Are Emerging Issues a High Priority for an Organization's Risk Management?
The adage ‘prevention is better than the cure’ rings true in the context of risk management.
Risk is omnipresent in organizations of all sizes, from operational and emerging to regulatory and financial risks. Organizations are constantly exposed to uncertainties threatening their ability to generate a profit because risk is inherent to operations. The paradox is that organizations must embrace risk because risk-taking is fundamental to achieving economic reward and generating opportunities that lead to evolution.
By Peggy Mendezcuria | Chartered Managers Canada
Emerging issues will continue to evolve, and organizations must always be current with trends and well-thought-out plans of action in place to mitigate emerging risks that can become material to their business. While it can potentially introduce threats, it can also provide opportunities to organizations. The threats and opportunities that emerging issues offer may not be obvious. However, organizations can have a competitive advantage in identifying and addressing an emerging issue before a problem develops or an opportunity is missed.
Swiss Reinsurance (Swiss Re) defines emerging risks on its website as “newly developing or changing risks which are difficult to quantify, and which may have a major impact on an organization.”
One may ask what indeed constitutes an emerging issue. A simple answer to this is issues with characteristics different from the ‘business as usual’ issues. It can be described as chaotic, ambiguous, complex, uncertain, uncontrollable, and volatile and can affect several continents. Failure to pay attention to emerging issues can have dire consequences for an organization.
In recent times, the COVID-19 epidemic can be a great example of an emerging risk that everyone can resonate with and can fit all the descriptions noted above. The risk was difficult to define; it was highly chaotic to the economy and social environment. Its effect impacted many factors simultaneously and spread from continent to continent in a relatively short period. The level of uncertainty was extremely high due to the lack of knowledge about how it would have evolved, which was very challenging for many. It was out of any organization’s control, so there was a considerable need to adapt and respond rather than control. Finally, the pandemic posed significant changes in the risk in a very short period.
This article will discuss why emerging issues should be a priority for organizations, the major categories of significant issues, techniques for identifying emerging issues, and who should be involved in the management process of emerging issues.
Does your organization see risk through the lens of value creation, leveraging technology and human-led innovation to improve the approach to risk?
The Approach:
Emerging issues are complex and require a “big picture” approach. Senior decision-makers must recognize which risks impact their business most and understand how to manage them to enhance performance, drive value creation, ensure sustainability, and bring proactive risk management into sharp focus. This will ultimately strike a balance between risk and reward.
Prioritizing the issues that need to be addressed is not an exact science; however, organizations can consider some critical areas, including the criteria to be used in determining which issues are most important, what kind of process, what resources are used, the importance of context and trust of sources.
Becoming more informed about deciding on a real threat is essential, so avoiding fads and unsustainable trends is significant. In addition, steering away from a reactive view of issues and crossing fingers in the hope the issue will go away should empower a proactive anchor into strategic planning. This will engender a culture of actionable, risk-informed business decision-making from the top down, providing foresight to prevent or at least mitigate issues.
Context:
Context matters regarding company size, industry, and time horizon, and each organization will decide at the senior level what constitutes emerging issues and what resources will be dedicated to identifying and responding to those issues. Many organizations will identify issues of strategic relevance, analyze the issues in depth, decide on a procedure, draw up a detailed plan and evaluate the process. In addition, tracking emerging issues allows an organization to identify signals or changes in the environment and show how an evolving trend may become a significant risk over time. It can also help build resilience to ensure that it will survive and even thrive in uncertain times by anticipating possible scenarios or events, preparing for them, withstanding, absorbing their impacts, recovering from the effects and adapting to the changing conditions. This leads to responding, adapting to opportunities, and confidently making prompt and informed decisions.
Emerging issues can generally be considered a new issue in a known context, a known issue in a new context or a new issue in a new context. Each category is important because it addresses external environmental issues impacting the organization's activities, like regulatory changes. In addition, the management of a known issue may need to be revised if a new venture or activity is anticipated, and issues have yet to be considered because they are new to the organization.
Managing Emerging Issues:
Emerging issues may be challenging to manage, but most organizations categorize them as societal, geopolitical, environmental, economic, and technological. Senior leadership will determine and redistribute the emerging issues to specific areas of their operations within their organization for more in-depth analysis.
At an increasing level, board directors are devoting more time to enterprise risk management and emerging issues. This top-down approach is significant because boards recognize the value of coupling strategic oversight with the methods and processes used to manage risks, which can enhance business performance. Once the boards understand the emerging issues that are likely to evolve into risks, they will better understand how to manage them.
Many organizations have explicit and dedicated operational leaders and processes that help them identify and respond to emerging issues. If an organization has a formal enterprise risk management system, emerging issues can also be addressed.
Some organizations with limited resources to address emerging issues may utilize a SWOT analysis to help an organization understand its strengths, weaknesses, opportunities, and threats. It is a simple and recognizable approach that can be used to develop a good understanding of the impact and what can be done to minimize adverse effects and maximize potential opportunities.
In general, most organizations focus on three fundamental categories of issues, each requiring a different management approach that will benefit the operation, such as upside issues, which include product or service innovation and market expansion; outside issues, which include competition, legislation and natural disasters and downside issues, which provides for cybersecurity, fraud, and regulatory noncompliance.
The appointment of a Chief Risk Officer (CRO) is now a more standard approach to dedicating resources than in the past. This position is considered senior, often reporting to the Executive Director, President, or CEO. The CRO is typically responsible for setting the strategic risk management vision of the organization, providing solutions to business risk issues, and seeking ways to optimize risks in the organization as a competitive business advantage.
Once the senior leaders understand the different issues, they will better understand how to manage them. For example, outside issues must be identified and mitigated through analysis, such as stress testing, to determine if the organization has the resources to absorb the full impact of these external events. In contrast, downside issues require proactive prevention controls and structured monitoring of the threat level to prevent them.
Conclusion:
In conclusion, organizations must stay ahead of emerging issues within the enterprise risk management arena to thrive in an ever-changing environment by going beyond the traditional approach of risk assessments and utilizing the need for a holistic and proactive approach. Armed with an in-depth understanding of emerging issues and current risk capability, once integrated into regular business operations and an enterprise risk management plan, can lead to more comprehensive and risk-informed functions.
Emerging issues analysis and reporting should be used to challenge assumptions made when the business initially outlined its strategy. Organizations must be willing to change direction if their initial strategy is no longer feasible. In general, organizations can’t be ready for everything, but reporting through this lens of emerging issues analysis can ensure that the business will be sustainable and achieve positive risk management outcomes like enhanced customer trust and expansion into new markets.
About The Author:
Peggy Mendezcuria's career spans over 20 years within the insurance industry, in various roles, including, learning and development, operations management and industry engagements. Peggy is an Insurance Claims Manager at the largest adjusting company in Canada. She is also a part-time professor, and instructor, teaching CIP and insurance management courses. In her spare time, she is also an author of children’s books.
