Black swan events can provide clues to assessing and managing exposures

Black swans are normally seen as improbable events (the dot-com bubble or 2008 meltdown) affecting the financial industry. But organizations must also consider the black swans that could be swimming among their many risk exposures.

“It’s reasonable to expect a loss to occur, but it’s not reasonable to expect a catastrophic loss that would change the functionality of your organization’s purpose,” Andrew Hosie, vice president, national strategic growth & national sales at Gallagher, tells a recent Gallagher Talks online conference.

In response, organizations need to “identify the domino” that starts the collapse. “Avoid the trigger, avoid the claim,” he says.

He adds risk appears in any one of an organization’s four main business quadrants: finance, operation, strategic and hazard. And many of these — particularly in the strategic quadrant — are outside of an organization’s control.

But Hosie adds a fifth quadrant: employees’ actions or inactions within an organization’s operating environment. “These employees may actually limit or exacerbate any one of your risks that could be triggered, thus bringing a black swan event into being.”

Identify, assess and plan

First, you must understand your organization and overlay a risk-management framework that works for you.

Second, understand (and accept) that risk will happen.

Third, rank your risk exposures.

Once the risks are ranked, you can consider whether the organization can tolerate the loss. Then, you can treat (put in a sprinkler system because you manufacture fireworks); transfer (pay an insurance premium); or terminate (stop doing a particular activity) the issue.

“When you understand a risk in a measured like-for-like manner against all the other risks in your organization, you’ll understand what could be acceptable or unacceptable as a black swan,” Hoise says. You might even determine that something you considered a black swan “is actually something different.”

It’s also important to understand that black swans are industry specific.

One example is Wimbledon, which had to cancel the 2020 Grand Slam tennis tournament due to COVID-19. The event’s organizers had purchased event cancellation coverage that could come into play for many reasons, including a pandemic, says April Pittendreigh, vice president, national operations, with Gallagher.

“Wimbledon recognized that their main exposure was the possibility of an event cancellation, so they were willing to pay $2 million a year for the coverage, and they’ve paid it for last 17 years,” she says. “Years ago, [Wimbledon’s] risk managers understood that their black swan would be any situation that resulted in the cancellation of a tournament.”

Their claims payout was $140 million.

Hosie says when an organization understands its current risks and what risks it might invite as it grows, the knowledge of those risks improves.

“As your knowledge improves, then the maturity around risks to your own organization improves,” he says, “and your total cost of risk decreases because you’re proactively able to manage, mitigate and avoid so that if there is a loss, you’re remunerated appropriately for the loss.”

So, instead of worrying about the next external black swan, it might be better to understand your own.

“Learn what the indications of assumed or unwanted probabilities are, and how relative that black swan will be to you — when or if it will occur,” Hosie says. In the meantime, “simply enjoy all the other white swans you surround yourself with.”

Feature image by iStock.com/T-Immagini