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Risk Management: The importance of horizon scanning

At a glance

  • Whilst the Global Risks Report 2020 was very thorough, there was little mention of a global pandemic
  • Whilst it’s completely understandable that organisations of all shapes and sizes were not prepared for such a disruption, it does raise the question of whether better foresight could have helped
  • Each organisation has a role to play to ensure, both for themselves and their employees, that they are prepared for as many risks as possible that may be on the horizon.

The Global Risks Report 2020 was very thorough in explaining both the most likely and the most impactful risks that may occur this year. And whilst the usual suspects were there, such as climate change, cyber attacks and geopolitical tension, there was little mention of a global pandemic, and certainly no mention of it being one of the most likely or impactful risks to watch for this year. So whilst it’s important to look at certain risks, it’s equally important to not be single-focused.

Whilst it’s completely understandable that organisations of all shapes and sizes were not prepared for such a disruption, it does raise the question of whether better foresight could have helped. With today’s world being far more interconnected than ever before, it’s not amongst the realms of improbability that something similar could happen in the future – and if it does it would be important that the events of this year have been learned from.

Horizon Scanning

One way for companies to keep on top of their risk profile is to scan the horizon, to look at what may or may not be likely and how that would have an impact on their day-to-day running, their financials, and their reputation. Whilst important to look forward, it is equally important to look back, and learn from history. For example, what did the world look like six months before an event, such as Covid-19, or the most recent stock-market crash, and were there tell-tale signs that something was coming?

Each organisation has a role to play to ensure, both for themselves and their employees, that they are prepared for as many risks as possible that may be on the horizon. With this is mind, below is a list of questions organisations should ask themselves when planning for future risk events:

  • Does our organisation have a well embedded Emerging Risk Management (ERM) framework?
  • How are future / emerging risks factored into our risk management activity?
  • Is risk identification routinely part of strategic planning? How much time do we spend on it?
  • Do we use scenario planning or operational stress testing to explore alternative futures?
  • How do we use knowledge of 3rd parties to inform our own?

There is also a case to be made with discussing how risks can be turned into opportunities. For example, Covid-19 has allowed some companies to be more flexible with their workforce, introducing remote working and flexible hours.

Risk Categories

When discussing risk it’s understandable that, with such a vast potential range, it might be hard to know where to begin. It might be an idea to break down future risks in four categories, depending on the damage they are perceived to bring.

  1. Direct Damage: These are risks that will bring physical damage to a building, warehouse, office or shop whether that be yours or that of a third party.
  2. Consequential Damage: This follows on from the first, in which this would be any collateral damage that comes as a result of direct damage. For example, a loss of profit or inability to maintain production.
  3. Indirect Damage: This is any indirect economic losses as a result of the first and second categories in this list. For example, loss of market share, loss of image or financial ratings.
  4. Consequence of Preceding: This is a combined effect of the above issues, such as losing business, reputation and potentially becoming uninsurable.

When discussing risks that fall into these categories, there are three natures to be aware of:

  • Hazards
    • For example a fire causing loss of building, loss of stock, loss of sales and/or profit.
  • Control
    • For example a price change within supply chain or market, leading to an increase in cost of staffing. Changes in regulations can have an impact on costs and the development of products.
  • Opportunity
    • Spotting a gap in the market or exploiting trends

Suggested Steps

When it comes to looking at future risks, and how your clients can better understand the areas that need strengthening, horizon scanning is just the first of a few steps that should be part of the risk management process.

Below are some ideas on how any organisation can best set themselves up, in order to maintain knowledge of any possible risks.

  • Horizon Scanning
    • Identifying new & emerging risks
    • Systematic risk identification
    • Encouraging creative thinking where “what if…?” is the common question, no matter how far-fetched the scenario might be.
  • Scenario Planning & Stress Testing
    • Exploring resilience to possible alternative futures
    • Understanding financial & organisational resilience
    • Allow participants to consider the worst-case scenarios
    • Consider more than one risk event happening at a time
  • Risk Registers
    • Recording & reporting decisions made about known risks
    • Managing short term, known risks
  • Working Groups or Programme Boards
    • Allocating responsibility for thinking about and making recommendations on a relevant emerging risk topic

For more information on this topic, or for any information on how Zurich can help, please speak to your usual contact.

Image © Getty

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