Resiliency and interconnected risk: 3 trends to watch

The world of business is a web of interconnected risks. Daily news stories on the ever-evolving impact of COVID-19, natural disasters, and cyberattacks on critical infrastructure highlight how threats can cut across industry lines to have a national — or even global­ — impact.

Business leaders are under pressure to stay ahead of potential threats around our connected world. But with so many variables at play, it can be challenging to arrive at a holistic understanding of risk. Here are three risk trends that business leaders in any industry or region may face and sharing tips on how to work with insurance partners to mitigate them.

As of September 2021, according to the Chamber of Commerce there were 2.2 million more job openings than unemployed workers in the United States. Most experts blame disruption from the pandemic for this labor shortage, which accelerated retirement for baby boomers and prompted one in every four workers to consider quitting their jobs in search of more flexible, higher-paying roles. As companies struggle to fill positions, business leaders are discovering both short- and long-term consequences. Labor shortages may force employees to work excessive hours, causing burnout, unplanned absences, work injuries, reduced productivity, and poor employee retention.

“This tightening workforce trend that we’re seeing impacts almost every industry,” says David Perez, chief underwriting officer, Global Risk Solutions for Liberty Mutual Insurance. “And every industry needs a sustainable pipeline of talent to thrive.” Building that pipeline, Perez notes, may require expanding your pool of eligible candidates and incentivizing workers with flexible work options, competitive pay, and benefits.

Companies might consider reducing their hiring requirements, offering industry training and apprenticeship opportunities, and targeting nontraditional labor sources like prisons and rehabilitation programs. As always, it’s crucial to provide proper training for new employees to reduce the risk of injuries or accidents and develop a strategic risk-management program that factors in workers’ needs.

Specific industries also should consider a closer look at how the labor shortage affects their operations.

Social inflation, or the rising cost of litigation and its impact on insurance claims, isn’t a new risk area, but it has been exacerbated over the last 20 months. Socially conscious deliberations, polarized jury pools, and the “anchoring” of dollar values ꟷ where jurors benchmark payouts against their personal observations ꟷ combine to sustain it. Meanwhile, pandemic-related closures led to a backlog of millions of civil court cases vulnerable to ongoing social inflation. In civil courts alone, the backlog has increased by 30% since COVID-19 arrived. And as those cases stay open, they are unlikely to decline in value — which means higher payouts for businesses that are found at fault.

For businesses that have to pay out, social inflation can have serious financial consequences. And even for companies who never go to court, the rising cost of insurance due to social inflation can impact business growth. Perez recommends that business leaders work closely with their insurers to evaluate their current limits and ensure they have adequate coverage. “Exposures in this litigious climate could vary,” Perez says. “Some experts would say that you could never purchase enough limits.”

While companies can’t control the outcome of a lawsuit, they can create a culture of safety and risk mitigation to reduce the likelihood of accidents that result in large verdicts. Insurers today are developing strategies to help manage social inflation risk through investing in data and analytics to guide decision making, taking a proactive approach to trial preparation, and considering a variety of resolution strategies.

Risk managers should seek to understand the key drivers of social inflation, including the current case backlog and savvy plaintiff’s bar, and strategies to help control costs.

Although addressing environmental, social, and governance (ESG) issues is still in its infancy in many companies, it has grown exponentially among both activist groups and the general public in the last few years. Customers and stakeholders alike are looking for business leaders to address their environmental impact and promote diversity, equity, and inclusion (DEI) at their companies. Consumers are relying more on their values to determine what businesses they want to support with their dollars.

“[Customers and stakeholders] want to see that businesses are transparent,” Perez notes. To stay ahead of ESG risk, it’s critical for business leaders to put these issues on the board agenda, and to be as open and honest as possible with the public about how their company is addressing ESG. Failure to make ESG a priority can lead to backlash, even impacting the long-term financial health of an organization. To be a socially responsible business, organizations should critically evaluate investment portfolios, vendors, suppliers, and partners, and review their internal policies and practices to ensure they align with ESG guidelines. Failure to do so can lead to exposures and losses in directors and officers (D&O), casualty, property, and more.

Customers are taking a closer look at ESG than ever before, and risk managers should take a closer look as well.

Corporations today are facing risks in ways they’ve never seen before, and it’s only going to get more complex moving forward. To be resilient, businesses should partner with insurers that have the skills, services, and solutions to navigate every facet of the risk-management ecosystem.

What should organizations look for in an insurance partner? First, Perez says, ensure that your insurance provider has deep knowledge and offers solutions for your industry. The challenges and risk-management needs of a manufacturer are different from those of a construction company or private equity firm. In addition to underwriting, risk control, and claims, review what other services your provider can offer to help mitigate potential threats. For example, Liberty Mutual is partnering with Jupiter Intelligence to help construction customers better understand the long-term effects of climate change so they can incorporate resiliency into their projects and operations.

Finally, Perez notes, remember that your relationships with your broker and insurer need to be collaborative. They should listen to your concerns, understand your challenges, and work with you to help identify creative solutions to support ongoing business continuity.

To learn more about interconnected risk and how to build a resilient business, go to https://business.libertymutual.com/insights/the-interconnectivity-of-risk/.