXA XL

At first glance the private sector and the humanitarian community may seem like unlikely partners, but a closer look reveals that both are heavily impacted by the climate crisis and both are essential to finding innovative ways to manage climate risk and build resilience. As the Red Cross Red Crescent Climate Centre has previously observed “the private sector is an essential partner in reducing the impacts of climate change and extreme-weather events on vulnerable people. The innovations, products, services, political influence, capacity to shape behaviour, and investments… are essential for enhancing the resilience of marginalized and vulnerable communities.”¹⁵

Addressing the human impact of climate change together

Richard Blewitt, Executive Director of International, British Red Cross; Maarten van Aalst, Director of Red Cross Red Crescent Climate Centre; Carina Bachofen, Associate Director, Red Cross Red Crescent Climate Centre; Edward Cameron, Independent Consultant, British Red Cross

Innovation has always been at the heart of the London insurance market. In the 1870s a visionary underwriter called Cuthbert Heath laid the foundations for Lloyd’s to transition from what was then a hugely important centre for marine insurance policies into the global centre for insurance it is today, by introducing non-marine policies into Lloyd’s for the first time. When writing the market’s first reinsurance and burglary policies, Heath could not have known how his forward-thinking approach would set the tone for the future of London Market innovation. Yet, 150 years later, the UK’s insurance sector is continuing to lead the way.

Unlocking insurance industry innovation through collaboration

Julie Page, Chief Executive, Aon UK

Insurance is about protecting people and organisations from risk – but that risk has changed out of all recognition in recent decades. As we live longer, each one of our life stages alters – careers span many jobs, often with spells of part time or self-employment. As more of us are living longer, our needs for care change, which also has an impact on every generation within a family.

Meeting the professional skills needs of the future

Sian Fisher, CEO, Chartered Insurance Institute

On top of my role of representing the constituents of North Warwickshire, I have the pleasure of chairing the Insurance & Financial Services All-Party Parliamentary Group (IFSAPPG), which exists to act as a forum of engagement between Parliament, the insurance industry, wider financial services sector and the public.

The Future of Insurance - A view from Parliament

Craig Tracey MP, Conservative Member of Parliament for North Warwickshire and Chair of the Insurance & Financial Services All-Party Parliamentary Group

“Mitigating these risks will require a global approach and scale of action, and London – as the world’s most international, interconnected and innovative insurance centre – stands ready to take up the challenge”

- Alderman William Russell, The Rt Hon the Lord Mayor

"Employing 300,000 people in the UK, paying over £10 billion in taxation and managing investments of almost £2 trillion – the insurance sector remains one of the jewels in the crown of the UK financial services sector and a vital driver of the UK’s economic engine."

- John Glen MP

“The pandemic has put a spotlight on the importance of technology and on rapidly evolving digitisation. However, our increasing ability and requirement to work, learn and access services online has led to a significant expansion of the cyber risks we face”

- Catherine McGuinness

“As well as preparing for future systemic risks, our industry is playing an immediate and vital role in the global recovery through risk management, and of course claims assessment and payment.”

- John Neal

“The insurance industry – and the London Market, in particular – has an important role to play in supporting companies across all industries to adapt to reduce carbon emissions and manage the risks associated with Climate Change”

- Sean McGovern

“A collaborative approach involving all stakeholders including at-risk communities, the private sector, humanitarian organisations, and governments enabled by international bodies, is vital to ensure that greater capital and resources are mobilised appropriately, effectively and at scale to help the most vulnerable”

- British Red Cross

“While COVID-19 has presented the global insurance industry with an unprecedented and unique set of challenges - both from an operational and risk management perspective - so too has it presented us with an opportunity to drive innovation and digitalisation in a way that few of us could have imagined before the pandemic”

- Julie Page

“Insuring Women’s Futures established and led by the Chartered Insurance Institute in collaboration with a wide variety of expert stakeholders, focuses on evolving the insurance and personal finance profession’s approach to women and risk.”

- Sian Fisher

“The role of the insurance market is key in mitigating and insuring against the risks associated with climate change, the environmental, social, and societal impacts it will have, as well as the economic concerns that arise from it.”

- Craig Tracey MP

15 Climate Centre (2019), Companies and Climate Resilience: Mobilizing the power of the private sector to address climate risks

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