Top risks on CROs minds:
What's keeping them awake at night?
Conversations from The Leadership Forum at RiskMinds International 2023
A panel of Chief Risk Officers around the world convened at RiskMinds International 2023 to debate the risks that keep them awake at night. Ongoing geopolitical uncertainty, such as the war in Ukraine potentially being replicated in Taiwan, and accelerating technology change from AI and quantum computing, plus regulation were the three key worries identified in a live poll of hundreds of senior risk managers, including 170+ CROs, in the audience for this leadership debate.
The panel largely agreed with the thoughts of their peers in the audience, although they did also add other overlapping key risks financial institutions should keep on their radar. The seven key risks identified by the panel are:
From wars causing sanctions, oil price spikes and more generally barriers to free trade being put up – the present geopolitical landscape unsurprisingly featured heavily as a risk keeping CROs awake at night. The panel observed how western governments are seeming to focus more tightly on their internal markets and domestic agendas, and how the US’ championing of free trade is waning.
Supply chain shocks were much discussed, emanating from these geopolitical risks. “This would obviously mean risk appetites need recalculating,” commented one panellist.
But supply chain shocks can also come about due to changing robotic technology advances. These could mean near shore manufacturing comes back to its source markets in the future, as the need for cheap labour in developing countries reduces with enhanced automation. Changing demographics could impact it as well.
As inflation and consequentially interest rates rise, this potentially causes inequality and social unrest. There is less money to spend in consumer pockets, so general retail sales fall and their profits are adversely affected. But not perhaps for luxury retailers focused on high-net worth individuals (HNWIs) that are not so impacted by a general economic downturn. Grocers might get more business as hard pressed consumers stop ordering take away food or going to restaurants. The prices of companies in these fields and their credit risk would need to be adjusted accordingly.
Increased risk requirements and coverage are evident. ESG adherence rules are strengthened globally, and in the UK, new operational resilience requirements are introduced from regulators. There is also the UK Prudential Regulation Authority (PRA) supervisory statement (SS), known as SS1/23, which sets out the regulator’s expectations for banks’ management of model risk, with the desired outcome that it becomes a risk discipline in its own right, particularly as a new era of AI powered models beckons, requiring appropriate governance.
Enhanced external cyber risks, plus the cost of IT failure as it becomes more embedded in financial services were also front of mind. Cloud computing and crypto-powered blockchains especially will increase the necessity for better management of third parties in the future when delivering IT and services.
“Collaboration is needed”, said a panellist, in order to fight this threat.
More widespread usage of AI, and its democratisation via generative tools like ChatGPT, also appears to be a worry to risk managers. Given its potential to allow fraudsters to access AI power when formulating their scams more easily, they are right to be concerned. Scenario management models are a good idea to plan how a CRO might fight these threats.
Another particularly potent emerging technology risk is the advancement of quantum computing. Quantum computing has the potential to blow apart the existing public key infrastructure (PKI) security measures that give us our unique PIN codes. Its implications for cyber security should not be underestimated.
Accelerating climate and biodiversity deterioration is a well-known threat and has the potential to disrupt the insurance landscape especially, as increased storm damage, floods, droughts for farmers, and so on become common. Adding to this are the physical and transition risks of the move towards a ‘green’ economy as the 2050 net zero imperative approaches. What companies are worth investing in from the energy field was debated – oil in the short term, but no coal perhaps, with renewables being dialled up longer term. This risk and opportunity assessment depends on where in the world you are looking at and the natural resources that a company or country has at its disposal to diversify and transition.
Thabile Nyaba, Chief Risk and Sustainability Officer, OMI, joins us at RiskMinds Insurance, part of RiskMinds International, to talk about the role of insurance in combatting climate change.
Reduced barriers of entry for new players, such as fintechs, in financial services is a key concern when deciding where to allocate capital and risk. What companies will be disrupted and lose value? What value do newcomers offer as they adopt new technologies and ways of working to disrupt and perhaps displace traditional players in traditional markets? What firms will forge their own new business model and be the Apple of the 21st century? These are all assessments that need to be made as competition increases and digitalisation narrows the prior demarcation lines between businesses.
Aging populations have different priorities and banking preferences to the upcoming generation Z. Servicing both effectively can be difficult. Younger potential customers often expect high quality digital experiences and demonstrate different financial behaviours and interests, including more flexible working patterns and sustainability conscious investment habits, in comparison to their more senior counterparts. Adapting to this may require an evolution of banking business models, plus investment into new talent and technology to stay competitive.
Asset concentration risk was another topic debated by the CROs in London, alongside operational resilience, and the class “Cs” of risk management: credit and conduct risk.
A panellist reminded fellow CROs and senior risk leaders in the room:
Always think about risk holistically and not in silos, consisting of credit, liquidity, counterparty risk or so forth. They overlap.
