Philippe Auzimour & Sabrina Baker-Boshuizen
The downturn in the global economy raises important questions about how organisations conduct their business – and particularly about how they assess and manage risk. in March 2009 Marsh has conducted a survey in cooperation with ipsos Mori to find out how organisations have responded to the downturn in the economy.
The survey examined attitudes to risk management in the current economic downturn for over 700 organisations in seven different sectors and twelve different countries in Europe. Of these organisations 101 were in public entities. The results and the most notable reactions are published the Public Sector Research Report. The report was produced by Marsh in close cooperation with Alarm, Risk Management Partners and PRIMO Europe.
On the question if the economic downturn has raised the importance of risk management 56% of the participants respond positively. “We are anticipating that the greater incidence of job losses, house repossessions and greater indebtedness in the population place (will) increase strain on housing and social services.
We think there will also be greater budget pressures. And we also think there is more likelihood of contractors failing leading to loss of supply. We think there might be a greater risk of fraud in benefits and grants systems” says a Risk adviser from the United Kingdom.
Asked to rate various risks, participants say the four most significant over the next 18 months will be environmental risk (73%), public liability (65%), business continuity (63%) and partnership risks (59%). In addition, almost as many participants are concerned about PPP and PFI associates or contractors (51%) as are concerned about citizens (54%).
These two results illustrate how the downturn – combined with court rulings and regulations such as the EU Environmental Liability Directive 2 – are adding to public entities’ long-term liabilities and making it increasingly difficult for them to genuinely share risks with the private sector.
Over half the participants (56%) say that, because of the downturn, risk management is now seen as more important at senior levels in their organisation.
A similar proportion says that the downturn has prompted their organisation to review its approach to risk management. And 22% say their board’s appetite for risk has grown. The proportion saying appetite has diminished (25%) is the smallest in any of the seven sectors in our survey.
To the question if a sector-wide standard for risk management would benefit their organisation. Almost three-quarters (71%) of participants respond that a sector- wide standard for risk management either would or already does benefit their organisation. Of those already covered by a sector-wide standard, 89% say it benefits them.
Currently, however, only 40% of participants say they have initiatives for evaluating their risk management practices against those of their peers.
Raise risk management to the position it deserves
Public-sector organisations that have not yet formally incorporated risk management need to do so. Risk management can be embedded by training senior executives. a dedicated risk manager will keep track of risks across the whole organisation and liaise with all the departments involved. The CEO should create a risk committee or a risk management group.
Optimize risk retention and risk transfer
This should be a significant help to local authorities in optimising their insurance programmes by means of arbitrage between self-insurance and risk transfer. There should be a direct return on investment in risk management, in terms of reducing the total cost of risk, and hence the cost of retained risks.
Create a Europe-wide public-sector risk management standard
As an example, in conjunction with PRIMO France, Marsh is in the process of designing a Risk management label for Public Entities, which aims at evaluating risk management practices of medium to large local authorities. Better risk management practices helps to protect citizens, improve attractiveness to stakeholders, improve access to public funding and also helps in reducing the total cost of risk by improving access to insurance.