In this article, first published by the LMA and re-produced here with their kind permission, Alex Koukoudis, Senior Executive, Finance & Risk at the LMA and Seema Bradbury, Asta’s Chief Risk Officer and Chair of the LMA’s Risk Committee, explore the evolving landscape of risk and the indispensable role played by CROs in the industry.

Lloyd’s 2022 results presented strong financial performance despite several years of turbulence.  From events such as the widespread disruption caused by COVID-19 to the war in Ukraine and the resulting increased geopolitical risk, there has been an uptick in the activities being overseen and challenged by risk functions. In his recent market message, Lloyd’s Chief of Markets, Patrick Tiernan, warned of an increasingly complex risk environment as underwriting teams navigate the advantageous market conditions ahead of the execution of their approved 2024 business plans.

What risks does the market face?

Managing agents, as well as other global commercial carriers, are facing headwinds from several well-known areas: a stubborn inflationary environment, climate change and sustainability risks, the increased use of artificial intelligence (AI), and, in various areas, capital constraints. All these factors are globally interconnected in many ways, resulting in the potential for systemic shock. At the same time, the nature of risks is evolving faster than ever, encompassing net-zero transitions, supply chain risks, cyber risks and an increasing list of emerging risks related to climate and technology/digitalisation.

“The COVID pandemic has taught us the benefit of more thoroughly interrogating business models and strategies to predict potential vulnerabilities.”

The role of the LMA’s Chief Risk Officer (CRO) and Risk Next Gen committees

At the Lloyd’s Market Association (LMA) CRO and the CRO Next Generation Committee meetings, we regularly exchange views and ideas on the nature of the risks facing the Lloyd’s market. Over the years, we have noticed that while the area of emerging risk was no more than an AOB item on boards’ risk committee agendas, this is now getting significantly more airtime. The COVID pandemic has taught us the benefit of more thoroughly interrogating business models and strategies to predict potential vulnerabilities based on the external environment and what could go wrong next. In a recent CRO Committee meeting, we hosted the Prudential Regulation Authority (PRA) to discuss a few hot topic risks, and it was encouraging to see similar themes being discussed among market practitioners and regulators.

Highlighting the importance of the risk function in the existing landscape

The risk function continues to play a pivotal role in identifying, assessing and mitigating risks that threaten the viability of business models and the achievement of strategy. Risk functions have contributed significantly to the market’s remediation exercise, and the last few years have seen the role and expectations of risk leaders change significantly. Asking the sometimes obvious but awkward questions has never been more important in a rapidly changing environment. The introduction of AI has been cited among CROs in the market as potentially leading to the fastest change in the way we do business in a decade, impacting business models and resource needs. This will undoubtedly bring new risks to the fore which we had not envisaged even 10 years ago. The key is to constantly look forward to seeing what is coming next and proactively manage this changing risk profile.

The need for the CRO to be involved in building the strategy across all areas

It is encouraging to see that more CROs are currently engaged in the most difficult discussions and decisions, providing senior executives with guidance and support on strategic business risks. There is an immediate example of this coming up in 2024 as Lloyd’s and managing agents face into the challenges and opportunities of the Blueprint 2 implementation.

Our experience has shown that when CROs are considered as an equal strategic partner by Chief Executive Officers, Chief Underwriting Officers, and other senior executives, and are involved in shaping the strategy of the managing agent, the strategic execution is less risky and not subject to unknown, or, rather, untested events.

“One of the topics we are currently working on is emerging risks and how to approach these, including qualitative risk assessments and the use of various techniques.’

We should all support CROs to invest more in the risk function’s capabilities, with a focus on nurturing talent that can continue taking the risk function one step further. At the LMA, we recently established the CRO Next Generation group, which I referenced earlier. The group’s objectives are to encourage networking with peers, provide support on identified topics to the CRO Committee and develop a rounded view and awareness of what other LMA groups and committees are doing on risk-related topics. The group has identified key areas of focus to engage and take forward and subsequently produce an output for the benefit of the wider CRO Committee and the Lloyd’s market. One of the topics we are currently working on is emerging risks and how to approach these, including qualitative risk assessments and the use of various techniques.

What we are doing proves the point that the role of the CRO and the risk function is continuously evolving, from one that was expected to perform control-related activities, to one of proactive assessment and identification. This involves advising the CEO, the CUO and the board in the development and execution of a growth strategy, supported by a ‘stressed’ and balanced risk appetite.

Airmic’s white paper on the role of the CRO¹ defined a risk leader as the expert executive, competent to contribute to the success of the business model and the development of strategy and achievement of business objectives for the organisation. Senior executives and the board should enable the risk function to provide strategic challenges by encouraging risk leaders to think outside the box and by supporting them to enhance the risk function with the necessary skills and capabilities. This is the best way to future-proof underwriting activities from unexpected shocks and emerging risks and promote controlled risk-taking, ultimately leading to a sustainable, profitable business.

If you would like to continue the conversation, get in touch with Chief Risk Officer – Asta, Seema Bradbury at s.bradbury@asta-uk.com