Despite the increasing uncertainty with regards to the financial hit to industries, Russell Group have modelled the exposure for companies and countries. In the first of these articles, we take a look at the impact on shipping.
10 Lessons Learnt from COVID-19
14 April 2020 | Blog Post
“The global community has massively underestimated the risks that pandemics present to human life and livelihoods, at least in terms of policy outcomes. The resources devoted to preventing and responding to such threats seem wholly inadequate to the scale of the risk. While it is impossible to produce precise estimates for the probability and potential impact of pandemics, it is not difficult to demonstrate a compelling case for greater investment. There are very few risks facing humankind that threaten loss of life on the scale of pandemics.”
These are the opening remarks of a 2016 report: The Neglected Dimension of Global Security: A Framework to Counter Infectious Disease Crises. As the coronavirus worldwide pandemic continues to spread, the ramifications for any business has gone from temporary disruption to a serious impediment. Mass quarantines, wide-scale mandated business shutdowns, millions of sick employees, and massive supply chain disruption is the new reality for organisations and customers worldwide.
While climate change and pandemic has not been considered high on risk registers for many organisations, lessons are being learnt from this pandemic. The list that follows is Russell Group’s Top 10 Learnings from COVID-19.
1. Supply and Demand
The whole issue of supply and demand both now and in the future is a concern. What if working from home becomes the norm? How does this impact city business centres and in turn trading patterns as a consequence? Movement of product through countries is a constant concern as regulations are changing on a dynamic basis. A big concern in transporting strategically needed materials from around the world. Some companies are therefore actively working with their suppliers to make sure they have a handle on their risks too.
By slashing interest rates to near zero, central banks around the world are showing how seriously they take the economic fallout from the virus. Wherever you sit in the supply chain, whether it is an in-house IT department, a tech reseller, a big vendor or service provider, the impact will come from two directions: supply and demand, according to the Register.
Microsoft has already noted that its personal computing business, including Windows OEM and Surface products, would be hit by manufacturing shortages. Meanwhile, Apple has reportedly told support staff that replacement iPhones for some devices will be in short supply for two to four weeks. Industrial production in China, a global centre for technology manufacturing, fell 13.5 per cent in January-February from the same period a year earlier, the largest fall in 30 years.
2. People Working From Home
The disruption to the world’s economies caused by the COVID-19 pandemic is expected to wipe out 6.7% of working hours globally in the second quarter of this year – the equivalent of 195 million jobs worldwide, according to the UN’s labour body. Only 30% of UK employees worked from home during 2019[MB1] , according to the latest research by the Office of National Statistics (ONS).
Due to the current COVID-19 (Coronavirus) pandemic, many UK employees are now expected to work from home for the foreseeable future. Office workers are less of an issue but there is an issue of physical labour, particular manufacturing, which many organisations are worried about. Businesses are learning that we can be just as productive digitally as we were coming into the office, which will lead to a very different world for everyone. It was probably long overdue. For some companies, due to legislation and security, working from home is a challenge. However, many organisations are seeing increased productivity due to remote working, which could be down to multiple factors such as reduced commuting and business travelling.
3. Workers Comp
Workers compensation in the USA is considered a major potential area of concern. If a worker in the U.S. gets COVID-19, who pays out? This is still unclear. There are many grey areas in relation to Workers Compensation but the outbreak of coronavirus has already resulted in some workers’ compensation claims and more are expected. But whether those claims are going to succeed depends on the individual circumstances and the state where the infection occurred.
While compensability issues will play out case-by-case, workers’ compensation insurers in at least two states have decided that they will guarantee workers’ compensation benefits for health care workers and first responders. Kentucky Employers Mutual Insurance Co. announced Friday that effective immediately it will pay wage-replacement benefits for any first responder or employee in the medical field who is quarantined because of direct exposure to a person diagnosed with COVID-19.
KEMI’s announcement follows a decision March 5 by the Washington state Department of Labour and Industries to pay wage-loss and medical treatment expenses for any health care worker or first responder who is quarantined because of coronavirus exposure. The National Council on Compensation Insurance, a rate advisory organization for most U.S. states, said that it remains to be seen whether other states will follow Washington State’s lead.
A white paper issued by Aon explains why greater exposure to the general public tends to limit liability for workers’ comp insurers. “While every jurisdiction has specific laws pertaining to workers’ compensation and communicable disease claims, the general rule for most industries is that the matter would likely not be deemed compensable if the employee was considered at no greater risk than the general public,” the Aon report said.
4. Debt and Third Party Exposure
There has got to be a worry about debt from third parties and other suppliers going out of business. Rentals and other forms of income from third parties are already being impacted. The fear then is that a lack of liquidity leads to another credit crunch. Instead of the 2008-09 crash warning companies off debt, they have become addicted to cheap interest rates and built up a mountain of it. Global corporate debt outside financial services mushroomed to $75 trillion at the end of 2019, up from $48 trillion at the end of 2009, according to the Institute of International Finance. Tech companies are already responding.
Last month, Micron Technology drew down $2.5bn under its revolving credit facility to increase its cash position. While fears of companies' ability to service this debt had focused on the prospect of rising interest rates, now commentators are looking at company cash flow and revenue as the trigger for a cascade of defaults.
Jerry Flum, CEO of CreditRiskMonitor, a financial risk advisory firm, told The Register. "The debt risk is greater than it's ever been. What this virus has done is come into this highly unstable situation of corporate borrowing all over the world. [The markets] tripped on a pebble; the pebble is the virus."
If a central bank's decision to cut interest rates fails to stimulate demand, companies will try to do so by reducing prices, further eroding margins and putting cashflow and the ability to service debt at risk. "The real denominator, the thing that really is going to tell who the survivors are going to be is the amount of debt on your balance sheet," he said. CreditRiskMonitor's research suggests every peak in corporate debt is followed by a spike in defaults sooner or later.
5. Risk Management
Risk registers have been one-dimensional – they need to be connected. In terms of the risk register, what is the real risk? Have we done enough to understand the real risks to our business from risks that can shut a company down in this way? There will likely be changes to strategic objectives and planning going forward.
Event modelling and planning is crucial because of the complexity of events. We need a more joined up global approach to risk.
6. Business Continuity
A crucial difference going forward will be more investment in Business Continuity plans. A move that will bring the question of do you have an “in-depth” or “high-level” business plan?
In terms of a wider strategic approach to pandemics do you take a more flexible approach to business continuity? In the past there may have been a plan for everyone to work out of a plan B alternative office location, but the new reality is that you can be more flexible than that with home working. Establish an incident management team. Decide what authority it has. What if the members become ill? Ask all departments to review and refresh their continuity plans as necessary.
Consider any value statements your organisation may have that should guide your response and communications.
7. Integration risks
Some insurers are worried about “integration risks” as companies rush to implement new IT systems to cater for the remote working conditions. Moving too quickly without having issues such as security at the forefront of their minds can open up the company to new risks further down the line. In IT, for example, some components manufacturers and end product assemblers struggle with the consequences of the outbreak. John White, head of crisis preparation at supply chain risk consultancy S-RM, said this is likely to be the start of several waves of supply chain disruption rippling out of China, South Korea and the rest of the far east.
"It's too early to fully quantify the magnitude of the disruption that our supply chains might experience, but it's probable that what we're seeing is the start of something, much in the same way as we're really seeing the start of what coronavirus looks like in Western Europe and the Americas. What we're seeing now are signs of the disruption in Asian manufacturing making their way out through supply chains."
He points out that components, end products and source material were mostly all produced in the Chinese regions affected by the virus. Some may be shipped directly to the channel, but components and sub-components are often shipped elsewhere to be assembled in complex extended supply chains. As the inventory unwinds, vendors will start to understand where the problems lie.
8. Cyber Issues
Remote working is having an effect on process. How do you ensure the same controls are enforced, especially in a highly regulated or commercially sensitive area of the company? There seems to be a notable increase in the number of cyber threats companies are seeing. Coronavirus-related fraud reports increased by 400% in March, according to Experian. Scammers are claiming to be tracking Coronavirus, providing updates or offering treatments or protective equipment.
Emails are claiming to be from HMRC or other government bodies offering financial assistance. Investment schemes and trading advice scams are taking advantage of the economic impact of Coronavirus. Text messages and emails from companies you know well are requesting personal details or for you to click on a link. Phishing emails tend to have suspicious email addresses and these are often different from the name of the sender.
9. General Opportunities
How litigious everything could become has not yet been modelled. The biggest risk is cash flow. There are, however, distinct opportunities for companies with a healthy balance sheet. Some companies will emerge with a more mobile workforce. For example, WFH could open up a labour opportunity as it can enable a company to attract better talent as they can offer remote working as opposed to having to comply with immigration restrictions.
10. Conclusion – New World of Risk
Going forward the world will look very different, especially economically. Someone has to pay for all of this. The key – in terms of data – will be investing in insights that allows corporates to follow the money across supply chains and trading routes. Much of the planning of future solutions links back to understanding connected exposure and for that, data is key. It emphasises the importance of Russell Group’s work on connected risk, which has been a truly collaborative effort with some of the world’s largest insurers and risk managers.
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