As digital transformation and shifts in social attitudes gather pace, the risk landscape is being transformed. For financial services businesses, this is leading to a pressing need to rethink risk management assumptions and approaches, as they look to balance the risk downsides with the upside opportunities. How can your organisation get up to speed? Symon Dawson, Partner, Risk Transformation, PwC UK, explores the opportunities.
Covid-19 has caused huge disruption and economic challenges. From a risk management perspective, few if any scenario models or contingency plans could have anticipated the scale of the global crisis – or the extent to which it put whole sectors out of action and threw global supply chains into disarray. The crisis has also brought into sharp relief the vulnerabilities of a highly connected and interdependent world. In turn, the disruption emanating from the pandemic has accelerated digital transformation and shifts in social attitudes. These trends bring complex risks. In a clear case in point, digitisation offers faster, cheaper and more efficient commerce, but also heightens cyber, data privacy, and resilience risks. In turn, businesses face an intensifying spotlight on sustainability, social inclusion and other environmental, social and governance (ESG) issues.
The two come together in concerns about the impact of automation on employment. This could be offset by investment in digital upskilling and adaptation of knowledge worker roles to work alongside and leverage the robotic workforce. Our own research finds that automation has the potential to create as many jobs as it impacts, however, it is clearly important for risk managers to consider the social, economic and political risks.
From risk to opportunity
While a fast-changing risk landscape is a challenge for all businesses, it’s especially so for financial services (FS) organisations. But it also offers opportunities for forward-thinking businesses. From credit and investment decisions to protecting against losses, the ability to understand and manage risk can be a key source of return in FS. Risk management teams are not only there to monitor and control exposures, but can advise on upside opportunities.
For banking and capital markets (BCM) organisations, the trade-offs between risk and return include how to sustain the credit and liquidity needed to drive economic recovery, while protecting against a potential rise in bad debts. By supporting the real economy in its hour of greatest need, this is also a chance to rebuild some of the trust lost during the financial crisis.
For insurers, comparable challenges and opportunities include providing affordable cover against cyber, pandemic, and climate change risks. While this is a chance to boost revenue growth, the scale and nature of these exposures remain highly uncertain.
For asset and wealth management (AWM) organisations, the challenges include balancing financial returns with the need to meet stakeholder expectations on ESG. The big risk is making claims in areas such as sustainability and social inclusion that aren’t being met. What’s acceptable now may not be in the future, which underlines the importance of a forward looking perspective on risk.
Ready for tomorrow’s challenges
Within FS and other industries, this transformation in the risk and wider business landscape is not only spurring a rethink of risk assumptions, but also a whole new approach to risk management. Reactively managing today’s risks is no longer enough. Your risk team must also deal with emerging threats and capitalise on opportunities.
Harnessing the latest technology, data analytics, and machine learning would provide the foundations for much greater risk readiness. This could include running the kind of multiple scenario models that would have proved so useful in planning for the impact of Covid-19, or improving early warning indicators by spotting patterns in underlying internal and external datasets. Risk and business management platforms can also be more closely aligned to help deliver more timely and relevant risk insights. Potential advantages include faster, more precise and customised credit evaluation and approval in the face of today’s heightened impairment risks.
The other big priority is being able to look beyond credit, market, and other financial risks towards non-financial drivers of risk and return. These include areas such as ecosystem resilience, new business model viability, sustainability, and public trust. This not only calls for new forms of monitoring, but also a different mindset for risk management. A key part of this would be moving from managing defined risks to closely tracking and developing scenario plans for the uncertainties and tail risk vulnerabilities that can quickly erupt into major strategic threats.
More for less
Your risk teams’ accomplished modelling capabilities give them a headstart in making the most of new data and tech-enabled capabilities. The main challenge, as so often, will be in having the resources to act. With revenues constrained, risk teams are expected to deliver more for less. Any big injection of investment only tends to come after regulatory change or sanction.
Iterative steps might be the key to success. You can still set a clear vision for transformation and then build towards it. It’s also important to remember that risk transformation is as much about behaviour as big ticket technology. This includes how your risk team engages with the business frontline and balances the demands of oversight, challenge and advice.
Enhanced status and influence
So, this is a time of immense possibility as well as challenge for risks teams. As a risk professional, transformation is an opportunity to leverage their analytical prowess and behavioural understanding to maximum impact, to move beyond pure risk oversight to become key insight partners, and helping the business leaders make sound decisions and act with confidence.
In my next blog posts, I’ll be looking at how to develop and deliver targeted transformation within a realistic budget – more bang for your buck. In the meantime, I look forward to engaging with as many of you as possible at RiskMinds International.
© 2020 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only and should not be used as a substitute for consultation with a professional advisor.