When was the last time you considered the operational resilience of your business? Although resilience might not seem like the most exciting thing to focus on, it’s vital to have some strategy to address it, especially during economically turbulent periods. The UK Financial Conduct Authority considers operational resilience to be the ability of a business to
prevent, adapt, respond to, recover, and learn from operational disruptions.
Today, I’ll be taking a close look at this topic through the insurance sector’s lens and explore new methodologies for achieving resilience. Unsurprisingly, insurers play an essential role in enabling operational resilience due to their linkages across multiple sectors. Casualty insurance addresses financial indemnity issues, for example, while commercial liability policies drive stability against business-specific risks, and health insurance promotes recovery following illness or accident.
Of course, through the use of broader packages and multiple products, underwriting can provide protection and resilience against more general risks too. When a business’s value chain is adequately insured, it can safeguard the development and launch of new processes, products, and innovation procedures necessary to grow.
Where to draw the boundaries?
From cloud computing giants to challenger banks, businesses worldwide are increasingly reliant on deeply integrated services managed by third-party providers. The latter means that corporations need to evaluate the resilience of external services in their assessments carefully.
For many businesses, the most challenging questions to solve here relate to risk model boundaries. Should the risk exposure of specific customers be addressed? For which assets are physical replacements a necessity, and where would financial indemnity suffice? Should the operational resilience strategy focus on risk prevention or recovery?
The answers to these questions inevitably vary from business to business. The most comprehensive operational resilience plans are those that take the broadest possible view of risks. Still, there is an unavoidable trade-off between over-preparing for a low-probability event versus failing to prepare for a more likely disruption adequately.
Resilience during Covid-19
Even for many companies with well-developed operational resilience protocols, Covid-19 has had a severe and wide-ranging impact. Globally, few sectors and regions have emerged unscathed from the pandemic or the wide-ranging economic fallout associated with it.
Analysts at Norton Rose Fulbright carried out an extensive survey to explore how companies navigated the operational resilience challenges stemming from the pandemic. They found that the vast majority of organizations enhanced their operational governance levels and oversight, and 70% of respondents said that they would be increasing their spending on resilience.
Developing a successful operational resilience strategy
Operational resilience strategies can broadly be divided into two categories — results-oriented (an approach that considers the resilience of specific outputs) and process-oriented (an activity that evaluates the resilience of critical processes). To implement an effective resilience program, the first thing you’ll need to do is pick which type of approach makes more sense for your market context.
Next, to give yourself an idea of your current operational resilience, you’ll need to conduct research into the specific risks faced by your organization and answer questions about the severity and frequency of each one you identify. Consider classifying threats as tail risks (those with a low probability of occurring) or trend risks (where the probability is changing over time).
Successful operational resilience strategies need to cover the entire value chain, from product conception through to customer delivery and use. Suppose you’re operating in the insurance space. In that case, management consultancy KPMG recommends in one of their research paper to judge one’s resilience according to specific ‘pillars’ such as cybersecurity, IT, people, and suppliers.
Managing operational resilience
After you’ve captured adequate data to complete your risk profile, you can implement a transformation program to address any operational weaknesses in your business model. In the financial sector, such programs are commonplace already, and insurers are only just starting to catch up, having come under significant pressure from regulators recently.
Putting the right leadership and execution teams in place to deal with operational resilience is essential, but it’s also crucial to address cultural and mindset roadblocks. Ensuring that your entire team is briefed on addressing operational resilience issues will mean that employees flagged risks as soon as they are encountered.
What’s more, technology can help you orchestrate your operational resilience strategy — you can measure and monitor your risk in real-time through appropriate metrics. You can also harness technology to evolve new products that boost your resilience through access to new markets.
Best practices in operational resilience
A great example of how to do operational resilience well comes from the world’s largest companies, including the tech giants. Many market players have put resilience up, front and center in all their product offerings to recognize the tech giants’ hosting and digital services they rely on within their operations.
Today, several tech giants define operational resilience as
the ability to provide continuous service through people, processes, and technology that are aware of and adaptive to constant change.
To make that vision a reality, these companies provide detailed incident management protocols, redundant data infrastructure, and direct third-party assurance mechanisms.
Meanwhile, in China’s insurance sector, large insurance providers achieve operational resilience via diversification. Many have connected their pre-existing and new products and services to deliver more resilient business operations via insurance and non-insurance-related offers. The latter improved resilience through reduced exposure to specific competitors while growing the customer base to millions.
Attaining resilience via corporate venturing
Although it might not suit every business, corporate venturing is another proven strategy to accelerate operational resilience. Acquiring external assets through acquisitions and investments enables businesses with limited internal resources to rapidly adopt new resilience-enhancing technology.
If you wish to implement corporate venturing to address your organization’s operational risk, consider following the four-step approach detailed below:
- Discover: Once a non-resilient element of your business is uncovered, engage in deep-dive research to identify customer, market, or tech-based strategies that could reduce exposure.
- Validate: Look for specific venturing opportunities that match your strategy. To figure out which business is the right one to join forces with, engage in fast-moving iterative discussions with your operational resilience team and other stakeholders.
- Incubate: After you’ve defined and designed the ecosystem to improve your operational resilience, begin building your new platform, product, or system. Alternatively, work with external growth partners like a startup or growth venture.
- Commercialize: Put your new strategy into practice or bring your new product to market. Once you have done so, be sure to restart the evaluation process as risks are continually morphing.
When assessing a new business to partner with as part of a corporate venture, be sure to apply an innovation scoring and evaluation framework. AM Best did some excellent work on the matter last year. An assessment considering aspects of that framework can provide great insight into an external body’s operational resilience by ranking it according to factors such as leadership, resource allocation, and structure. Others would include emerging impact sourcing and scoring techniques that ensure an alignment with fast-moving sustainability requirements.
Thanks for reading my thoughts on innovative ways to boost operational resilience and use it as a source of growth. I’m always on the hunt for new stories and experiences connected to this topic. If you have time, leave a comment and let me know how your organization addresses operational resilience during 2021.
About William Hawkins
Will is a director of Research, Europe for Keefe, Bruyette & Woods (KBW). Will has spent nearly twenty-five years analyzing the quoted equity of the European insurance industry. This has led him to appreciate the importance of a management team balancing short-term financial delivery with longer-term operational resilience. The disruptive impact of financial technology seems a dominant megatrend for the next generation. Will believes. This megatrend creates challenges and opportunities for existing insurance core processes, forcing them to improve and disrupt in new ways. It also questions the wider value proposition of insurance within the bigger universes of risk and investment management, as the global insurance industry may be in a bigger state of flux than many observers appreciate right now.